As filed with the Securities and Exchange Commission on August 24, 2009
Registration Nos. 333-______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.DC 20549
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Form
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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AGREE REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 38-3148187
(State or other jurisdiction
(Exact name of (I.R.S. Employer
incorporation or organization) Identification No.)
registrant as specified in its charters)
| Maryland | 38-3148187 |
| (State or other jurisdiction of incorporation or organization) | (IRS employer identification number) |
31850 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MICHIGANNorthwestern Highway
Farmington Hills, Michigan 48334
(Address,
(248) 737-4190
(Address, including zip code, and telephone number, including area code, of registrant'sthe registrant’s principal executive offices)
RICHARD AGREE
31850 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MICHIGAN 48334
(810) 737-4190
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
DAVID P. LEVIN, ESQ.
KRAMER, LEVIN, NAFTALIS & FRANKEL
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 715-9100
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Richard Agree Chairman and Chief Executive Officer Agree Realty Corporation 31850 Northwestern Highway Farmington Hills, Michigan 48334 Phone: (248) 737-4190 (Name, address, including zip code, and telephone number, including area code, of agent for service) | Copy to: Jeffrey M. Sullivan, Esq. DLA Piper LLP (US) 4141 Parklake Avenue, Suite 300 Raleigh, North Carolina 27612 Phone: (919) 786-2000 Facsimile: (919) 786-2200 |
Approximate date of commencement of proposed sale to the public: As soon as
practicablepublic: From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Formform are being offered pursuant to dividend or interest reinvestment plans, please check the following box: [ ]
box. ¨
If any of the securities being registered on this Formform are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"),other than securities offered only in connection with dividend or reinvestment plans, please check the following box: [X]
box. x
If this Formform is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ]
offering. ¨
If this Formform is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ]
offering. ¨
If delivery ofthis Form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become effective upon filing with the prospectus is expected to be madeCommission pursuant to Rule 434462(e) under the Securities Act, please check the following box: [ ]
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(1) In no event will the aggregate maximum offering price of all securities
issuedbox. ¨
If this Form is a post-effective amendment to a registration statement filed pursuant to this Registration Statement exceed $125,000,000. AnyGeneral Instruction I.D. filed to register additional securities registered hereunder may be sold separately or as units with
otheradditional classes of securities registered hereunder.
(2) Subject to footnote (1) above, there is being registered hereunder an
indeterminate number of shares of Common Stock, par value $.0001 per
share, as may be sold, from time to time, by the Registrant.
(3) The proposed maximum offering price per share will be determined from
time to time by the Registrant in connection with the issuance by the
Registrant of the shares of its securities registered hereunder.
(4) Subject to footnote (1) above, there is being registered hereunder an
indeterminate number of shares of Preferred Stock, par value $.0001 per
share, as may be sold, from time to time, by the Registrant.
(5) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(o) promulgated413(b) under the Securities Act, check the following box. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of 1933, as
amended.
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“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ Smaller reporting company ¨
(Do not check is a smaller reporting company)
CALCULATION OF REGISTRATION FEE
| Title of Securities to be Registered | Proposed Maximum Aggregate Offering Price (1) | Amount of Registration Fee (2) | ||||||
| Agree Realty Corporation: | ||||||||
| Common Stock | ||||||||
| Preferred Stock | ||||||||
Depository Shares (3) | ||||||||
| Warrants | ||||||||
Preferred Stock Purchase Rights (4) | ||||||||
| Total | $ | 125,000,000 | $ | 6,975 | ||||
| (1) | The proposed aggregate offering prices per class of security will be determined from time to time by the registrant in connection with the issuance by the registrant of the securities registered hereunder. |
| (2) | Calculated pursuant to Rule 457(o) of the rules and regulations of the Securities Act of 1933, as amended. |
| (3) | Each depositary share will be issued under a deposit agreement, will represent an interest in a fractional share of preferred stock or multiple shares of preferred stock and will be evidenced by a depositary receipt. |
| (4) | This Registration Statement also relates to the rights to purchase shares of Series A Junior Participating Preferred Stock of the registrant, which are attached to all shares of common stock issued, pursuant to the terms of the Registrant’s Second Amendment to Rights Agreement dated December 8, 2007. Until the occurrence of prescribed events, the rights are not exercisable, are evidenced by the certificates for the common stock and will be transferred with and only with such common stock. |
The Registrantregistrant hereby amends this Registration Statementregistration statement on such date or dates as may be necessary to delay its effective date until the Registrantregistrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statementthe registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
PROSPECTUS
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1997
AGREE REALTY CORPORATION
$125,000,000
COMMON STOCK
PREFERRED STOCK
$125,000,000
Common Stock
Preferred Stock
Depositary Shares
Warrants
Agree Realty Corporation (the "Company") mayintends to offer and sell from time to time offer and
sell (i) shares of its common stock, par value $.0001 per share (the "Common
Stock") and (ii) shares of its preferred stock, par value $.0001 per share (the
"Preferred Stock" and, together with the Common Stock, the "Offered
Securities"), with an aggregate publicsecurities described in this prospectus. The total offering price of the securities described in this prospectus will not exceed $125,000,000 in the aggregate.
We will provide specific terms of any securities we may offer in supplements to exceed
$125,000,000.this prospectus. The Offered Securitiessecurities may be offered separately or together in any combination and as separate series, in amountsseries. You should read this prospectus and at prices and termsany prospectus supplement carefully before you invest. Our common stock is traded on the New York Stock Exchange under the symbol “ADC.” We will make applications to be set forth inlist on the NYSE any shares of common stock sold pursuant to a supplement to this Prospectus (the "Prospectus Supplement").
The termsprospectus. We have not determined whether we will list any other securities we may offer on any exchange or over-the-counter market. If we decide to seek listing of any securities, the Preferred Stock, includingsupplement to this prospectus will disclose the specific designation and
stated value per share, any dividend, liquidation, redemption, conversion,
voting and other rights, and all other specific terms of the Preferred Stock,
including the initial public offering price, will be set forth in the
applicable Prospectus Supplement. The specific number of shares of Common Stock
and issuance price per share thereof will be set forth in the applicable
Prospectus Supplement. exchange or market.
In addition, the specific terms of the Prospectus
Supplement may include limitations on direct or beneficial ownership and restrictions on transfer of the Offered Securities,securities offered by this prospectus, in each case as may be appropriate to preserve theour status of the Company as a real estate investment trust, ("REIT")or REIT, for Federalfederal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain Federal income tax considerations relating to, and
any listing on a securities exchange of, the Offered Securities coveredoffered by such
Prospectus Supplement.
The Offered Securitiesthis prospectus may be offered directly, by the Company, through agents designated from time to time by the Companyus, or to or through underwriters or dealers, or through a combination of the foregoing.dealers. If any agents or underwriters are involved in the sale of any of the Offered
Securities,securities offered by this prospectus, their names, and any applicable purchase price, fee, commission or discount arrangement between or among them, will be set forth, or will be calculable from the information set forth, in the applicable Prospectus
Supplement. See "Planprospectus supplement. None of Distribution." No Offered Securitiesthe securities offered by this prospectus may be sold without delivery of the applicable Prospectus Supplementprospectus supplement describing the method and terms of the offering of such Offered Securities.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
THE "RISK FACTORS" SET FORTH IN THE APPLICABLE PROSPECTUS SUPPLEMENT.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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those securities.
Each prospectus supplement will also contain information, where applicable, about federal income tax considerations and any legend or statement required by state law or the Securities and Exchange Commission.
Investing in our securities involves risks. See “Risk Factors” beginning on page 3.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete and any representation to the contrary is a criminal offense.
The date of this Prospectus is ____________, 1997.
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AVAILABLE INFORMATIONAugust 24, 2009.
We have not authorized any dealer, salesman or other person to give any information or to make any representation other than those contained or incorporated by reference in this prospectus and the accompanying supplement to this prospectus. You must not rely upon any information or representation not contained or incorporated by reference in this prospectus or the accompanying prospectus supplement. This prospectus and the accompanying supplement to this prospectus do not constitute an offer to sell or the solicitation of an offer to buy any securities other than the registered securities to which they relate, nor do this prospectus and the accompanying supplement to this prospectus constitute an offer to sell or the solicitation of an offer to buy securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. The Company hasinformation contained in this prospectus and the supplement to this prospectus is accurate as of the dates on their covers. When we deliver this prospectus or a supplement or make a sale pursuant to this prospectus or a supplement, we are not implying that the information is current as of the date of the delivery or sale.
TABLE OF CONTENTS
| Page | |
| ABOUT THIS PROSPECTUS | 1 |
| WHERE CAN YOU FIND MORE INFORMATION | 1 |
| INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE | 1 |
| DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS | 2 |
| OUR COMPANY | 3 |
| RISK FACTORS | 3 |
| USE OF PROCEEDS | 3 |
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS | 4 |
| DESCRIPTION OF COMMON STOCK | 4 |
| DESCRIPTION OF PREFERRED STOCK | 10 |
| DESCRIPTION OF DEPOSITARY SHARES | 16 |
| DESCRIPTION OF WARRANTS | 20 |
| FEDERAL INCOME TAX CONSIDERATIONS | 21 |
| PLAN OF DISTRIBUTION | 38 |
| 39 | |
| LEGAL MATTERS | 39 |
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ABOUT THIS PROSPECTUS
This prospectus is part of a “shelf” registration statement that we have filed with the Securities and Exchange Commission (the "Commission"“SEC”). By using a shelf registration statement, (of which this Prospectus is a part) on
Form S-3 (herein, together with all amendmentswe may sell, at any time and exhibits, referredfrom time to as the
"Registration Statement") under the Securities Acttime, in one or more offerings, any combination of 1933, as amended (the
"Securities Act"), with respect to the securities offered hereby. This
Prospectus doesdescribed in this prospectus. The exhibits to our registration statement contain the full text of certain contracts and other important documents we have summarized in this prospectus. Since these summaries may not contain all the information that you may find important in deciding whether to purchase the securities we offer, you should review the full text of these documents. The registration statement and the exhibits can be obtained from the SEC as indicated under the heading “Where You Can Find More Information.”
This prospectus only provides you with a general description of the securities we may offer. Each time we sell securities, we will provide a prospectus supplement that contains specific information set forthabout the terms of those securities. The prospectus supplement may also add, update or change information contained in this prospectus. You should read both this prospectus and any prospectus supplement together with the Registration Statement, certain portionsadditional information described below under the heading “Where You Can Find More Information.”
We are not making an offer of which have been omittedthese securities in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus or a prospectus supplement is accurate as permitted byof any date other than the rules and regulationsdate on the front of the Commission. document.
When used in this prospectus, “Registrant,” “Company,” “we, ” “us, ” or “our ” refers to Agree Realty Corporation and its majority-owned operating partnership, Agree Limited Partnership (the “Operating Partnership”), and its direct and indirect subsidiaries on a consolidated basis.
WHERE CAN YOU FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov. You may also read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549.
You may also obtain copies of our SEC filings at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, DC 20549. Please call l-800-SEC-0330 for further information on the operations at the public reference room. Our SEC filings are also available at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Statements contained in this Prospectusprospectus as to the contentcontents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of thethat contract or other document filed as an exhibit to the Registration Statement,registration statement, each such statement being qualified in all respects by that reference and the exhibits to the Registration Statement.and schedules thereto. For further information regarding the
Companyabout us and the securities offered hereby, reference is hereby madeby this prospectus, you should refer to the Registration Statementregistration statement and thesuch exhibits to the Registration Statementand schedules which may be obtained from the CommissionSEC at its principal office in Washington, D.C., upon payment of any fees prescribed by the Commission.
SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company is subject to the informational requirements ofdocuments listed below have been filed by us under the Securities Exchange Act of 1934, as amended ("(the “Securities Exchange Act"Act”), and, in accordance
therewith, files reports, proxy statements and other information with the Commission. Reports, proxy statementsSEC and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
and at its Regional Offices located at Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661; and Suite 1300, Seven World Trade
Center, New York, New York 10048. 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 site on
the World Wide Web at http://www.sec.gov. that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The Common Stock is listed on the New York
Stock Exchange, Inc. (the "NYSE") and such reports, proxy statements and other
information concerning the Company can be inspected at the offices of the NYSE,
20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company pursuant
to the Exchange Act (File No. 1-12928) are hereby incorporated by reference in this Prospectus.
(a) The Company's prospectus:
| · | Annual Report on Form 10-K for the year ended December 31, 2008; |
| · | Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009; |
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| · | Current Report on Form 8-K filed on January 8, 2009, the Current Report on Form 8-K filed on May 28, 2009, the Current Report on Form 8-K filed on June 9, 2009, and the Current Report on Form 8-K filed on July 16, 2009; and |
| · | The description of our common stock in our registration statement on Form 8-A filed on March 18, 1994, including any amendments and reports filed for the purpose of updating such description. |
We are also incorporating by reference into this prospectus all documents that we have filed or will file with the fiscal year ended
December 31, 1995 (the "Form 10-K").
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.
(c) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
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(d) The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
(e) Description of the Offered Securities contained in the Company's
registration statement on Form 8-A filed March 18, 1994.
All documents filedSEC as prescribed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act subsequent tosince the date of this Prospectusprospectus and prior to the termination of the offering made hereby shallsale of the securities offered by this prospectus and the accompanying prospectus supplement.
This means that important information about us appears or will appear in these documents and will be deemed to be
incorporated by reference intoregarded as appearing in this Prospectus.
Any statement containedprospectus. To the extent that information appearing in a document all or a portion of whichfiled later is incorporated or deemed to be incorporated by reference herein shall be deemed
to beinconsistent with prior information, the later statement will control and the prior information, except as modified or superseded, for purposes of the Registration Statement and
this Prospectus to the extent that a statement contained in the Registration
Statement, this Prospectus or any other subsequently filed document that is
also incorporated by reference herein modifies or supersedes that statement.
Any statement so modified or superseded shall notwill no longer be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakesprospectus.
Copies of all documents which are incorporated by reference in this prospectus and the applicable prospectus supplement (not including the exhibits to providesuch information, unless such exhibits are specifically incorporated by reference) will be provided without charge to each person, including any beneficial owner of the securities offered by this prospectus, to whom a Prospectusthis prospectus or the applicable prospectus supplement is delivered, upon written or oral request of that person, a copy of any document incorporated herein by
reference (other than exhibits to those documents unless the exhibits are
specifically incorporated by reference into the documents that this Prospectus
incorporates by reference).request. Requests should be directed to Kenneth Howe, Vice
President -- Finance, Agree Realty Corporation,our Secretary, 31850 Northwestern Highway, Farmington Hills, Michigan 48334; telephone number (810) 737-4190.
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER OR AGENT. THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT DO
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER OR
THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR
RESPECTIVE DATES.
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THE COMPANY
The Company48334 (telephone number: (248) 737-4190). You may also obtain copies of these filings, at no cost, by accessing our website at http://www.agreerealty.com; however, the information found on our website is a self-administered, self-managed REITnot considered part of this prospectus or any accompanying prospectus supplement.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, together with other statements and information we publicly disseminate, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which ownsare based on certain assumptions and manages, throughdescribe our future plans, strategies and expectations, are generally identifiable by use of the Operating Partnership (as defined below), retail
income-producing properties primarily leasedwords “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on a long-term basisforward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. Factors which may cause actual results to differ materially from current expectations include, but are not limited to: (i) the ongoing U.S. recession, the existing global credit and financial crisis and other changes in general economic, financial and real estate market conditions; (ii) risks that our acquisition and development projects will fail to perform as expected; (iii) financing risks, such as the inability to obtain debt or equity financing on favorable terms or at all the level and volatility of interest rates; (iv) loss or bankruptcy of one or more of our major retail companies. The Company,tenants; (v) a Maryland corporationfailure of our properties to generate additional income to offset increases in operating expenses; (vi) and other factors discussed in “Risk Factors” and elsewhere in this report and in subsequent filings with headquarters in
Farmington Hills, Michigan, wasthe SEC.
We caution readers that any such statements are based on currently available operational, financial and competitive information, and they should not place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur.
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OUR COMPANY
We are a fully-integrated, self-administered and self-managed real estate investment trust that focuses primarily on the ownership, development, acquisition and management of retail properties net leased to national tenants. We were formed in December 1993 to continue to operate
and expand the business founded in 1971 by our current Chief Executive Officer and Chairman, Richard Agree. We specialize in developing retail properties for national tenants who have executed long-term net leases prior to the commencement of construction. As of June 30, 2009, approximately 89% of our annualized base rent was derived from national tenants. All of our freestanding property tenants and the majority of our community shopping center business conducted since 1971 by its
predecessor entities, Agree Realty Grouptenants have triple-net leases, which require the tenant to be responsible for property operating expenses including property taxes, insurance and Agree Development Company. The
Company currently ownsmaintenance. We believe this strategy provides us with a generally consistent source of income and operates 25cash for distributions.
At June 30, 2009, our portfolio consisted of 71 properties, (the "Properties," and
sometimes collectively referred to as the "Portfolio") located in 1116 states principally in the midwestern United Statescontaining an aggregate of approximately 3.5 million square feet of gross leasable area. As of June 30, 2009, our portfolio included 59 freestanding net leased properties and Florida. The Properties consist
of 13 neighborhood and12 community shopping centers anchored by major retail
tenants and 12 single tenant propertiesthat were 98.2% leased to national retail tenants.in aggregate with a weighted average lease term of approximately 10.8 years remaining. As of December 31, 1996, 98%June 30, 2009, approximately 69% of our annualized base rent was derived from our top three tenants: Walgreen Co. – 29%; Borders Group, Inc. – 29%, and Kmart Corporation – 11%.
Our assets are held by, and all of our operations are conducted through, directly or indirectly, the Operating Partnership, of which we are the sole general partner and in which we held a 95.93% interest as of June 30, 2009. Under the partnership agreement of the Portfolio was leasedOperating Partnership, we, as the sole general partner, have exclusive responsibility and approximately
91%discretion in the management and control of the Company's base rental income was attributable to national and
regional retailers under long-term leases. Such retailers include Kmart
Corporation, Borders, Inc., Roundy's Inc., Fashion Bug (Charming Shoppes, Inc.)
and Circuit City Stores, Inc.
Upon completion of its initial public offering in April 1994, the Company
succeeded to the ownership of a portfolio of 17 properties, all of which were
developed by its predecessor entities. Since the consummation of its initial
public offering, the Company has developed six additional single tenant
properties and has acquired two single tenant properties, increasing the square
footage of gross leasable area in the Portfolio to 2,616,663 square feet as of
December 31, 1996. Management believes that the addition of these properties is
consistent with its strategy of developing high quality retail properties
leased to national and regional retailers.
In addition to the Portfolio, during 1996, the Company acquired interests,
ranging from 8% to 20%, in seven limited liability companies formed for the
purpose of acquiring, developing and operating seven single-tenant
income-producing properties leased by Borders, Inc. and located in Ann Arbor,
Michigan; Boynton Beach, Florida; Tulsa, Oklahoma; Oklahoma City, Oklahoma;
Omaha, Nebraska; and Indianapolis, Indiana.
The Company is operated under the direction of Richard Agree, President and
Chairman of the Board of the Company, and Kenneth Howe, the Vice President --
Finance of the Company, along with the other executive officers of the Company.
Messrs. Agree and Howe have a combined 35 years experience in the construction,
management, leasing and disposition of shopping center properties.
The Company's executive officesOperating Partnership. Our headquarters are located at 31850 Northwestern Highway, Farmington Hills, Michigan 48334. TheMI 48334 and our telephone number is (810)(248) 737-4190. The
We believe that we have operated, and we intend to continue to operate, in such a manner to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). In order to maintain qualification as a REIT, we must, among other things, distribute at least 90% of our REIT income and meet certain other asset and income tests. Additionally, our charter limits ownership of the Company, wasdirectly or constructively, by any single person to 9.8% of the total number of outstanding shares, subject to certain exceptions. As a REIT, we are not subject to federal income tax with respect to that portion of our income that meets certain criteria and is distributed annually to the stockholders.
RISK FACTORS
You should carefully consider the risks and uncertainties described in our reports we file with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act that are incorporated by reference herein, as well as all of the information set forth in Maryland on December 15, 1993this prospectus and the duration of
its existence is perpetual. Unless the context requires otherwise, as used
herein the term "Company" includes Agree Realty Corporation and Agree Limited
Partnership (the "Operating Partnership"), of which Agree Realty Corporation is
the sole general partner.
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any accompanying prospectus supplement before investing in our securities.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company expectsprospectus supplement states otherwise, we expect to use all or a portion of the net proceeds fromof the sale of the Offered Securities, first, to discharge all or a portion of the then
outstanding principal amount under the $50,000,000 Line of Credit Agreement,
dated as of November 14, 1995, by and among the Operating Partnership, the
Company, Michigan National Bank, NBD Bank and LaSalle National Bank (the
"Credit Agreement"). As of February 5, 1997, approximately $25,000,000 was
outstanding under the Credit Agreement, which borrowings were used for the
acquisition, construction and development of additional properties. Subject to
certain exceptions, the then outstanding principal balance of the borrowings
under the Credit Agreement, together with the accrued interest thereon, becomes
payable on the maturity date, November 14, 2001. The borrowings under the
Credit Agreement bear an adjustable interest rate.
The Company intends, unless otherwise described in the applicable
Prospectus Supplement, to use the remaining net proceeds from the sale of the
Offered Securitiesthese securities for general corporate purposes, which may include acquiring
additional retail income-producing properties or interestsinclude:
| · | acquiring properties, securities or other assets as suitable opportunities arise; |
| · | developing, maintaining, expanding and improving properties in our portfolio; |
| · | repayment of indebtedness outstanding at that time; |
| · | financing future acquisitions of properties or businesses that we may from time to time consider; and |
| · | general working capital. |
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Any specific allocation of the net proceeds of an offering of securities to a specific purpose will be determined at the time of such offering and will be described in entities owning
or developing such properties as suitable opportunities arise, making
improvementsthe related supplement to properties, repaying certain then-outstanding secured or
unsecured indebtedness and for working capital. Pending use for the foregoing
purposes, such proceeds may be invested in short-term, interest-bearing time or
demand deposits with financial institutions, cash items or qualified government
securities.
this prospectus.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's ratiofollowing table sets forth the consolidated ratios of earnings to combined fixed charges and preferred stock dividends for the nine months ended September 30, 1996, the year ended
December 31, 1995 and the year ended December 31, 1994 (which includes resultsperiods shown:
| Six Months Ended June 30, 2009 | 4.59 | x | ||
| Year Ended December 31, 2008 | 3.74 | x | ||
| Year Ended December 31, 2007 | 3.98 | x | ||
| Year Ended December 31, 2006 | 4.11 | x | ||
| Year Ended December 31, 2005 | 3.96 | x | ||
| Year Ended December 31, 2004 | 3.71 | x |
The ratios of operations of the Company's predecessor entities for the period of January
1, 1994 through April 21, 1994) was 1.65x, 1.91x and 1.44x, respectively, and
for the years ending December 31, 1993, 1992 and 1991 (which are based on the
results of the Company's predecessor entities) was .99x, .93x and .84x,
respectively. For the years ending December 31, 1993, 1992 and 1991,
respectively, all of which were priorearnings to the Company's initial public offering
in April of 1994, the Company's earnings were inadequate to covercombined fixed charges and preferred dividends were computed by $22,654, $635,882dividing earnings by the aggregate of fixed charges and $1,462,384. The Companypreferred dividends. We had no preferred dividend requirement in any of the foregoing years.periods. Therefore, the ratio of earnings to combined fixed charges and preferred stock dividends are the same as the ratio of earnings to fixed charges for such years. Earnings were calculated by adding certain fixed charges (consisting of interest on indebtedness and amortization of finance costs) to the Company'sour income before extraordinary items. Fixed charges consist of interest costs, whether expensed or capitalized and amortization of debt issuance costs.
DESCRIPTION OF SECURITIES
COMMON STOCK
General
We have the authority to issue 20,000,000 shares of capital stock, par value $.0001 per share, of which 13,350,000 shares are classified as shares of common stock, par value $.0001 per share, and 6,500,000 shares are classified as shares of excess stock, par value $.0001 per share. At June 30, 2009, we had outstanding 8,191,574 shares of common stock and no shares of excess stock.
The summaryfollowing description of our common stock sets forth certain general terms and provisions of the termscommon stock to which any prospectus supplement may relate, including a prospectus supplement providing that common stock will be issuable upon conversion of our preferred stock or upon the Offered Securities set forthexercise of common stock warrants issued by us. The statements below does not
purport to be complete and isdescribing the common stock are in all respects subject to and qualified in itstheir entirety by referencesreference to the Company's articlesapplicable provisions of incorporation,our charter and bylaws.
Subject to preferential rights with respect to any outstanding preferred stock, holders of our common stock will be entitled to receive dividends when, as they mayand if authorized by our board of directors and declared by us, out of assets legally available therefor. Upon our liquidation, dissolution or winding up, holders of common stock, together with the holders of excess stock (as described below), will be amended
from timeentitled to time (the "Charter"),share equally and bylaws, as they may be amended from timeratably in any assets available for distribution to time (the "Bylaws").
Underthem, after payment or provision for payment of our debts and other liabilities and the Company's Charterpreferential amounts owing with respect to any of our outstanding preferred stock. The common stock will possess voting rights in the election of directors and Bylaws,in respect of certain other corporate matters, with each share entitling the total numberholder thereof to one vote. Holders of shares of all
classes of capitalcommon stock that the Company has authority to issue is 20,000,000
shares, par value $.0001 per share, initially consisting of 5,000,000 shares of
Common Stock and 2,500,000 shares of excess stock (the "Excess Stock"). At
February 1, 1997, 2,678,430 shares of Common Stock were issued and outstanding,
all of which are fully paid and nonassessable.
The Board of Directors is authorized to classify or reclassify any unissued
portion of the authorized shares of capital stock to provide for the issuance
of shares in other classes or series, including preferred stock in one or more
series.
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DESCRIPTION OF COMMON STOCK
GENERAL
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Holders of
Common Stock dowill not have cumulative voting rights in the election of directors,
which means that holders of more than 50% of the shares of Common Stock voting
for the election of directors can elect all of the directors if they choose to
do so and the holders of the remaining shares cannot elect any directors.
Subject to preferential rights with respect to any outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock, together with the holders of Excess Stock, are
entitled to share ratably in net assets remaining after payment of liabilities
and satisfaction of preferential rights with respect to any outstanding shares
of Preferred Stock. The shares of Common Stockcommon stock are not convertible into any other class or series except into Excess Stockexcess stock under limited circumstances. See "--“— Restrictions on Ownership and Transfer."” Holders of Common Stock doshares of common stock will not have preemptive rights, which means they have no right to acquire any additional shares of Common Stockcommon stock that may be issued by the Companyus at a subsequent date. The outstanding shares of Common Stock are, and the Common Stock to be outstanding
upon completion of the offeringcommon stock will, when issued, be fully paid and nonassessable.nonassessable and will not be subject to preemptive or similar rights. The Common Stockcommon stock is listed on the NYSE.
RESTRICTIONS ON TRANSFER
NYSE under the symbol “ADC.”
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Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.
Restrictions on Ownership and Transfer
For the Companyus to qualify as a REIT under the Internal Revenue Code, of
1986, as amended (the "Code"), not more than 50% of the value of itsour issued and outstanding Equity Stock (as defined below) may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include, except in limited circumstances, certain entities such as qualified private pension plans) during the last half of a taxable year, (other thanand the first
year for which an election is made to be taxed as a REIT). The Equity Stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of twelve12 months or during a proportionate part of a shorter taxable year (other than the first year for which an election is made to be
taxed as a REIT), andyear. In addition, certain percentages of the Company'sour gross income must be from particular activities (see "Federal“Federal Income Tax Considerations -- Taxation
of the Company --— REIT Qualification Requirements — Income Tests"Tests”). The CharterOur charter contains restrictions on the acquisitionownership and transaction of shares of Equity Stock essentially for the Companyto enable us to qualify as a REIT.
Subject to certain exceptions specified in the Charter,our charter, no holder may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% (the "Ownership Limit"“Ownership Limit”) of the value of the Company'sour outstanding Common Stockcommon stock and Preferred Stockpreferred stock (collectively, the "Equity Stock" or“Equity Stock”) except that the "Stock") and 24% forany member of the Agree-Rosenberg Group (as defined in the Charter)our charter) may own up to 24%. The
BoardOur board of Directorsdirectors may waive the Ownership Limit if evidence satisfactory to the Boardboard of Directorsdirectors and the Company'sour tax counsel is presented that such ownership will not then or in the future jeopardize the Company'sour status as a REIT. As a condition of such waiver, the Boardboard of Directorsdirectors may require opinions of counsel satisfactory to it and/or an undertaking from the applicant with respect to preserving theour REIT status of the
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Company.status. The foregoing restrictions on transferability and ownership will not apply if the Boardboard of Directorsdirectors determines that it is no longer in theour best interests of the Company to attempt to qualify, or to continue to qualify as a REIT. If shares of Equity Stock in excess of the Ownership Limit, or shares which would cause the REITus to be beneficially owned by less than 100 persons, are issued or transferred to any person, such issuance or transfer shall be null and void to the intended transferee, and the intended transferee would acquire no rights to the stock. Shares transferred in excess of the Ownership Limit will be automatically converted into shares of Excess Stockexcess stock that will be deemed transferred by operation of law to the Company as trustee for the exclusive benefit of the person or persons to whom the shares are ultimately transferred, until the intended transferee retransfers the shares. While these shares are held in trust, they will not be entitled to vote or to share in any dividends or other distributions. The shares may be retransferred by the intended transferee to any person who may hold such shares at a price not to exceed the price paid by the intended transferee, at which point the shares will automatically be converted into ordinary Equity Stock. In addition, such shares of Excess Stockexcess stock held in trust are purchasable by the Companyus for a 90-day period at a price equal to the lesser of the price paid for the stock by the intended transferee and the market price for the stock on the date the
Company determineswe determine to purchase the stock. This period commences on the date of the violative transfer if the intended transferee gives notice to the Companyus of the transfer, or the date the Boardboard of Directorsdirectors determines that a violative transfer has occurred if no notice has been provided.
All certificates representing shares of the Offered Securitiescommon stock will bear a legend referring to the restrictions described above.
In order for the Companyus to comply with itsour record keeping requirements, our charter requires that each beneficial or constructive owner of Equity Stock and each person (including stockholders of record) who holds stock for a beneficial or constructive owner, shall provide to us such information as we may request in order to determine our status as a REIT and to ensure compliance with limitations on the Charterownership of Equity Stock. Our charter also requires written statementseach beneficial or constructive owner of actual stock ownership be submitted
by certain stockholdersa specified percentage of Equity Stock to the Company,provide, no later than January 31 of each year, as follows: (i) ifwritten notice to us stating the Company has 200name and address of such owner, the number of shares of Equity Stock beneficially or fewer stockholdersconstructively owned, and a description of record on any
dividend record date, it will demand written statements of actual stock
ownership from each record holder of 1/2 of 1% or more of the outstanding
Equity Stock; (ii) if the Company has between 201 and 1,999 stockholders of
record on any dividend record date, it will demand written statements of actual
stock ownership from each record holder of 1% or more of the outstanding Equity
Stock; (iii) if the Company has more than 1,999 stockholders of record on any
dividend record date, it will demand written statements of actual ownership
from each record holder of 5% or more of the outstanding Equity Stock.how such shares are held. In addition, each such stockholder must upon demand disclose to the Company, in
writing,provide such additional information as the Company may request in order to determine the effect of such stockholder's direct, indirect and constructivestockholder’s ownership of Equity Stock on the Company'sCompany’s status as a REIT orand to complyensure compliance with the requirementslimitations on the ownership of any taxing authority or governmental agency.Equity Stock.
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This ownership limitation may have the effect of precluding acquisition of control of the Company by a third party unless the Boardboard of Directorsdirectors determines that maintenance of REIT status is no longer in theour best interests
of the Company.interests. No restrictions on transfer will preclude the settlement of transactions entered into through the facilities of the NYSE, provided that certain transactions may be settled by the delivery of Excess Stock.
-excess stock.
Shareholder Rights Plan
We have adopted a rights agreement, under which each holder of our common stock receives one preferred share purchase right for each outstanding share of common stock. Each right is attached to each share of common stock, is not currently exercisable and trades only with the shares of common stock. Each right will separate from the share of common stock to which it is attached and will become exercisable 10 -
TRANSFER AGENT AND REGISTRAR
The transfer agentdays after a public announcement that a person or group has acquired common stock that would result in ownership of 15% or more of our shares of common stock. Upon the occurrence of such an event, each right would entitle the holder to purchase for an exercise price of $70.00 one one-hundredth of a share of new Series A Junior Participating Preferred Stock, which is designed to have economic and registrarvoting rights generally equivalent to one share of common stock. If a person or group actually acquires 15% or more of our shares of common stock, each right held by the acquiring person or group (or their transferees) will become void, and each right held by our other stockholders will entitle those holders to purchase for the Common Stockexercise price a number of shares of our common stock having a market value of twice the exercise price. If we, at any time after a person or group has become a 15% beneficial owner and acquired control of our board of directors, are involved in a merger or similar transaction with any person or group or sell assets to any person or group, each outstanding right would then entitle its holder to purchase for the exercise price a number of shares of such other company having a market value of twice the exercise price. In addition, if any person or group acquires 15% or more of our shares of common stock, we may, at our option and to the fullest extent permitted by law, exchange one share of common stock for each outstanding right. The rights are not exercisable until the above events occur and will expire on December 22, 2018, unless earlier exchanged or redeemed by us. We may redeem the rights for $.001 per right under certain circumstances.
Classification of Board of Directors, Vacancies and Removal of Directors
Our board of directors is The First National
Bankdivided into three classes of Boston.
DESCRIPTION OF PREFERRED STOCK
GENERALdirectors, serving staggered three year terms. At each annual meeting of stockholders, the class of directors to be elected at the meeting generally will be elected for a three-year term and the directors in the other two classes will continue in office. Subject to limitations prescribedthe rights of any class or series to elect directors, a director may only be removed for cause by Maryland lawthe affirmative vote of the holders of 80% of our outstanding shares of common stock entitled to vote generally in the election of directors, voting together as a single class. We believe that the classified board will help to assure the continuity and stability of our board of directors and our business strategies and policies as determined by our board of directors. The use of a staggered board may delay or defer a change in control of us or the Company's
Charter,removal of incumbent management.
Our charter and bylaws provide that, subject to any rights of holders of preferred stock, and unless the board of directors otherwise determines, any vacancies may be filled by a vote of the stockholders or a majority of the remaining directors, though less than a quorum, except vacancies created by the increase in the number of directors, which only may be filled by a vote of the stockholders or a majority of the entire board of directors. In addition, our charter and bylaws provide that, subject to any rights of holders of preferred stock to elect additional directors under specified circumstances, only a majority of the board of directors may increase or decrease the number of persons serving on the board of directors. These provisions could temporarily prevent stockholders from enlarging the board of directors and from filling the vacancies created by such removal with their own nominees.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
Our charter and bylaws establish an advance notice procedure for stockholders to make nominations of candidates for director or bring other business before an annual meeting of stockholders.
Our bylaws provide that (i) only persons who are nominated by, or at the direction of, the board of directors, or by a stockholder who has given timely written notice containing specified information to our secretary prior to the meeting at which directors are to be elected, will be eligible for election as directors and (ii) at an annual meeting, only such business may be conducted as has been brought before the meeting by, or at the direction of, the chairman of the board of directors or by a stockholder who has given timely written notice to our secretary of such stockholder’s intention to bring such business before such meeting. In general, for notice of stockholder nominations or proposed business (other than business to be included in our proxy statement under SEC Rule 14a-8) to be conducted at an annual meeting to be timely, such notice must be received by us not less than 60 days nor more than 90 days prior to the first anniversary of the previous year’s annual meeting.
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The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a meaningful opportunity to consider the qualifications of the proposed nominees or the advisability of the other proposed business and, to the extent deemed necessary or desirable by our board of directors, to inform stockholders and make recommendations about such nominees or business, as well as to ensure an orderly procedure for conducting meetings of stockholders. Although our charter and bylaws do not give the board of directors power to block stockholder nominations for the election of directors or proposal for action, they may have the effect of discouraging a stockholder from proposing nominees or business, precluding a contest for the election of directors or the consideration of stockholder proposals if procedural requirements are not met and deterring third parties from soliciting proxies for a non-management slate of directors or proposal, without regard to the merits of such slate or proposal.
Relevant Factors to be Considered by the Board of Directors
Our charter provides that, in determining what is in our best interest in a business combination or certain change of control events, each of our directors shall consider the interests of our stockholders and, in his or her discretion, also may consider (i) the interests of our employees, suppliers, creditors and tenants; and (ii) both the long-term and short-term interests of our company and our stockholders, including the possibility that these interests may be best served by the continued independence of our company. Pursuant to this provision, our board of directors may consider subjective factors affecting a proposal, including certain nonfinancial matters, and on the basis of these considerations may oppose a business combination or other transaction which, evaluated only in terms of its financial merits, might be attractive to some, or a majority, of our stockholders.
Additional Classes and Series of Stock
Our board of directors is authorized to issue, from the authorized but
unissued sharesestablish one or more classes and series of capital stock, including series of the Company, Preferred Stock in such
classes or series as the Board of Directors may determine and to establishpreferred stock, from time to time, and to establish the number of shares of Preferred Stock to be included in any sucheach 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, andwithout any further vote or action by the stockholders, unless such other subjectsaction is required by applicable law or matters asthe rules of any stock exchange or automated quotation system on which our securities may be fixed by
resolution of the Board of Directors. listed or traded.
The issuance of Preferred Stockadditional classes or series of capital stock may have the effect of delaying, deferring or preventing a change in control of our company without further action of the Company.
stockholders. The issuance of additional classes or series of capital stock with voting and conversion rights may adversely affect the voting power of the holders of our capital stock, including the loss of voting control to others. The ability of our board of directors to issue additional classes or series of capital stock, while providing flexibility in connection with possible acquisitions or other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding voting stock, even where such an acquisition may be beneficial to us or our stockholders.
Business Combinations
Maryland law prohibits “business combinations” between us and an interested stockholder or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or transfer of equity securities, liquidation plan or reclassification of equity securities. Maryland law defines an interested stockholder as:
| · | any person or entity who beneficially owns 10% or more of the voting power of our stock; or |
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| · | an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding voting stock. |
A person is not an interested stockholder if our board of directors approves in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, our board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by our board of directors.
After the five-year prohibition, any business combination between us and an interested stockholder or an affiliate of an interested stockholder generally must be recommended by our board of directors and approved by the affirmative vote of at least:
| · | 80% of the votes entitled to be cast by holders of our then-outstanding shares of voting stock; and |
| · | two-thirds of the votes entitled to be cast by holders of our voting stock other than stock held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or stock held by an affiliate or associate of the interested stockholder. |
These super-majority vote requirements do not apply if our common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its stock.
The statute permits various exemptions from its provisions, including business combinations that are approved or exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Our board of directors has exempted from these provisions of the MGCL any business combination with Messrs. Richard Agree and Edward Rosenberg or any other person acting in concert or as a group with Messrs. Agree and Rosenberg.
Control Share Acquisitions
Maryland law provides that “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights, except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror or by officers or by directors who are our employees are excluded from the shares entitled to vote on the matter. “Control shares” are voting shares of stock that, if aggregated with all other shares of stock currently owned by the acquiring person, or in respect of which the acquiring person is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiring person to exercise voting power in electing directors within one of the following ranges of voting power:
| · | one-tenth or more but less than one-third; |
| · | one-third or more but less than a majority; or |
| · | a majority or more of all voting power. |
Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of control shares, subject to certain exceptions. A person who has made or proposes to make a control share acquisition may compel our board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, we may present the question at any stockholders meeting.
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If voting rights are not approved at the stockholders meeting or if the acquiring person does not deliver the statement required by Maryland law, then, subject to certain conditions and limitations, we may redeem any or all of the control shares, except those for which voting rights have previously been approved, for fair value. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of the shares were considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares for purposes of these appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if we are a party to the transaction, nor does it apply to acquisitions approved by or exempted by our charter or bylaws.
Our bylaws contain a provision exempting from the control share acquisition statute any members of the Agree-Rosenberg Group, our other officers, our employees, any of the associates or affiliates of the foregoing and any other person acting in concert of as a group with any of the foregoing. Consequently, the control share acquisitions statute will not apply to Messrs. Agree and Rosenberg unless our board of directors later amends our bylaws to modify or eliminate this provision.
Maryland Unsolicited Takeovers Act
Subtitle 8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Securities Exchange Act and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to any or all of five provisions:
| · | a classified board; |
| · | a two-thirds vote requirement for removing a director; |
| · | a requirement that the number of directors be fixed only by vote of directors; |
| · | a requirement that a vacancy on the board be filled only by the remaining directors and for the remainder of the full term of the directorship in which the vacancy occurred; and |
| · | a majority requirement for the calling of a special meeting of stockholders. |
Through provisions in our charter and bylaws unrelated to Subtitle 8, we (1) have a classified board, (2) require an 80% vote for the removal of any director from the board, (3) vest in the board the exclusive power to fix the number of directorships and (4) provide that unless called by our chairman of our board of directors, our president or our board of directors, a special meeting of stockholders may only be called by our secretary upon the written request of the stockholders entitled to cast not less than a majority of all the votes entitled to be cast at the meeting.
Limitation of Liability and Indemnification
The MGCL 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 liability resulting from:
| · | actual receipt of an improper benefit or profit in money, property or services; or |
| · | active and deliberate dishonesty established by a final judgment and which is material to the cause of action. |
Our charter contains such a provision that eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law. These limitations of liability do not apply to liabilities arising under the federal securities laws and do not generally affect the availability of equitable remedies such as injunctive relief or rescission.
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Our officers and directors are and will be indemnified under Maryland law and our articles of incorporation, as amended, against certain liabilities. Our charter requires us to indemnify our directors and officers to the fullest extent permitted from time to time by the laws of the State of Maryland.
Maryland law requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. Maryland law 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, or threatened to be made, a party by reason of their service in those or other capacities unless it is established that:
| · | the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty; |
| · | the director or officer actually received an improper personal benefit in money, property or services; or |
| · | in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. |
However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis of that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of:
| · | a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and |
| · | a written undertaking by him or her on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met. |
We maintain liability insurance for each director and officer for certain losses arising from claims or charges made against them while acting in their capacities as our directors or officers.
Insofar as the foregoing provisions permit indemnification of directors, executive officers or persons controlling us for liability arising under the Securities Act, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
DESCRIPTION OF PREFERRED STOCK
As of the date hereof, none150,000 shares are classified as Series A Junior Participating Preferred Stock, par value $.0001 per share. None of the shares of capital stock has been
designated as Preferred Stock. TheSeries A Junior Participating Preferred Stock will, whenis issued for lawful
consideration therefor, be fully paid and nonassessable and, unless otherwise
provided in the applicable Prospectus Supplement, will have no preemptive
rights.
TERMS
Theor outstanding. Shares of our Series A Junior Participating Preferred Stock shall have the dividend, liquidation, redemptionmay be issued under our shareholder rights plan, which is summarized above.
The following description of our preferred stock sets forth certain general terms and voting rights set forth below unless otherwise provided in a Prospectus
Supplement relatingprovisions of our preferred stock to a particular series of the Preferred Stock.which any prospectus supplement may relate. The statements below describing the Preferred Stockpreferred stock are in all respects subject to and qualified in their entirety by reference to the applicable provisions of our charter (including the Charterapplicable articles supplementary) and bylaws.
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General
Subject to limitations prescribed by Maryland law and our charter, our board of directors is authorized to fix the number of shares constituting each class or series of preferred stock and the By-Lawsdesignations and anypowers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including those provisions as may be desired concerning voting, redemption, dividends, dissolution or the distribution of assets, conversion or exchange, and those other subjects or matters as may be fixed by resolution of our board of directors or duly authorized committee thereof. The preferred stock will, when issued, be fully paid and nonassessable and, except as may be determined by our board of directors and set forth in the articles supplementary setting forth the terms of any class or series of preferred stock, will not have, or be subject to, any preemptive or similar rights.
You should refer to the Charter
designating terms of a series of Preferred Stock (the "Articles
Supplementary").
Reference is made to the Prospectus Supplementprospectus supplement relating to the Preferred
Stockclass or series of preferred stock offered thereby for specific terms, including: (i) the title and stated
value of such Preferred Stock and the number of shares offered; (ii) the
liquidation preference per share; (iii) the initial public offering price at
which such Preferred Stock will be issued; (iv) the dividend rate, periods and
payment dates or methods of calculation thereof applicable to such Preferred
Stock and the date from which dividends on such Preferred Stock shall commence
to cumulate, if applicable; (v) the provision for a sinking fund, if any, for
such Preferred Stock; (vi) the provision for redemption, if applicable, of such
Preferred Stock; (vii) any listing of such Preferred Stock on any securities
exchange; (viii) the terms and conditions, if applicable, upon which such
Preferred Stock will be convertible into Common Stock, including the conversion
price or rate (or manner of calculation thereof); (ix) any other specific
terms, preferences, rights, limitations or restrictions of such Preferred
Stock; (x) a discussion of Federal income tax considerations applicable to such
Preferred Stock; (xi) the relative ranking and preference of such Preferred
Stock as to dividend rights and rights upon liquidation, dissolution or winding
up of the affairs
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| (1) | The class or series, title and stated value of that preferred stock; |
| (2) | The number of shares of that preferred stock offered, the liquidation preference per share and the offering price of that preferred stock; |
| (3) | The dividend rate(s), period(s) and/or payment date(s) or method(s) of calculation thereof applicable to that preferred stock; |
| (4) | Whether dividends on that preferred stock shall be cumulative or not and, if cumulative, the date from which dividends on that preferred stock shall accumulate; |
| (5) | The procedures for any auction and remarketing, if any, for that preferred stock; |
| (6) | Provisions for a sinking fund, if any, for that preferred stock; |
| (7) | Provisions for redemption, if applicable, of that preferred stock; |
| (8) | Any listing of that preferred stock on any securities exchange; |
| (9) | The terms and conditions, if applicable, upon which that preferred stock will be convertible into our common stock, including the conversion price (or manner of calculation thereof); |
| (10) | Whether interests in that preferred stock will be represented by our depositary shares; |
| (11) | The relative ranking and preference of the preferred stock as to distribution rights and rights upon our liquidation, dissolution or winding up if other than as described in this prospectus; |
| (12) | Any limitations on issuance of any other series of preferred stock ranking senior to or on a parity with the preferred stock as to distribution rights and rights upon our liquidation, dissolution or winding up; |
| (13) | A discussion of certain federal income tax considerations applicable to that preferred stock; |
| (14) | Any limitations on actual, beneficial or constructive ownership and restrictions on transfer of that preferred stock and, if convertible, the related common stock, in each case as may be appropriate to preserve our status as a REIT; and |
| (15) | Any other material terms, preferences, rights, limitations or restrictions of that preferred stock. |
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of the Company; (xii) any limitations on issuance of any series of Preferred
Stock ranking senior to or on a parity with such series of Preferred Stock as
to dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company; (xiii) any limitations on direct or beneficial
ownership and restrictions on transfer, in each case as may be appropriate to
preserve the status of the Company as a REIT; and (xiv) the voting rights, if
any, of such Preferred Stock.
RANK
Rank
Unless otherwise specified in the applicable Prospectus Supplement,prospectus supplement and the Preferred Stockarticles supplementary setting forth the terms of any class or series of preferred stock, the preferred stock will, with respect to dividend rights to the payment of dividends and distribution of our assets and rights upon our liquidation, dissolution or winding up, of the Company, rank (i) rank:
| (1) | senior to all classes or series of our common stock and excess stock and to all of our equity securities the terms of which provide that those equity securities are junior to the preferred stock; |
| (2) | on a parity with all of our equity securities other than those referred to in clauses (1) and (3); and |
| (3) | junior to all of our equity securities the terms of which provide that those equity securities will rank senior to it. |
Dividends
Holders of shares of our preferred stock of each class or series of Common Stock and Excess Stock of the Company and to all
equity securities ranking junior to such Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company; (ii) on a parity with all equity securities issued by the Company, the
terms of which specifically provide that such equity securities rank on a
parity with the Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; and (iii) junior to all
equity securities issued by the Company, the terms of which specifically
provide that such equity securities rank senior to the Preferred Stock with
respect to dividend rights or rights upon liquidation, dissolution or winding
up of the Company.
DIVIDENDS
Holders of each series of Preferred Stock willshall be entitled to receive, when, as and if authorized by our board of directors and declared by the Board of Directors,us, out of our assets of the
Company legally available for payment, cash dividends at such rates and on such
dates asthat will be set forth in the applicable Prospectus Supplement. Such rate
may be fixedprospectus supplement and the articles supplementary setting forth the terms of any class or variable or both.series of preferred stock. Each such dividend shall be payable to holders of record as they appear on the shareour stock transfer books ofon the Company on
such record datedates as shall be fixed by the Boardour board of Directors, as specified in
the Prospectus Supplement relating to such series of Preferred Stock.
directors.
Dividends on any class or series of Preferred Stockour preferred stock may be cumulative or noncumulative,non-cumulative, as provided in the applicable Prospectus Supplement.prospectus supplement and the articles supplementary setting forth the terms of any class or series of preferred stock. Dividends, if cumulative, will be cumulativeaccumulate from and after the date set forth in the applicable Prospectus Supplement.prospectus supplement and the articles supplementary setting forth the terms of any class or series of preferred stock. If the Boardour board of Directorsdirectors fails to declareauthorize a dividend payable on a dividend payment date on any class or series of the Preferred
Stockour preferred stock for which dividends are noncumulative, then the holders of suchthat class or series of the Preferred Stockour preferred stock will have no right to receive a dividend in respect of the dividend period ending on suchthat dividend payment date, and the Companywe will have no obligation to pay the dividend accrued for suchthat period, whether or not dividends on suchthat class or series are declared payable on any future dividend payment date.
So long as
If any shares of our preferred stock of any class or series of Preferred Stockare outstanding, no full dividends shall be outstanding, unless (i)
full dividends (including, if such dividends are cumulative, dividends for
prior dividend periods) shall have beendeclared or paid or declared and set apart for payment on all outstandingour preferred stock of any other class or series ranking, as to dividends, on a parity with or junior to the preferred stock of that class or series for any period unless:
| (1) | if that class or series of preferred stock has a cumulative dividend, full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for that payment on the preferred stock of that class or series for all past dividend periods and the then current dividend period, or |
| (2) | if that class or series of preferred stock does not have a cumulative dividend, full dividends for the then current dividend period have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for that payment on the preferred stock of that class or series. |
When dividends are not paid in full (or a sum sufficient for their full payment is not so set apart) upon the shares of Preferred Stock of such series and all
other classes and series of Preferred Stock (other than Junior Stock, as
hereinafter defined) and (ii) the mandatory repurchase or other mandatory
retirement of, or with respect to any sinking or other analogous fund for, any
shares of Preferredpreferred stock of such series
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or any other Preferred Stock of any class or series and the shares of any other class or series of preferred stock ranking on a parity as to dividends with the preferred stock of that class or series, all dividends declared upon shares of preferred stock of that class or series and any other class or series of preferred stock ranking on a parity as to dividends with that preferred stock shall be declared pro rata so that the amount of dividends declared per share on the preferred stock of that class or series and that other class or series of preferred stock shall in all cases bear to each other the same ratio that accrued and unpaid dividends per share on the shares of preferred stock of that class or series (which shall not include any accumulation in respect of unpaid dividends for prior dividend periods if that preferred stock does not have a cumulative dividend) and that other class or series of preferred stock bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on preferred stock of that series that may be in arrears.
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Except as provided in the immediately preceding paragraph, unless: (1) if that class or series of preferred stock has a cumulative dividend, full cumulative dividends on the preferred stock of that class or series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period; and (2) if that class or series of preferred stock does not have a cumulative dividend, full dividends on the preferred stock of that class or series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set aside for payment for the then current dividend period, then no dividends (other than Junior Stock)in our common stock or other stock ranking junior to the preferred stock of that class or series as to dividends and upon our liquidation, dissolution or winding up) shall have occurredbe declared or been providedpaid or set aside for and sufficient fundspayment or other distribution shall have been
deposited in trust to effect such repurchasebe declared or retirement, the Company may not
declare any dividends on any Common Stockmade upon our common stock, excess stock or any of our other equity securitiesstock ranking junior to or on a parity with the preferred stock of the
Company rankingthat class or series as to dividends or distributionsupon our liquidation, nor shall any common stock, excess stock or any of assetsour other stock ranking junior to or on a parity with the preferred stock of such class or series of Preferred Stock (the Common Stock andas to dividends or upon our liquidation, dissolution or winding up be redeemed, purchased or otherwise acquired for any such other equity
securities being herein referredconsideration (or any moneys be paid to as "Junior Stock"), or make any payment on
account of, or set apart money for, the purchase, redemption or other
retirement of, ormade available for a sinking or other analogous fund for any Junior Stock
or make any distribution in respect thereof, whether in cash or property or in
obligations or equity securitiesthe redemption of the Company, other thanany shares of Junior
Stock which are neither convertiblethat stock) by us (except by conversion into nor exchangeable or exercisableexchange for any securitiesother of our stock ranking junior to the Company other than sharespreferred stock of Junior Stock.
that class or series as to dividends and upon our liquidation, dissolution or winding up).
Any dividend payment made on shares of a class or series of Preferred Stockpreferred stock shall first be credited against the earliest accrued but unpaid dividend due with respect to shares of suchthat class or series which remains payable.
REDEMPTION
Redemption
If so provided in the applicable Prospectus Supplement, aprospectus supplement and the articles supplementary setting forth the terms of any class or series of Preferred Stock may be redeemable, in whole or from time to time in part, atpreferred stock so states, the optionshares of the Company, and maypreferred stock will be subject to mandatory redemption pursuant
to a sinking fund or otherwise,redemption at our option, in whole or in part, in each case uponon the terms, at the times and at the redemption prices set forth in such Prospectus Supplement.
that prospectus supplement and the articles supplementary setting forth the terms of any class or series of preferred stock.
The Prospectus Supplementprospectus supplement relating to a class or series of Preferred Stockpreferred stock that is subject to mandatory redemption will specify the number of shares of such
Preferred Stockthat preferred stock that shall be redeemed by the Companyus in each year commencing after a date to be specified, at a redemption price per share to be specified, together with an amount equal to all accrued and unpaid dividends thereon (which shall not, if such Preferred Stockthat preferred stock does not have a cumulative dividend, include any accumulation in respect of unpaid dividends for prior dividend periods) to the date of redemption. The redemption price may be payable in cash or other property, as specified in the applicable Prospectus Supplement.prospectus supplement. If the redemption price for Preferred Stockpreferred stock of any series is payable only from the net proceeds of the issuance of shares of equity securities of the Company,our stock, the terms of such series of Preferred Stockthat preferred stock may provide that, if no such shares of
capital stock shall have been issued or to the extent the net proceeds from any issuance are insufficient to pay in full the aggregate redemption price then due, such Preferred Stockthat preferred stock shall automatically and mandatorily be converted into the applicable shares of capitalour applicable stock of the Company pursuant to conversion provisions specified in the applicable Prospectus Supplement.
So long as anyprospectus supplement. Notwithstanding the foregoing, unless:
| (1) | if that class or series of preferred stock has a cumulative dividend, full cumulative dividends on all outstanding shares of any class or series of preferred stock shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period; and |
| (2) | if that class or series of preferred stock does not have a cumulative dividend, full dividends on the preferred stock of any class or series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period. |
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Unless otherwise specified in the applicable prospectus supplement and the articles supplementary setting forth the terms of any class or series of Preferred Stock or any
other series of Preferred Stock of the Company ranking on a parity as to
dividends and distribution of assets with such series of Preferred Stock are in
arrears,preferred stock no shares of any suchclass or series of Preferred Stock or such other series
of Preferred Stock of the Company willpreferred stock shall be redeemed (whether by mandatory or
optional redemption) unless all suchoutstanding shares of preferred stock of that class or series are simultaneously redeemed, and
the Company will not purchase or otherwise acquire any such shares;redeemed; provided, however, that the foregoing willshall not prevent the purchase or acquisition of such shares of preferred stock of that class or series pursuant to a purchase or exchange offer made on the same terms to holders of all suchoutstanding shares outstanding.
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of preferred stock of that class or series.
In addition, unless:
| (1) | if that class or series of preferred stock has a cumulative dividend, full cumulative dividends on all outstanding shares of any class or series of preferred stock have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period; and |
| (2) | if that class or series of preferred stock does not have a cumulative dividend, full dividends on the preferred stock of any class or series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period; |
we shall not purchase or otherwise acquire directly or indirectly any shares of preferred stock of that class or series (except by conversion into or exchange for our stock ranking junior to the eventpreferred stock of that class or series as to dividends and upon our liquidation, dissolution or winding up).
If fewer than all of the outstanding shares of apreferred stock of any class or series of
Preferred Stock are to be redeemed, the number of shares to be redeemed will be determined by lot orus and those shares may be redeemed pro rata (subjectfrom the holders of record of those shares in proportion to roundingthe number of those shares held by those holders (with adjustments to avoid redemption of fractional shares)
as may be determined by the Company or by any other equitable method as may be determined by us that will not result in the Company in its sole discretionissuance of any excess preferred stock.
Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of record of a share of preferred stock of any class or series to be equitable. Fromredeemed at the address shown on our stock transfer books. Each notice shall state:
| (1) | the redemption date; |
| (2) | the number of shares and class or series of the preferred stock to be redeemed; |
| (3) | the redemption price; |
| (4) | the place or places where certificates for that preferred stock are to be surrendered for payment of the redemption price; |
| (5) | that dividends on the shares to be redeemed will cease to accrue on that redemption date; and |
| (6) | the date upon which the holder’s conversion rights, if any, as to those shares shall terminate. |
If fewer than all the shares of preferred stock of any class or series are to be redeemed, the notice mailed to each holder thereof shall also specify the number of shares of preferred stock to be redeemed from each holder. If notice of redemption of any shares of preferred stock has been given and if the funds necessary for that redemption have been set apart by us in trust for the benefit of the holders of any shares of preferred stock so called for redemption, then from and after the redemption dates (unless default shall be made by the Company in providing for
the payment of the redemption price plus accumulated and unpaiddate dividends if
any), dividends shallwill cease to accumulateaccrue on thethose shares of Preferred Stock
called for redemptionpreferred stock, those shares of preferred stock shall no longer be deemed outstanding and all rights of the holders thereof (exceptof those shares will terminate, except the right to receive the redemption price plus accumulated and unpaid dividends, if any)
shall cease.
LIQUIDATION PREFERENCE
price.
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Liquidation Preference
Upon anyour voluntary or involuntary liquidation, dissolution or winding up, of
the affairs of the Company, then, before any distribution or payment shall be made to the holders of any Common Stock, Excess Stockcommon stock, excess stock or any other class or series of capitalour stock of the Company ranking junior to the Preferred Stockthat class or series of preferred stock in the distribution of assets upon anyour liquidation, dissolution or winding up, of
the Company, the holders of each class or series of Preferred Stockpreferred stock shall be entitled to receive out of our assets of the Company legally available for distribution to stockholders liquidating distributions in the amount of the liquidation preference per share if any, set(set forth in the applicable Prospectus
Supplement,prospectus supplement), plus an amount equal to all dividends accrued and unpaid thereon (which shall not include any accumulation in respect of unpaid noncumulative
dividends for prior dividend periods)periods if that class or series of preferred stock does not have a cumulative dividend). After payment of the full amount of the liquidating distributions to which they are entitled, the holderholders of Preferred
Stockthat class or series of preferred stock will have no right or claim to any of theour remaining assets of the
Company. In the event that,assets. If, upon any suchour voluntary or involuntary liquidation, dissolution or winding up, theour legally available assets of the Company are insufficient to pay the amount of the liquidating distributions on all outstanding shares of Preferred Stockthat class or series of preferred stock and the corresponding amounts payable on all shares of other classes or series of capitalour stock of the Company ranking on a parity with the
Preferred Stockthat class or series of preferred stock in the distribution of assets upon our liquidation, dissolution or winding up, then the holders of the
Preferred Stockthat class or series of preferred stock and all other such classes or series of capital stock ranking
on parity with the Preferred Stock shall share ratably in any suchthat distribution of assets in proportion to the full liquidating distributions to which they would otherwise bybe respectively entitled.
If liquidating distributions shall have been made in full to all holders of Preferred Stock, theshares of that class or series of preferred stock, our remaining assets of the Company shall be distributed among the holders of any other classes or series of capital stock ranking junior to the Preferred Stockthat class or series of preferred stock upon our liquidation, dissolution or winding up, according to their respective rights and preferences and in each case according to their respective number of shares. For suchthose purposes, theneither our consolidation or merger of
the Company with or into any other corporation, trust or other entity ornor the sale, lease, transfer or conveyance of all or substantially all of theour property or business of
the Company, shall not be deemed to constitute aour liquidation, dissolution or winding up of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, exceptup.
Voting Rights
Except as set forth below or as otherwise from time to time required by law or as indicated in the applicable Prospectus Supplement.
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prospectus supplement and the articles supplementary setting forth the terms of any class or series of preferred stock, holders of preferred stock will not have any voting rights.
Whenever dividends on any shares of that class or series of preferred stock shall be in arrears for six or more quarterly periods, regardless of whether those quarterly periods are consecutive, the holders of those shares of that class or series of preferred stock (voting separately as a class with all other classes or series of preferred stock upon which like voting rights have been conferred and are exercisable) will be entitled to vote for the election of two additional directors to our board of directors (and our entire board of directors will be increased by two directors) at a special meeting called by one of our officers at the request of a holder of that class or series of preferred stock or, if that special meeting is not called by that officer within 30 days, at a special meeting called by a holder of that class or series of preferred stock designated by the holders of record of at least 10% of the shares of any of those classes or series of preferred stock (unless that request is received less than 90 days before the date fixed for the next annual or special meeting of the stockholders), or at the next annual meeting of stockholders, and at each subsequent annual meeting until:
| (1) | if that class or series of preferred stock has a cumulative dividend, all dividends accumulated on those shares of preferred stock for the past dividend periods and the then current dividend period shall have been fully paid or declared and a sum sufficient for the payment thereof set apart for payment, or |
| (2) | if that class or series of preferred stock does not have a cumulative dividend, four consecutive quarterly dividends shall have been fully paid or declared and a sum sufficient for the payment thereof set apart for payment. |
Unless provided otherwise for any series of Preferred Stock,preferred stock, so long as any shares of Preferred Stock of a seriespreferred stock remain outstanding, the Company willwe shall not, without the affirmative vote or consent of the holders of at least a majoritytwo-thirds of the shares of sucheach class or series of Preferred Stockpreferred stock outstanding at the time, given in person or by proxy, either in writing or at a meeting (such(that class or series voting separately as a class), (i) authorize or create, or increase the authorized or
issued amount of, any class or series of capital stock ranking prior to such
series of Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized capital stock of the Company into such shares, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares, or (ii) amend, alter or
repeal the provisions of the Charter or the Articles Supplementary for such
series of Preferred Stock, whether by merger, consolidation or otherwise (an
"Event"), so as to materially and adversely affect any right, preference,
privilege or voting power of such series of Preferred Stock or the holders
thereof, provided, however, with respect to the occurrence of any Event set
forth in (ii) above, so long as the Preferred Stock remains outstanding with
the terms thereof materially unchanged, taking into account that upon the
occurrence of an Event the Company may not be the surviving entity, the
occurrence of any such Event shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting power of holders of
Preferred Stock, and provided further that (a) any increase in the amount of
the authorized Preferred Stock or the creation or issuance of any other series
of Preferred Stock or (b) any increase in the amount of authorized shares of
such series or any other series of Preferred Stock, in each case ranking on a
parity with or junior to the Preferred Stock of such series with respect to
payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting powers.
:
15
| (1) | authorize or create, or increase the authorized or issued amount of, any class or series of stock ranking senior to that class or series of preferred stock with respect to payment of dividends or the distribution of assets upon our liquidation, dissolution or winding up or reclassify any of our authorized stock into those shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase those shares; or |
| (2) | amend, alter or repeal the provisions of the charter in respect of that class or series of preferred stock, whether by merger, consolidation or otherwise, so as to materially and adversely affect any right, preference, privilege or voting power of that class or series of preferred stock; provided, however, that any increase in the amount of the authorized preferred stock or the creation or issuance of any other class or series of preferred stock, or any increase in the number of authorized shares of that class or series, in each case ranking on a parity with or junior to the preferred stock of that class or series with respect to payment of dividends and the distribution of assets upon our liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect those rights, preferences, privileges or voting powers. |
The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which suchthat vote would otherwise be required shall be effected, all outstanding shares of suchthat class or series of Preferred Stockpreferred stock shall have been redeemed or called for redemption upon proper notice and sufficient funds shall have been irrevocably deposited in trust to effect suchthat redemption.
CONVERSION RIGHTS
Conversion Rights
The terms and conditions, if any, upon which shares of any class or series of Preferred Stockpreferred stock are convertible into Common Stockcommon stock, debt securities or another series of preferred stock will be set forth in the applicable Prospectus Supplementprospectus supplement relating thereto.thereto and the articles supplementary setting forth the terms of any class or series of preferred stock. Such terms will include the number of shares of Common Stockcommon stock or those other series of preferred stock or the principal amount of debt securities into which the shares of Preferred Stock arepreferred stock is convertible, the conversion price or rate (or manner of calculation thereof), the conversion period, provisions as to whether conversion will be at our option or at the option of the holders of the Preferred Stockthat class or series of the Company,preferred stock, the events requiring an adjustment of the conversion price and the provisions affecting conversion in the event of the redemption of suchthat class or series of Preferred Stock.
RESTRICTIONS ON TRANSFER AND OWNERSHIP
preferred stock.
Restrictions on Ownership and Transfer
See "Description“Description of Common Stock -- Stock—Restrictions on Transfer"Ownership and Transfer,” for a discussion of the restrictions on ownership and transfer of shares of capital stock necessary for the Companyus to qualify as a REIT under the Code.
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TRANSFER AGENT AND REGISTRAR
Transfer Agent and Registrar
The transfer agent and registrar for the Preferred Stockpreferred stock will be set forth in the applicable Prospectus Supplement.prospectus supplement.
DESCRIPTION OF DEPOSITARY SHARES
General
We may issue depositary shares, each of which would represent a fractional interest of a share of a particular series of preferred stock. We will deposit shares of preferred stock represented by depositary shares under a separate deposit agreement among us, a preferred stock depositary and the holders of the depositary shares. Subject to the terms of the deposit agreement, each owner of a depositary share will possess, in proportion to the fractional interest of a share of preferred stock represented by the depositary share, all the rights and preferences of the preferred stock represented by the depositary shares.
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Depositary receipts will evidence the depositary shares issued pursuant to the deposit agreement. Immediately after we issue and deliver preferred stock to a preferred stock depositary, the preferred stock depositary will issue the depositary receipts.
Dividends and Other Distributions
The depositary will distribute all cash dividends on the preferred stock to the record holders of the depositary shares. Holders of depositary shares generally must file proofs, certificates and other information and pay charges and expenses of the depositary in connection with distributions.
If a distribution on the preferred stock is other than in cash and it is feasible for the depositary to distribute the property it receives, the depositary will distribute the property to the record holders of the depositary shares. If such a distribution is not feasible and we approve, the depositary may sell the property and distribute the net proceeds from the sale to the holders of the depositary shares.
Withdrawal of Stock
Unless we have previously called the underlying preferred stock for redemption or the holder of the depositary shares has converted such shares, a holder of depositary shares may surrender them at the corporate trust office of the depositary in exchange for whole or fractional shares of the underlying preferred stock together with any money or other property represented by the depositary shares. Once a holder has exchanged the depositary shares, the holder may not redeposit the preferred stock and receive depositary shares again. If a depositary receipt presented for exchange into preferred stock represents more shares of preferred stock than the number to be withdrawn, the depositary will deliver a new depositary receipt for the excess number of depositary shares.
Redemption of Depositary Shares
Whenever we redeem shares of preferred stock held by a depositary, the depositary will redeem the corresponding amount of depositary shares. The redemption price per depositary share will be equal to the applicable fraction of the redemption price and any other amounts payable with respect to the preferred stock. If we intend to redeem less than all of the underlying preferred stock, our company and the depositary will select the depositary shares to be redeemed as nearly pro rata as practicable without creating fractional depositary shares or by any other equitable method determined by us that preserves our REIT status.
On the redemption date:
| · | all dividends relating to the shares of preferred stock called for redemption will cease to accrue; |
| · | our company and the depositary will no longer deem the depositary shares called for redemption to be outstanding; and |
| · | all rights of the holders of the depositary shares called for redemption will cease, except the right to receive any money payable upon the redemption and any money or other property to which the holders of the depositary shares are entitled upon redemption. |
Voting of the Preferred Stock
When a depositary receives notice regarding a meeting at which the holders of the underlying preferred stock have the right to vote, it will mail that information to the holders of the depositary shares. Each record holder of depositary shares on the record date may then instruct the depositary to exercise its voting rights for the amount of preferred stock represented by that holder’s depositary shares. The depositary will vote in accordance with these instructions. The depositary will abstain from voting to the extent it does not receive specific instructions from the holders of depositary shares. A depositary will not be responsible for any failure to carry out any instruction to vote, or for the manner or effect of any vote, as long as any action or non-action is in good faith and does not result from negligence or willful misconduct of the depositary.
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Liquidation Preference
In the event of our liquidation, dissolution or winding up, a holder of depositary shares will receive the fraction of the liquidation preference accorded each share of underlying preferred stock represented by the depositary share.
Conversion of Preferred Stock
Depositary shares will not themselves be convertible into our common stock or any other securities or property of our company. However, if the underlying preferred stock is convertible, holders of depositary shares may surrender them to the depositary with written instructions to convert the preferred stock represented by their depositary shares into whole shares of common stock, other shares of our preferred stock or other shares of stock, as applicable. Upon receipt of these instructions and any amounts payable in connection with a conversion, we will convert the preferred stock using the same procedures as those provided for delivery of preferred stock. If a holder of depositary shares converts only part of its depositary shares, the depositary will issue a new depositary receipt for any depositary shares not converted. We will not issue fractional shares of common stock upon conversion. If a conversion will result in the issuance of a fractional share, we will pay an amount in cash equal to the value of the fractional interest based upon the closing price of the common stock on the last business day prior to the conversion.
Amendment and Termination of a Deposit Agreement
Our company and the depositary may amend any form of depositary receipt evidencing depositary shares and any provision of a deposit agreement. However, unless the existing holders of at least two-thirds of the applicable depositary shares then outstanding have approved the amendment, we may not make any amendment that:
| · | would materially and adversely alter the rights of the holders of depositary shares; or |
| · | would be materially and adversely inconsistent with the rights granted to the holders of the underlying preferred stock. |
Subject to exceptions in the deposit agreement and except in order to comply with the law, no amendment may impair the right of any holders of depositary shares to surrender their depositary shares with instructions to deliver the underlying preferred stock and all money and other property represented by the depositary shares. Every holder of outstanding depositary shares at the time any amendment becomes effective who continues to hold the depositary shares will be deemed to consent and agree to the amendment and to be bound by the amended deposit agreement.
We may terminate a deposit agreement upon not less than 30 days’ prior written notice to the depositary if:
| · | the termination is necessary to preserve our REIT status; or |
| · | a majority of each series of preferred stock affected by the termination consents to the termination. |
Upon a termination of a deposit agreement, holders of the depositary shares may surrender their depositary shares and receive in exchange the number of whole or fractional shares of preferred stock and any other property represented by the depositary shares. If we terminate a deposit agreement to preserve our status as a REIT, then we will use our best efforts to list the preferred stock issued upon surrender of the related depositary shares on a national securities exchange.
In addition, a deposit agreement will automatically terminate if:
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| · | we have redeemed all underlying preferred stock subject to the agreement; |
| · | a final distribution of the underlying preferred stock in connection with any liquidation, dissolution or winding up has occurred, and the depositary has distributed the distribution to the holders of the depositary shares; or |
| · | each share of the underlying preferred stock has been converted into other capital stock of our company not represented by depositary shares. |
Charges of a Preferred Stock Depositary
We will pay all transfer and other taxes and governmental charges arising in connection with a deposit agreement. In addition, we will generally pay the fees and expenses of a depositary in connection with the performance of its duties. However, holders of depositary shares will pay the fees and expenses of a depositary for any duties requested by the holders that the deposit agreement does not expressly require the depositary to perform.
Resignation and Removal of Depositary
A depositary may resign at any time by delivering to us notice of its election to resign. We may also remove a depositary at any time. Any resignation or removal will take effect upon the appointment of a successor depositary. We will appoint a successor depositary within 60 days after delivery of the notice of resignation or removal. The successor must be a bank or trust company with its principal office in the United States and have a combined capital and surplus of at least $50 million.
Miscellaneous
The depositary will forward to the holders of depositary shares any reports and communications from us with respect to the underlying preferred stock.
Neither the depositary nor our company will be liable if any law or any circumstances beyond their control prevent or delay them from performing their obligations under a deposit agreement. The obligations of our company and a depositary under a deposit agreement will be limited to performing our duties in good faith and without negligence in regard to voting of preferred stock, gross negligence or willful misconduct. Neither us nor a depositary must prosecute or defend any legal proceeding with respect to any depositary shares or the underlying preferred stock unless they are furnished with satisfactory indemnity.
Our company and any depositary may rely on the written advice of counsel or accountants, or information provided by persons presenting shares of preferred stock for deposit, holders of depositary shares or other persons they believe in good faith to be competent, and on documents they believe in good faith to be genuine and signed by a proper party.
In the event a depositary receives conflicting claims, requests or instructions from our company and any holders of depositary shares, the depositary will be entitled to act on the claims, requests or instructions received from us.
Depositary
The prospectus supplement will identify the depositary for the depositary shares.
Listing of the Depositary Shares
The prospectus supplement will specify whether or not the depositary shares will be listed on any securities exchange.
19
DESCRIPTION OF WARRANTS
We may issue warrants for the purchase of our common stock or preferred stock. Warrants may be issued independently or together with any of the other securities offered by this prospectus that are offered by any prospectus supplement and may be attached to or separate from the securities offered by this prospectus. Each series of warrants will be issued under a separate warrant agreement to be entered into between us and a warrant agent specified in the applicable prospectus supplement. The warrant agent will act solely as our agent in connection with the warrants of such series and will not assume any obligation or relationship of agency or trust for or with any holders or beneficial owners of warrants.
The applicable prospectus supplement will describe the terms of the warrants in respect of which this prospectus is being delivered, including, where applicable, the following:
| (1) | the title of the warrants; |
| (2) | the aggregate number of the warrants; |
| (3) | the price or prices at which the warrants will be issued; |
| (4) | the designation, number and terms of the securities purchasable upon exercise of the warrants; |
| (5) | the designation and terms of the other securities offered by this prospectus with which the warrants are issued and the number of the warrants issued with each security offered by this prospectus; |
| (6) | the date, if any, on and after which the warrants and the related securities will be separately transferable; |
| (7) | the price or prices at which the securities purchasable upon exercise of the warrants may be purchased; |
| (8) | the date on which the right to exercise the warrants shall commence and the date on which that right shall expire; |
| (9) | the minimum or maximum amount of the warrants which may be exercised at any one time; |
| (10) | information with respect to book-entry procedures, if any; |
| (11) | a discussion of federal income tax considerations; and |
| (12) | any other material terms of the warrants, including terms, procedures and limitations relating to the exchange and exercise of the warrants. |
20
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material Federalfederal income tax considerations
regarding an investment in the Offered Securities is based on current law, is
for general information only and is not tax advice. For purposes of this
discussion, the "Company" refers only to Agree Realty Corporation. Kramer,
Levin, Naftalis & Frankel ("Kramer Levin"), counsel to the Company, has
reviewed the following discussion and is of the opinion that it fairly
summarizes all Federal income tax considerations that are likely to be material
to Company stockholders. However, this discussion does not purport to deal with
all aspects of taxation that may be relevant to particular stockholders in
light of their personal investment or tax circumstances, or to certain types of
stockholders (including insurance companies, tax-exempt organizations,
financial institutions or broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States) subject to special
treatment under the Federal income tax laws. The discussion in this section is based on existing provisionslaw, and is limited to investors who own our shares as investment assets rather than as inventory or as property used in a trade or business. The summary does not discuss all of the particular tax consequences that might be relevant to you if you are subject to special rules under federal income tax law, for example if you are:
| · | a bank, life insurance company, regulated investment company, or other financial institution; |
| · | a broker, dealer or trader in securities or foreign currency; |
| · | a person who has a functional currency other than the U.S. dollar; |
| · | a person who acquires our shares in connection with employment or other performance of services; |
| · | a person subject to alternative minimum tax; |
| · | a person who owns our shares as part of a straddle, hedging transaction, constructive sale transaction, constructive ownership transaction, or conversion transaction; or |
| · | except as specifically described in the following summary, a tax-exempt entity or a foreign person. |
The Code existingsections that govern federal income tax qualification and proposed Treasury
Regulations, existing court decisions,treatment of a REIT and existing rulings and other
administrative interpretations. There can be no assurance that futureits stockholders are complex. This presentation is a summary of applicable Code provisions, related rules and regulations, and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect. Future legislative, judicial, or other legal authorities willadministrative actions or decisions could also affect the accuracy of statements made in this summary. We have not alter significantly the tax
consequences described below. No rulings have been obtainedreceived a ruling from the Internal Revenue Service, (the "IRS") concerningor IRS, with respect to any matter described in this summary, and we cannot assure you that the IRS or a court will agree with the statements made in this summary. The IRS or a court could, for example, take a different position, which could result in significant tax liabilities for applicable parties, from that described in this summary with respect to our acquisitions, operations, restructurings or any other matters described in this summary. In addition, this summary is not exhaustive of all possible tax consequences, and does not discuss any estate, gift, state, local, or foreign tax consequences. For all these reasons, we urge you and any prospective acquiror of our shares to consult with a tax advisor about the federal income tax and other tax consequences of the matters discussedacquisition, ownership and disposition of our shares. Our intentions and beliefs described in this section. Because the following represents only a summary it is qualified in
its entirety by theare based upon our understanding of applicable Code provisions, ruleslaws and regulations promulgated thereunder,that are in effect as of the date of the filing of this prospectus. If new laws or regulations are enacted which impact us directly or indirectly, we may change our intentions or beliefs.
Your federal income tax consequences may differ depending on whether or not you are a “U.S. stockholder.” For purposes of this summary, a “U.S. stockholder” for federal income tax purposes is:
| · | a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws; |
| · | an entity treated as a corporation for federal income tax purposes, that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
| · | an estate the income of which is subject to federal income taxation regardless of its source; or |
| · | a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or an electing trust in existence on August 20, 1996, to the extent provided in Treasury regulations; |
21
whose status as a U.S. stockholder is not overridden by an applicable tax treaty. Conversely, a “non-U.S. stockholder” is a beneficial owner of our shares who is not a U.S. stockholder. If a partnership (including any entity treated as a partnership for federal income tax purposes) is a beneficial owner of our shares, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and administrativethe activities of the partnership. A beneficial owner that is a partnership and judicial interpretations
thereof.
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 AND OF THE COMPANY'S ELECTION TO BE TAXED AS A
REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General
The Company haspartners in such a partnership should consult their tax advisors about the federal income tax consequences of the acquisition, ownership and disposition of our shares.
Taxation as a REIT
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with theour taxable year ending December 31, 1994. The Company believesOur REIT election, assuming continuing compliance with the then applicable qualification tests, continues in effect for subsequent taxable years. Although no assurance can be given, we believe that commencing with such
taxable year, it haswe have been organized and hashave operated, and will continue to be organized and to operate, in such a manner asthat qualified and will continue to qualify us to be taxed under the Code as a REIT.
As a REIT, we generally are not subject to federal income tax on our net income distributed as dividends to our stockholders. Distributions to our stockholders generally are included in their income as dividends to the extent of our current or accumulated earnings and profits. Our dividends are not generally entitled to the favorable 15% rate on qualified dividend income (scheduled to increase to ordinary income rates for taxationtaxable years beginning after December 31, 2010), but a portion of our dividends may be treated as capital gain dividends, all as explained below. No portion of any of our dividends is eligible for the dividends received deduction for corporate stockholders. Distributions in excess of current or accumulated earnings and profits generally are treated for federal income tax purposes as return of capital to the extent of a recipient stockholder’s basis in our shares, and will reduce this basis. Our current or accumulated earnings and profits are generally allocated first to distributions made on our preferred stock, and thereafter to distributions made on our common stock. For all these purposes, our distributions include both cash distributions and any in kind distributions of property that we might make.
Our counsel, DLA Piper LLP (US), has opined that we have been organized and have qualified as a REIT under the Code for our 2005 through 2008 taxable years, and the Company intends to
continue to operate in such a manner, but no assurance can be given that it
will qualify as a REIT in any particular year.
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The REIT requirements, relating to the Federal income tax treatment of
REITsour current investments and their stockholders, are highly technical and complex. The following
discussion sets forth only the material aspects of the Code sections that
govern the Federal income tax treatment of a REIT and its stockholders. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change, which may apply
retroactively.
Opinion of Counsel
Kramer Levin will deliver its opinion that, commencing with the Company's
taxable year ending December 31, 1994, and assuming that the actions described
in this discussion of "Federal Income Tax Considerations" are completed in a
timely fashion, the Company will be treated as having met the requirements for
qualification and taxation as a REIT commencing with its taxable year ending
December 31, 1994, and its proposed methodplan of operation and the proposed method
of operation of the Operating Partnership will enable itus to continue to meet the requirements for qualification and taxation as a REIT under the Code. It
must be emphasized that the opinion will be based on various assumptions and
will be conditioned upon certain representations made by the Company as to
factual matters. Such factual assumptions and representations are set forth
below in this discussion of "Federal Income Tax Considerations." In addition,
the opinion will be based upon the factual representations of the Company
concerning its business and properties, and the business and properties held by
or through the Operating Partnership, as set forth in this Prospectus. The
opinion will be expressed as of its date, and Kramer Levin has no obligation to
advise stockholders of the Company of any subsequent change in the matters
stated, represented, or assumed, or any subsequent change in applicable law.
Moreover, suchOur continued qualification and taxation as a REIT dependswill depend upon the Company's
ability to meet, through actual annual operating results, distribution levels
and diversity of stock ownership, theour compliance with various qualification tests imposed under the Code as discussed below, the results of whichand summarized below. While we believe that we will satisfy these tests, our counsel has not reviewed and will not be reviewed by
Kramer Levin. Accordingly, no assurance can be given that the actual results of
the Company's operation for any one taxable year will satisfy such
requirements. See "-- Failurereview compliance with these tests on a continuing basis. If we fail to Qualify." An opinion of counsel is not binding
on the IRS, and no assurance can be given that the IRS will not challenge the
Company's qualification as a REIT.
Taxation of the Company
If the Company qualifies for taxationqualify as a REIT, it generally will not be
subject to Federal corporate income tax on its net income that is currently
distributed to stockholders because the REIT provisions of the Code generally
allow a REIT to deduct dividends paid to stockholders. This deduction for
dividends paid to stockholders substantially eliminates the Federal "double
taxation" (once at the corporate level and once again at the stockholder level)
that generally results from investment in a corporation.
However, the Companywe will be subject to Federalfederal income taxtaxation as follows:
First, the Companyif we were a C corporation and our stockholders will be taxed at regular corporate rateslike stockholders of C corporations. In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our stockholders may be reduced or eliminated.
If we qualify as a REIT and meet the tests described below, we generally will not pay federal income tax on any
undistributedamounts we distribute to our stockholders. However, even if we qualify as a REIT, taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Companywe may be subject to the
"alternative minimum tax" on its items offederal tax preference. Third, if the Company
has (i) net income from the sale or other disposition of "foreclosure property"
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(generally, property acquired by reason of a default in a lease or an
indebtedness held by a REIT) which is held primarily for sale to customers in the following circumstances:
| · | We will be taxed at regular corporate rates on any undistributed “real estate investment trust taxable income,” including our undistributed net capital gains. |
| · | If our alternative minimum taxable income exceeds our taxable income, we may be subject to the corporate alternative minimum tax on our items of tax preference. |
| · | If we have net income from the disposition of “foreclosure property” that is held primarily for sale to customers in the ordinary course of business or from other nonqualifying income from foreclosure property, we will be subject to tax on this income at the highest regular corporate rate, currently 35%. |
| · | If we have net income from prohibited transactions, including dispositions of inventory or property held primarily for sale to customers in the ordinary course of business other than foreclosure property, we will be subject to tax on this income at a 100% rate. |
| · | If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, but nonetheless maintain our qualification as a REIT, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% or the 95% test, with adjustments, multiplied by a fraction intended to reflect our profitability. |
22
| · | If we fail to distribute for any calendar year at least the sum of 85% of our REIT ordinary income for that year, 95% of our REIT capital gain net income for that year, and any undistributed taxable income from prior periods, we will be subject to a 4% nondeductible excise tax on the excess of the required distribution over the amounts actually distributed. |
| · | If we acquire an asset from a corporation in a transaction in which our basis in the asset is determined by reference to the basis of the asset in the hands of a present or former C corporation, and if we subsequently recognize gain on the disposition of this asset during the ten year period beginning on the date on which the asset ceased to be owned by the C corporation, then we will pay tax at the highest regular corporate tax rate, which is currently 35%, on the lesser of the excess of the fair market value of the asset over the C corporation’s basis in the asset on the date the asset ceased to be owned by the C corporation, or the gain we recognize in the disposition. |
| · | If we acquire a corporation, to preserve our status as a REIT we must generally distribute all of the C corporation earnings and profits inherited in that acquisition, if any, not later than the end of the taxable year of the acquisition. However, if we fail to do so, relief provisions would allow us to maintain our status as a REIT provided we distribute any subsequently discovered C corporation earnings and profits and pay an interest charge in respect of the period of delayed distribution. As discussed below, we have acquired a C Corporation in connection with our acquisition of real estate. Our investigations of this C Corporation indicated that it did not have undistributed earnings and profits that we inherited but failed to timely distribute. However, upon review or audit, the IRS may disagree. |
| · | As summarized below, REITs are permitted within limits to own stock and securities of a “taxable REIT subsidiary.” A taxable REIT subsidiary is separately taxed on its net income as a C corporation, and is subject to limitations on the deductibility of interest expense paid to its REIT parent. In addition, its REIT parent is subject to a 100% tax on the difference between amounts charged and redetermined rents and deductions, including excess interest. |
| · | If and to the extent we invest in properties in foreign jurisdictions, our income from those properties will generally be subject to tax in those jurisdictions. If we continue to operate as we do, then we will distribute our taxable income to our stockholders each year and we will generally not pay federal income tax. As a result, we cannot recover the cost of foreign income taxes imposed on our foreign investments by claiming foreign tax credits against our federal income tax liability. Also, we cannot pass through to our stockholders any foreign tax credits. |
If we fail to qualify or (ii) other nonqualifying net income from
foreclosure property, itelect not to qualify as a REIT, we will be subject to tax at the highest corporate rate
on such income. Fourth, if the Company has netfederal income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customerstax in the same manner as a C corporation. Distributions to our stockholders if we do not qualify as a REIT will not be deductible by us nor will distributions be required under the Code. In that event, distributions to our stockholders will generally be taxable as ordinary coursedividends potentially eligible for the 15% income tax rate (scheduled to increase to ordinary income rates for taxable years beginning after December 31, 2010) discussed below in “Taxation of business other than foreclosure property), such incomeU.S. Stockholders” and, subject to limitations in the Code, will be subject to a
100% tax. Fifth, ifeligible for the Company should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below), and has nonetheless
maintained itsdividends received deduction for corporate stockholders. Also, we will generally be disqualified from qualification as a REIT because certain other requirements have
been met, it will be subject to a 100% tax onfor the gross income attributable to
the greater of the amount by which the Company fails the 75% or 95% test,
multiplied by a fraction intended to reflect the Company's profitability.
Sixth, if the Company should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any undistributedfour taxable income from prior periods, the Company would be subject to a four
percent 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., a corporation generally subject to full corporate-level tax)
in a transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other property) in
the hands of the C corporation, and the Company recognizes gain on the
disposition of such asset during the 10-year period beginning on the date on
which such asset was acquired by the Company (the "Recognition Period"), then
pursuant to guidelines issued by the IRS in IRS Notice 88-19 (the "Built-in
Gain Rules"), such gain, to the extent of the excess of (a) the fair market
value of such asset as of the beginning of such Recognition Period over (b) the
Company's adjusted basis in such asset as of the beginning of such Recognition
Period (the "Built-in Gain"), will be subject to tax at the highest regular
corporate rate. The results described above with respect to the recognition of
Built-in Gain assume that the Company will make an election pursuant to the
Built-in Gain Rules or applicable future administrative rules or Treasury
Regulations. The Company hasyears following disqualification. If we do not acquired, and does not expect to acquire, an
interest in any asset subject to the Built-in Gain Rules.
Requirements for Qualification
To qualify as a REIT for even one year, this could result in reduction or elimination of distributions to our stockholders, or in our incurring substantial indebtedness or liquidating substantial investments in order to pay the Company must electresulting corporate-level taxes. The Code provides certain relief provisions under which we might avoid automatically ceasing to be so treated and musta REIT for failure to meet thecertain REIT requirements, all as discussed below, relating toin more detail below.
23
REIT Qualification Requirements
General Requirements. Section 856(a) of the Company's organization,
sources of income, nature of assets, and distributions of income to
stockholders. The Company has made the necessary election.
The Code defines a REIT as a corporation, trust or association (1) which is
managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (3) which would be taxable as a domestic corporation, but
for sections 856 through 859 the Code; (4) which is neither a financial
institution nor an insurance company subject to certainassociation:
| (1) | that 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) | that would be taxable, but for Sections 856 through 859 of the Code, as a C corporation; |
| (4) | that is not a financial institution or an insurance company subject to special provisions of the Code; |
| (5) | the beneficial ownership of which is held by 100 or more persons; |
| (6) | that is not “closely held” as defined under the personal holding company stock ownership test, as described below; and |
| (7) | that meets other tests regarding income, assets and distributions, all as described below. |
Section 856(b) of the Code;
(5) the beneficial ownership of which is held by 100 or more persons; (6) not
more than 50% in value of the outstanding stock of which is, at any time during
the last half of each taxable year, owned, directly or indirectly through the
application of certain attribution rules, by five or fewer individuals (as
defined in the Code to include certain entities); and (7) which meets
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certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (1) tothrough (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 proportionatepro rata part of a taxable year of less than 12 months. ConditionsSection 856(h)(2) of the Code provides that neither condition (5) andnor (6) do not apply
to theneed be met for our first taxable year for which an election is made to be taxed as a REIT. We believe that we have met conditions (1) through (7) during each of the requisite periods ending on or before our most recently completed taxable year, and that we can continue to meet these conditions in future taxable years. There can, however, be no assurance in this regard.
By reason of condition (6), we will fail to qualify as a REIT for a taxable year if at any time during the last half of a year more than 50% in value of our outstanding shares is owned directly or indirectly by five or fewer individuals. To help comply with condition (6), our declaration of trust and bylaws restrict transfers of our shares. In addition, if we comply with applicable Treasury regulations to ascertain the ownership of our shares and do not know, or by exercising reasonable diligence would not have known, that we failed condition (6), then we will be treated as having met condition (6). However, our failure to comply with these regulations for ascertaining ownership may result in a penalty of $25,000, or $50,000 for intentional violations. Accordingly, we intend to comply with these regulations, and to request annually from record holders of significant percentages of our shares information regarding the ownership of our shares. Under our declaration of trust and bylaws, our stockholders are required to respond to these requests for information.
For purposes of condition (6), REIT shares held by a pension trust are treated as held directly by the pension trust’s beneficiaries in proportion to their actuarial interests in the pension trust. Consequently, five or fewer pension trusts could own more than 50% of the interests in an entity without jeopardizing that entity’s federal income tax qualification as a REIT. However, as discussed below, if a REIT is a “pension-held REIT,” each pension trust owning more than 10% of the REIT’s shares by value generally may be taxed on a portion of the dividends it receives from the REIT.
The Company satisfiesCode provides that we will not automatically fail to be a REIT if we do not meet conditions (1) through (6), provided we can establish reasonable cause for any such failure. Each such excused failure will result in the imposition of a $50,000 penalty instead of REIT disqualification. It is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision. This relief provision applies to any failure of the applicable conditions, even if the failure first occurred in a prior taxable year, as long as each of the requirements set forth in (1) through (6) above. In
addition, the Charter currently includes certain restrictions regarding
transfer of the Equity Stockrelief provision is satisfied after October 22, 2004.
24
Our Wholly Owned Subsidiaries and Our Investments through Partnerships. Except in respect of taxable REIT subsidiaries as discussed below, Section 856(i) of the Code provides that any corporation, 100% of whose stock is held by a REIT, is a qualified REIT subsidiary and shall not be treated as a separate corporation. The assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary are intended to assisttreated as the CompanyREIT’s. We believe that each of our direct and indirect wholly owned subsidiaries, other than the taxable REIT subsidiaries discussed below, will either be a qualified REIT subsidiary within the meaning of Section 856(i) of the Code, or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner under regulations issued under Section 7701 of the Code. Thus, except for the taxable REIT subsidiaries discussed below, in continuing to satisfyapplying all the share ownershipfederal income tax REIT qualification requirements described in (5)this summary, all assets, liabilities and (6)
above. See "Descriptionitems of Common Stock -- Restrictions on Transfer."
To monitor the Company's compliance with the share ownership requirements,
the Company is required to maintain records regarding the actual ownershipincome, deduction and credit of its shares. To do so, the Company must demand written statements each year from
the record holders of certain percentages of its stockour direct and indirect wholly owned subsidiaries are treated as ours.
We have invested and may invest in which the record
holdersreal estate through one or more limited or general partnerships or limited liability companies that are to disclose the actual owners of the shares (i.e., the persons
required to include in grosstreated as partnerships for federal income the REIT dividends). A list of those
persons failing or refusing to comply with this demand must be maintained as
part of the Company's records. A stockholder who fails or refuses to comply
with the demand must submit a statement with its tax return disclosing the
actual ownership of the shares and certain other information.
In addition, a corporation may not elect to be taxed as a REIT unless its
taxable year is the calendar year. The Company has a calendar year taxable
year.purposes. In the case of a REIT whichthat is a partner in a partnership, Treasury
Regulationsregulations under the Code provide that, for purposes of the REIT will bequalification requirements regarding income and assets discussed below, the REIT is deemed to own its proportionate share of the assets of the partnership corresponding to the REIT’s proportionate capital interest in the partnership and will beis deemed to be entitled to the income of the partnership attributable to suchthis proportionate share. In addition, for these purposes, the character of the assets and gross income of the partnership shallgenerally retain the same character in the hands of the REIT for purposes of section 856 of the
Code, including satisfying the gross income tests and the asset tests described
below. Thus, the Company'sREIT. Accordingly, our proportionate share of the assets, liabilities, and items of income of the Operating Partnership (and any othereach partnership in which we are a partner is treated as ours for purposes of the Company invests)income tests and asset tests discussed below. In contrast, for purposes of the distribution requirement discussed below, we must take into account as a partner our share of the partnership’s income as determined under the general federal income tax rules governing partners and partnerships under Sections 701 through 777 of the Code.
Taxable REIT Subsidiaries. We are permitted to own any or all of the securities of a “taxable REIT subsidiary” as defined in Section 856(l) of the Code, provided that no more than 25% of our assets, at the close of each quarter, is comprised of our investments in the stock or securities of our taxable REIT subsidiaries. (For our 2001 through 2008 taxable years, no more than 20% of our assets, at the close of each quarter, was permitted to be comprised of our investments in the stock or securities of our taxable REIT subsidiaries; before the introduction of taxable REIT subsidiaries in 2001, our ability to own separately taxable corporate subsidiaries was more limited.) Among other requirements, a taxable REIT subsidiary must:
(1) be a non-REIT corporation for federal income tax purposes in which we directly or indirectly own shares;
(2) join with us in making a taxable REIT subsidiary election;
(3) not directly or indirectly operate or manage a lodging facility or a health care facility; and
(4) not directly or indirectly provide to any person, under a franchise, license, or otherwise, rights to any brand name under which any lodging facility or health care facility is operated, except that in limited circumstances a subfranchise, sublicense or similar right can be granted to an independent contractor to operate or manage a lodging facility or, after our 2008 taxable year, a health care facility.
In addition, a corporation other than a REIT in which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value will automatically be treated as a taxable REIT subsidiary. Subject to the discussion below, we believe that we and each of our taxable REIT subsidiaries have complied with, and will continue to comply with, the requirements for taxable REIT subsidiary status at all times during which we intend for a subsidiary’s taxable REIT subsidiary election to be in effect, and we believe that the same will be treatedtrue for any taxable REIT subsidiary that we later form or acquire.
Our ownership of stock and securities in taxable REIT subsidiaries is exempt from the 10% and 5% REIT asset tests discussed below. Also, as discussed below, taxable REIT subsidiaries can perform services for our tenants without disqualifying the rents we receive from those tenants under the 75% or 95% gross income tests discussed below. Moreover, because taxable REIT subsidiaries are taxed as C corporations that are separate from us, their assets, liabilities and items of income, of the Companydeduction and credit are not generally imputed to us for purposes of applying the REIT qualification requirements described herein, providedin this summary. Therefore, taxable REIT subsidiaries can generally undertake third-party management and development activities and activities not related to real estate.
25
Restrictions are imposed on taxable REIT subsidiaries to ensure that they will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary may not deduct interest paid in any year to an affiliated REIT to the extent that the Operating Partnership (and any such other
partnership) is treated as a partnership for Federal income tax purposes. See
"-- Tax Aspectsinterest payments exceed, generally, 50% of the Operating Partnership -- Classification astaxable REIT subsidiary’s adjusted taxable income for that year. However, the taxable REIT subsidiary may carry forward the disallowed interest expense to a Partnership."
succeeding year, and deduct the interest in that later year subject to that year’s 50% adjusted taxable income limitation. In addition, if a taxable REIT subsidiary pays interest, rent, or other amounts to its affiliated REIT in an amount that exceeds what an unrelated third party would have paid in an arm’s length transaction, then the REIT generally will be subject to an excise tax equal to 100% of the excessive portion of the payment. Finally, if in comparison to an arm’s length transaction, a tenant has overpaid rent to the REIT in exchange for underpaying the taxable REIT subsidiary for services rendered, then the REIT may be subject to an excise tax equal to 100% of the overpayment. There can be no assurance that arrangements involving our taxable REIT subsidiaries will not result in the imposition of one or more of these deduction limitations or excise taxes, but we do not believe that we are or will be subject to these impositions.
Income Tests
In order to maintainTests. There are two gross income requirements for qualification as a REIT there are threeunder the Code:
| · | At least 75% of our gross income (excluding: (a) gross income from sales or other dispositions of property held primarily for sale; (b) any income arising from “clearly identified” hedging transactions that we enter into after July 30, 2008 to manage interest rate or price fluctuations with respect to borrowings we incur to acquire or carry real estate assets; (c) any income arising from “clearly identified” hedging transactions that we enter into after July 30, 2008 primarily to manage risk of currency fluctuations relating to any item that qualifies under the 75% or 95% gross income tests; and (d) real estate foreign exchange gain (as defined in Section 856(n)(2) of the Code) that we recognize after July 30, 2008) must be derived from investments relating to real property, including “rents from real property” as defined under Section 856 of the Code, interest and gain from mortgages on real property, income and gain from foreclosure property, or dividends and gain from shares in other REITs. When we receive new capital in exchange for our shares or in a public offering of five-year or longer debt instruments, income attributable to the temporary investment of this new capital in stock or a debt instrument, if received or accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% gross income test. |
| · | At least 95% of our gross income (excluding: (a) gross income from sales or other dispositions of property held primarily for sale; (b) any income arising from “clearly identified” hedging transactions that we enter into after December 31, 2004 to manage interest rate or price fluctuations with respect to borrowings we incur to acquire or carry real estate assets; (c) any income arising from “clearly identified” hedging transactions that we enter into after July 30, 2008 primarily to manage risk of currency fluctuations relating to any item that qualifies under the 75% or 95% gross income tests; and (d) passive foreign exchange gain (as defined in Section 856(n)(3) of the Code) that we recognize after July 30, 2008) must be derived from a combination of items of real property income that satisfy the 75% gross income test described above, dividends, interest, gains from the sale or disposition of stock, securities, or real property or, for financial instruments entered into during our 2004 or earlier taxable years, certain payments under interest rate swap or cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. |
For purposes of the 75% and 95% gross income tests outlined above, income derived from a “shared appreciation provision” in a mortgage loan is generally treated as gain recognized on the sale of the property to which it relates. Although we will use our best efforts to ensure that the income generated by our investments will be of a type that satisfies both the 75% and 95% gross income tests, there can be no assurance in this regard.
In order to qualify as “rents from real property” under Section 856 of the Code, several requirements that must be satisfied annually. First, at least 75%met:
| · | The amount of rent received generally must not be based on the income or profits of any person, but may be based on receipts or sales. |
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| · | Rents do not qualify if the REIT owns 10% or more by vote or value of the tenant, whether directly or after application of attribution rules. While we intend not to lease property to any party if rents from that property would not qualify as rents from real property, application of the 10% ownership rule is dependent upon complex attribution rules and circumstances that may be beyond our control. For example, an unaffiliated third party’s ownership directly or by attribution of 10% or more by value of our shares, as well as an ownership position in the stock of one of our tenants which, when added to our own ownership position in that tenant, totals 10% or more by vote or value of the stock of that tenant, would result in that tenant’s rents not qualifying as rents from real property. Our declaration of trust and bylaws disallow transfers or purported acquisitions, directly or by attribution, of our shares to the extent necessary to maintain our REIT status under the Code. Nevertheless, there can be no assurance that these provisions in our declaration of trust and bylaws will be effective to prevent our REIT status from being jeopardized under the 10% affiliated tenant rule. Furthermore, there can be no assurance that we will be able to monitor and enforce these restrictions, nor will our stockholders necessarily be aware of ownership of shares attributed to them under the Code’s attribution rules. |
| · | There is a limited exception to the above prohibition on earning “rents from real property” from a 10% affiliated tenant, if the tenant is a taxable REIT subsidiary. If at least 90% of the leased space of a property is leased to tenants other than taxable REIT subsidiaries and 10% affiliated tenants, and if the taxable REIT subsidiary’s rent for space at that property is substantially comparable to the rents paid by nonaffiliated tenants for comparable space at the property, then otherwise qualifying rents paid by the taxable REIT subsidiary to the REIT will not be disqualified on account of the rule prohibiting 10% affiliated tenants. |
| · | In order for rents to qualify, we generally must not manage the property or furnish or render services to the tenants of the property, except through an independent contractor from whom we derive no income or, for our 2001 taxable year and thereafter, through one of our taxable REIT subsidiaries. There is an exception to this rule permitting a REIT to perform customary tenant services of the sort that a tax-exempt organization could perform without being considered in receipt of “unrelated business taxable income” as defined in Section 512(b)(3) of the Code. In addition, a de minimis amount of noncustomary services will not disqualify income as “rents from real property” so long as the value of the impermissible services does not exceed 1% of the gross income from the property. |
| · | If rent attributable to personal property leased in connection with a lease of real property is 15% or less of the total rent received under the lease, then the rent attributable to personal property will qualify as “rents from real property”; if this 15% threshold is exceeded, the rent attributable to personal property will not so qualify. For our taxable years through December 31, 2000, the portion of rental income treated as attributable to personal property was determined according to the ratio of the tax basis of the personal property to the total tax basis of the real and personal property that is rented. For our 2001 taxable year and thereafter, the ratio is determined by reference to fair market values rather than tax bases. |
We believe that all or substantially all our rents have qualified and will qualify as rents from real property for purposes of Section 856 of the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relatingCode.
In order to real property or mortgagesqualify as mortgage interest on real property (including "rentsfor purposes of the 75% test, interest must derive from a mortgage loan secured by real property" and, in certain circumstances, interest) or from "qualified
temporary investment income" (described below). Second,property with a fair market value, at the time the loan is made, at least 95%equal to the amount of the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from suchloan. If the amount of the loan exceeds the fair market value of the real property, investments, and
from dividends,the interest and gain from the sale or disposition of stock or
securities or from any combination of the foregoing. Third, short-term
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gain from the sale or other disposition of stock or securities, gain from
prohibited transactions and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must represent less than 30% of the Company's
gross income (including gross income from prohibited transactions) for each
taxable year. In applying these tests, the Company will be treated as realizing
its shareinterest on a mortgage loan in a ratio equal to the ratio of the income and bearing its sharefair market value of the lossreal property to the total amount of the Operating
Partnership (andmortgage loan.
Absent the “foreclosure property” rules of Section 856(e) of the Code, a REIT’s receipt of business operating income from a property would not qualify under the 75% and 95% gross income tests. But as foreclosure property, gross income from such a business operation would so qualify. In the case of property leased by a REIT to a tenant, foreclosure property is defined under applicable Treasury regulations to include generally the real property and incidental personal property that the REIT reduces to possession upon a default or imminent default under the lease by the tenant, and as to which a foreclosure property election is made by attaching an appropriate statement to the REIT’s federal income tax return.
27
Any gain that a REIT recognizes on the sale of foreclosure property, plus any income it receives from foreclosure property that would not qualify under the 75% gross income test in the absence of foreclosure property treatment, reduced by expenses directly connected with the production of those items of income, would be subject to income tax at the maximum corporate rate, currently 35%, under the foreclosure property income tax rules of Section 857(b)(4) of the Code. Thus, if a REIT should lease foreclosure property in exchange for rent that qualifies as “rents from real property” as described above, then that rental income is not subject to the foreclosure property income tax.
Other than sales of foreclosure property, any gain we realize on the sale of property held as inventory or other partnershipproperty held primarily for sale to customers in which the Company invests), and the
characterordinary course of such income or loss, as well as other partnership items,business will be determinedtreated as income from a prohibited transaction that is subject to a penalty tax at a 100% rate. This prohibited transaction income also may adversely affect our ability to satisfy the partnership level.
Rents received by the Company will qualify as "rents from real property" in
satisfying the75% and 95% gross income requirementstests for federal income tax qualification as a REIT described above only if
several conditions are met. First,REIT. We cannot provide assurances as to whether or not the amountIRS might successfully assert that one or more of rent must not be basedour dispositions is subject to the 100% penalty tax. However, we believe that dispositions of assets that we have made or that we might make in whole or in part on the income or profits of any person. However, an amount
received or accrued generallyfuture will not be excluded fromsubject to the term "rents from
real property" solely by reason100% penalty tax, because we intend to:
| · | own our assets for investment with a view to long-term income production and capital appreciation; |
| · | engage in the business of developing, owning and managing our existing properties and acquiring, developing, owning and managing new properties; and |
| · | make occasional dispositions of our assets consistent with our long-term investment objectives. |
If we fail to satisfy one or both of being based on a fixed percentagethe 75% or percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" in satisfying the95% gross income tests in any taxable year, we may nevertheless qualify as a REIT for that year if we satisfy the REIT, or an ownerfollowing requirements after October 22, 2004:
| · | our failure to meet the test is due to reasonable cause and not due to willful neglect, and |
| · | after we identify the failure, we file a schedule describing each item of our gross income included in the 75% or 95% gross income tests for that taxable year. |
It is impossible to state whether in all circumstances we would be entitled to the benefit of 10% or morethis relief provision for the 75% and 95% gross income tests. Even if this relief provision does apply, a 100% tax is imposed upon the greater of the REIT,
directly or constructively owns 10% or more of such tenant (a "Related Party
Tenant"). Third, if rent for the taxable year attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent for the taxable year received under the lease, then the
portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, for rents received to qualify as "rents
from real property," the REIT generally must not operate or manage the property
or furnish or render services to the tenants of such property, other than
through an independent contractor who is adequately compensated and from whom
the REIT does not derive any income; provided, however, that the Company may
directly perform certain customary services in connection with the rental of
property (e.g., furnishing water, heat, light and air conditioning, and
cleaning windows, public entrances and lobbies) other than servicesamount by which are
considered rendered to the occupant of the property (e.g., renting parking
spaces on a reserved basis to tenants). The Company does not and 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 percentage or
percentages of receipts or sales, as described above) and the Company does not
and will not rent any property to a Related Party Tenant. The Company directly
and through independent contractors, performs services under certain of its
leases, all of which the Company believes are customary services. The Company
will hire independent contractors from whom it derives no revenue to perform
any non-customary services.
The Company expects that substantially all of its gross income will qualify
as "rents from real property." The Company provides management and development
services to certain properties outside the Portfolio for which it receives a
fee and may also realize gains from the sale of parcels of land adjacent to the
Properties; however, the Company anticipates that such fees and gains have
constituted and will continue to constitute less than 5% of the Company's gross
income.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages
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of receipts or sales. The Company does not, and does not intend to, charge
interest that will depend, in whole or in part, on the income or profits of any
person.
To the extent the Operating Partnership does not immediately use the
proceeds from the sale of the Offered Securities, these funds will be invested
in interest-bearing accounts and short-term, interest-bearing securities. The
interest income earned on these funds is expected to be includible underwe failed the 75% test or the 95% test, with adjustments, multiplied by a fraction intended to reflect our profitability. This relief provision applies to any failure of the applicable income tests, even if the failure first occurred in a prior taxable year, as "qualified temporary investment income" (which includes income
earned on stock or debt instruments acquired withlong as each of the proceedsrequirements of a stock
offering, not including amounts received under a dividend reinvestment plan).
Qualified temporary investment income treatment only applies during the one
year period beginning on the date the Company receives the new capital.
If the Company failsrelief provision is satisfied after October 22, 2004.
Under prior law, if we failed to satisfy one or both of the 75% or 95% gross income tests, for any taxable year, it maywe nevertheless qualifywould have qualified as a REIT for suchthat year if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Company'sif: our failure to meet such
teststhe test was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule ofneglect; we reported the nature and amount of itseach item of our income included in the 75% or 95% gross income tests for that taxable year on a schedule attached to its returnour tax return; and any incorrect information on the schedule was not due to fraud with intent to evade tax. ItFor our 2004 and prior taxable years, we attached a schedule of gross income to our federal income tax returns, but it is not possible, however,impossible to state whether in all circumstances the Companywe would be entitled to the benefit of thesethis prior relief provisions. As discussed above in "-- Taxationprovision for the 75% and 95% gross income tests. Even if this relief provision did apply, a 100% tax is imposed upon the greater of the Company," even if these
relief provisions apply,amount by which we failed the 75% test or the 95% test, with adjustments, multiplied by a tax would be imposed with respectfraction intended to the excess net
income. No similar mitigation provision applies to provide relief if the 30%
income test is failed, and in such case, the Company would cease to qualify as
a REIT. See "--Failure to Qualify."
reflect our profitability.
Asset Tests
The Company, atTests. At the close of each quarter of itseach taxable year, we must also satisfy threethe following asset percentage tests relatingin order to the nature of its assets. First, at least 75%
of the value of the Company's total assets must be represented by real estate
assets (including (i) its allocable share of real estate assets held by
partnerships in which the Company owns an interest or held by "qualified REIT
subsidiaries" of the Company and (ii) stock or debt instruments held for not
more than one year purchased with the proceeds of a stock offering or long-term
(at least five years) debt offering of the Company), cash, cash items and
government securities. Second, not more than 25% of the value of the Company's
total assets may be represented by securities other than those includible in
the 75% asset class. Third, of the investments included in the 25% asset class,
the value of any one issuer's securities owned by the Company may not exceed 5%
of the value of the Company's total assets and the Company may not own more
than 10% of any one issuer's outstanding voting securities (excluding
securities of a qualified REIT subsidiary or another REIT).
The Company believes it has complied and anticipates that it will continue
to comply with these asset tests. The Company is deemed to hold directly its
proportionate share of all real estate and other assets of the Operating
Partnership (and other partnerships in which the Company holds an interest). As
a result, the Company believes that more than 75% of its assets are and will
continue to be real estate assets. In addition, the Company does not, and does
not plan to, hold any securities representing more than 10% of any one issuer's
voting securities (other than securities of a qualified REIT subsidiary or
another REIT), or securities of any one
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issuer exceeding 5% of the value of the Company's gross assets (determined in
accordance with generally accepted accounting principles). As previously
discussed, the Company is deemed to own its proportionate share of the assets
of a partnership in which it is a partner so that the Company's partnership
interest in the Operating Partnership itself (or in other partnerships in which
the Company holds an interest) is not a security for purposes of the asset
test.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its statusqualify as a REIT for federal income tax purposes:
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| · | At least 75% of our total assets must consist of real estate assets, cash and cash items, shares in other REITs, government securities, and temporary investments of new capital (that is, stock or debt instruments purchased with proceeds of a stock offering or a public offering of our debt with a term of at least five years, but only for the one-year period commencing with our receipt of the offering proceeds). |
| · | Not more than 25% of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test. |
| · | Of the investments included in the preceding 25% asset class, the value of any one non-REIT issuer’s securities that we own may not exceed 5% of the value of our total assets, and we may not own more than 10% of any one non-REIT issuer’s outstanding voting securities. For our 2001 taxable year and thereafter, we may not own more than 10% of the vote or value of any one non-REIT issuer’s outstanding securities, unless that issuer is our taxable REIT subsidiary or the securities are “straight debt” securities or otherwise excepted as discussed below. |
| · | For our 2001 taxable year and thereafter, our stock and securities in a taxable REIT subsidiary are exempted from the preceding 10% and 5% asset tests. However, no more than 25% (for our 2001 through 2008 taxable years, 20%) of our total assets may be represented by stock or securities of taxable REIT subsidiaries. |
When a failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy theabove asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter.
In addition, if we fail the 5% value test or the 10% vote or value tests at the close of any quarter and do not cure such failure within 30 days after the close of that quarter, that failure will nevertheless be excused if (a) the failure is de minimis and (b) within 6 months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy the 5% value and 10% vote and value asset tests. For purposes of this relief provision, the failure will be “de minimis” if the value of the assets causing the failure does not exceed the lesser of (a) 1% of the total value of our assets at the end of the relevant quarter or (b) $10,000,000. If our failure is not de minimis, or if any of the other REIT asset tests have been violated, we may nevertheless qualify as a REIT if (a) we provide the IRS with a description of each asset causing the failure, (b) the failure was due to reasonable cause and not willful neglect, (c) we pay a tax equal to the greater of (i) $50,000 or (ii) the highest rate of corporate tax imposed (currently 35%) on the net income generated by the assets causing the failure during the period of the failure, and (d) within 6 months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy all of the REIT asset tests. These relief provisions apply to any failure of the applicable asset tests, even if the failure first occurred in a prior taxable year, as long as each of the requirements of the relief provision is satisfied after October 22, 2004.
The Company intendsCode also provides, for our 2001 taxable year and thereafter, an excepted securities safe harbor to the 10% value test that includes among other items (a) “straight debt” securities, (b) certain rental agreements in which payment is to be made in subsequent years, (c) any obligation to pay rents from real property, (d) securities issued by governmental entities that are not dependent in whole or in part on the profits of or payments from a nongovernmental entity, and (e) any security issued by another REIT.
We intend to maintain adequate records of the value of itsour assets to ensuredocument our compliance with the above asset tests, and to take such other
actionactions as may be required to cure any failure to satisfy the tests within 30 days after the close of any quarter as may be required to cure
any noncompliance. However, there can be no assurance that such other action
will always be successful.
quarter.
Annual Distribution Requirements
The Company, inRequirements. In order to be treatedqualify for taxation as a REIT isunder the Code, we are required to distribute
dividends (othermake annual distributions other than capital gain dividends)dividends to itsour stockholders in an amount at least equal to the excess of:
29
(A) the sum of (i) 95%90% of our “real estate investment trust taxable income,” as defined in Section 857 of the Company's "REIT taxable income"
(computed without regard to theCode, computed by excluding any net capital gain and before taking into account any dividends paid deduction for which we are eligible, and the Company's net
capital gain) and (ii) 95%90% of theour net income after tax, if any, from property received in foreclosure, property
in excess of the special tax on income from foreclosure property, minus over
(B) the sum of certain items ofour qualifying noncash income. In addition, during the Company's
Recognition Period, if the Company disposes of any asset subjectincome, e.g., imputed rental income or income from transactions inadvertently failing to the
Built-in Gain Rules, the Company will be required, pursuant to guidelines
issued by the IRS, to distribute at least 95% of the after-tax Built-in Gain
realized during the Recognition Period. Suchqualify as like-kind exchanges.
The distributions must be madepaid in the taxable year to which they relate, or in the following taxable year if declared before the Companywe timely files itsfile our tax return for suchthe earlier taxable year and if paid on or before the first regular dividenddistribution payment after suchthat declaration. If a dividend is declared in October, November, or December to stockholders of record during one of those months, and is paid during the following January, then for federal income tax purposes the dividend will be treated as having been both paid and received on December 31 of the prior taxable year. A distribution which is not pro rata within a class of our beneficial interests entitled to a distribution, or which is not consistent with the rights to distributions among our classes of beneficial interests, is a preferential distribution that is not taken into consideration for purposes of the distribution requirements, and accordingly the payment of a preferential distribution could affect our ability to meet the distribution requirements. Taking into account our distribution policies, including the dividend reinvestment plan we have adopted, we expect that we will not make any preferential distributions. The distribution requirements may be waived by the IRS if a REIT establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax discussed below. To the extent that the Company doeswe do not distribute all of itsour net capital gain or distributes
at least 95% (but less than 100%)and all of its "REITour real estate investment trust taxable income," as adjusted, itwe will be subject to tax on undistributed amounts.
In addition, we will be subject to a 4% nondeductible excise tax to the undistributed portion at regular ordinary and
capital gains corporate tax rates. Furthermore, if the Company shouldextent we fail to
distribute during eachwithin a calendar year at least the sumto make required distributions to our stockholders of (i) 85% of its REITour ordinary income for such year, (ii)and 95% of its REITour capital gain net income plus the excess, if any, of the “grossed up required distribution” for suchthe preceding calendar year and (iii)over the amount treated as distributed for that preceding calendar year. For this purpose, the term “grossed up required distribution” for any undistributedcalendar year is the sum of our taxable income for the calendar year without regard to the deduction for dividends paid and all amounts from prior periods,earlier years that are not treated as having been distributed under the Company wouldprovision. We will be subjecttreated as having sufficient earnings and profits to treat as a four percent excise tax ondividend any distribution by us up to the excess of suchamount required distribution over the amounts actually distributed. The Company
believes that it has made, and intends to make, timely distributions sufficient
to satisfy these annual distribution requirements.
The Company's REIT taxable income has been, and is expected to continue for
five to seven years to be less than its cash flow, duedistributed in order to avoid imposition of the allowance of
depreciation and other noncash charges in computing taxable income.
Accordingly, the Company anticipates that during this period it will generally
have sufficient cash or liquid assets to enable it to satisfy the 95%
distribution requirement. It is possible that the Company, from time to time,
may4% excise tax.
If we do not have sufficientenough cash or other liquid assets to meet the 95%90% distribution requirement due to timing differences between the actual receipt
of income and actual payment of deductible expenses and
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the inclusion of such income and deduction of such expenses in arriving at
taxable income of the Company, or if the amount of nondeductible expenses such
as principal amortization or capital expenditures exceeds the amount of noncash
deductions. In the event that such situation occurs, in order to meet the 95%
distribution requirement, the Companyrequirements, we may find it necessary and desirable to arrange for short-term,new debt or possibly long-term, borrowing orequity financing to pay dividends in the form of
taxable stock dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." If the
amount of nondeductible expenses exceeds noncash deductions, the Company may
refinance its indebtedness to reduce principal payments and borrowprovide funds for capital expenditures.
Under certain circumstances, the Companyrequired distributions in order to maintain our REIT status. We can provide no assurance that financing would be available for these purposes on favorable terms.
We may be able to rectify a failure to meet the distribution requirementpay sufficient dividends for aany year by paying "deficiency
dividends"“deficiency dividends” to stockholders in a later year, whichyear. These deficiency dividends may be included in the
Company'sour deduction for dividends paid for the earlier year. Thus,year, but an interest charge would be imposed upon us for the Company
may be abledelay in distribution.
In addition to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be requiredother distribution requirements above, to pay interest based upon the
amount of any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxationpreserve our status 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 bewe are required to timely distribute C corporation earnings and profits that we inherit from acquired corporations.
Depreciation and Federal Income Tax Treatment of Leases
Our initial tax bases in our assets will generally be made.our development and acquisition cost. We will generally depreciate our real property on a straight-line basis over 40 years and our personal property over the applicable shorter periods. These depreciation schedules may vary for properties that we acquire through tax-free or carryover basis acquisitions.
We are entitled to depreciation deductions from our facilities only if we are treated for federal income tax purposes as the owner of the facilities. This means that the leases of the facilities must be classified for federal income tax purposes as true leases, rather than as sales or financing arrangements, and we believe this to be the case. In such event,the case of sale-leaseback arrangements, the IRS could assert that we realized prepaid rental income in the year of purchase to the extent that the value of currenta leased property, at the time of purchase, exceeded the purchase price for that property. While we believe that the value of leased property at the time of purchase did not exceed purchase prices, because of the lack of clear precedent we cannot provide assurances as to whether the IRS might successfully assert the existence of prepaid rental income in any of our sale-leaseback transactions.
30
Taxation of U.S. Stockholders
The maximum individual federal income tax rate for long-term capital gains is generally 15% (scheduled to increase to 20% for taxable years beginning after December 31, 2010) and accumulated
earnings and profits, all distributionsfor most corporate dividends is generally also 15% (scheduled to stockholders will be taxable asincrease to ordinary income and,rates for taxable years beginning after December 31, 2010). However, because we are not generally subject to certain limitationsfederal income tax on the portion of the Code, corporate
distributees may beour REIT taxable income or capital gains distributed to our stockholders, dividends on our shares generally are not eligible for such 15% tax rate on dividends while that rate is in effect. As a result, our ordinary dividends continue to be taxed at the higher federal income tax rates applicable to ordinary income. However, the favorable federal income tax rates for long-term capital gains, and while in effect, for dividends, received deduction. Unless
entitledgenerally apply to:
| (1) | your long-term capital gains, if any, recognized on the disposition of our shares; |
| (2) | our distributions designated as long-term capital gain dividends (except to the extent attributable to real estate depreciation recapture, in which case the distributions are subject to a 25% federal income tax rate); |
| (3) | our dividends attributable to dividends, if any, received by us from non-REIT corporations such as taxable REIT subsidiaries; and |
(4) our dividends to relief under specific statutory provisions, the Company will also
be disqualified from taxationextent attributable to income upon which we have paid federal corporate income tax.
As long as we qualify as a REIT for the four taxable years following
the year during which qualification was lost. It is not possible to state
whether in all circumstances the Company would be entitled to such statutory
relief.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As used herein, the term "Domestic Stockholder" means a holder of shares of
Stock that (for United States Federalfederal income tax purposes) (i) ispurposes, a citizen or
resident of the United States, (ii) is a corporation, a partnership, or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof or (iii) is an estate or trust the income of
which is subjectdistribution to United States Federal income taxation regardless of its
source. For any taxable year for which the Company qualifies for taxation as a
REIT, amounts distributed to taxable Domestic Stockholders will be taxed as
follows.
Distributions Generally
Distributions to Domestic Stockholders, other than capital gain dividends
discussed below, will be taxable as ordinary income to such holders up to the
amount of the Company's current or accumulated earnings and profits. Such
distributions are not eligible for the dividends received deduction for
corporations. To the extentour U.S. stockholders that the Company makes distributions in
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excess of its current or accumulated earnings and profits, such distributions
will first be treated as a tax-free return of capital, reducing the tax basis
in the Domestic Stockholders' shares of Stock, and distributions in excess of
the Domestic Stockholders' tax basis in their respective shares of Stock are
taxable as gain realized from the sale of such shares. Dividends declared by
the Company in October, November, or December of any year payable to a
stockholder of record on a specified date in any such month will be treated as
both paid by the Company and received by the stockholder on December 31 of such
year, provided that the dividend is actually paid by the Company during January
of the following calendar year. Stockholders may not include on their own
income tax returns any tax losses of the Company. Future regulations may
require stockholders to take into account, for purposes of computing their
individual alternative minimum tax liability, certain tax preference items of
the Company.
As a result of certain rules relating to the determination of the Company's
earnings and profits, stockholders may be required to treat certain
distributions that would otherwise result in a tax-free return of capital as
taxable dividends. Moreover, any "deficiency dividends" will be treated as a
"dividend" (an ordinary dividend or a capital gain dividend, as the case may
be), regardless of the Company's earnings and profits.
Capital Gain Dividends
Dividends to Domestic Stockholders that are properly designated by the
Company as capital gain dividends will be treated as long-term gain (to the
extent theywe do not exceed the Company's actual net capital gain) for the
taxable year without regard to the period for which the stockholder has held
its stock. Corporate stockholders, however, may be required to treat up to 20%
of certain capital gain dividends as ordinary income. Capital gain dividends
are not eligible for the dividends received deduction for corporations.
Passive Activity and Loss; Investment Interest Limitations
Distributions from the Company and gain from the disposition of the shares
of Stock will not ordinarily be treated as passive activity income, and,
therefore, Domestic Stockholders generally will not be able to apply any
"passive activity losses" against such income. Dividends from the Company (to
the extent they do not constitute a return of capital) and gain from the
disposition of shares of Stock generally will be treated as investment income
for purposes of the investment interest limitation.
Dispositions of Shares of Stock
A Domestic Stockholder will recognize gain or loss on the sale or exchange
of shares of Stock to the extent of the difference between the amount realized
on such sale or exchange and the holder's tax basis in such shares. Such gain
or loss generally will constitute capital gain or loss if the holder has held
such shares for more than one year. Losses incurred on the sale or exchange of
shares of Stock held for six months or less (after applying certain holding
period rules), however, will generally be deemed long-term capital loss to the
extent of any capital gain dividends received by the Domestic Stockholder with
respect to such shares and treated as long-term capital gain.
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TAXATION OF TAX-EXEMPT STOCKHOLDERS
In general, a tax-exempt entity that is a stockholder of the Company will
not be subject to tax on distributions from the Company or gain realized on the
sale of Stock. The IRS has ruled, in Revenue Ruling 66-106, 1966-1 C.B. 151,
that amounts distributed by a REIT to a tax-exempt employees' pension trust did
not constitute unrelated business taxable income ("UBTI"). Although rulings are
merely interpretations of law by the IRS and may be revoked or modified, based
on this analysis, indebtedness incurred by the Company in connection with the
acquisition of an investment should not cause any income derived from the
investment to be treated as UBTI to a tax-exempt entity, provided that the
tax-exempt entity has not financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Code and the shares are
not otherwise used in an unrelated trade or business of the tax-exempt entity.
A tax-exempt entity that incurs indebtedness to finance its purchase of shares,
however, will be subject to UBTI by virtue of the acquisition indebtedness
rules.
In certain circumstances, qualified trusts that hold more than 10% (by
value) of the interests in a REIT meeting certain requirements are required to
treat a percentage of REIT dividends as UBTI. The rule applies only if (i) the
qualification of the REIT depends upon the application of a "look-through"
exception to the restriction on REIT stockholdings by five or fewer
individuals, including qualified trusts (see "Description of Capital Stock --
Restrictions on Transfer"), and (ii) the REIT is "predominantly held" by
qualified trusts. A REIT is predominantly held by qualified trusts if one
qualified trust owns more than 25% of the value of the REIT or a group of
qualified trusts each owning more than 10% of the value of the REIT
collectively own more than 50% of the value of the REIT. The qualification of
the Company as a REIT has not depended and it is not anticipated that it will
depend on the application of the "look-through" exception. The Company has not
been and does not expect to be "predominantly held" by qualified trusts.
SPECIAL TAX CONSIDERATIONS FOR FOREIGN STOCKHOLDERS
The rules governing United States Federal income taxation of non-resident
alien individuals, foreign corporations, foreign partnerships, and foreign
trusts and estates (collectively, "Non-U.S. Stockholders") are complex, and the
following discussion is intended only as a summary of such rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of Federal, state, and local income tax laws on an investment in the
Company, including any reporting requirements, as well as the tax treatment of
such an investment under their home country laws.
In general, Non-U.S. Stockholders will be subject to regular United States
Federal income tax with respect to their investment in the Company if such
investment is "effectively connected" with the Non-U.S. Stockholder's conduct
of a trade or business in the United States. A corporate Non-U.S. Stockholder
that receives income that is (or is treated as) effectively connected with a
United States trade or business may also be subject to the branch profits tax
under section 884 of the Code, which is payable in addition to regular United
States corporate income tax. The following discussion will apply to Non-U.S.
Stockholders whose investment in the Company is not so effectively connected.
The Company expects to withhold United States income tax, as described below,
on the gross amount of any distributions paid to a
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Non-U.S. Stockholder unless the Non-U.S. Stockholder files the appropriate IRS
form, claiming that a lower treaty rate applies or that the distribution is
"effectively connected" income.
A distribution by the Company that is not attributable to gain from the
sale or exchange by the Company of a United States real property interest and
that is not designated by the Companydesignate as a capital gain dividend will be treated as an ordinary income dividend to the extent of our current or accumulated earnings and profits. Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable year. However, corporate stockholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the Code.
In addition, we may elect to retain net capital gain income and treat it as constructively distributed. In that case:
| (1) | we will be taxed at regular corporate capital gains tax rates on retained amounts; |
| (2) | each U.S. stockholder will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated a capital gain dividend; |
| (3) | each U.S. stockholder will receive a credit for its designated proportionate share of the tax that we pay; |
| (4) | each U.S. stockholder will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over its proportionate share of the tax that we pay; and |
| (5) | both we and our corporate stockholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes. |
If we elect to retain our net capital gains in this fashion, we will notify our U.S. stockholders of the relevant tax information within 60 days after the close of the affected taxable year.
31
As discussed above, for noncorporate U.S. stockholders, long-term capital gains are generally taxed at maximum rates of 15% (scheduled to increase to 20% for taxable years beginning after December 31, 2010) or 25%, depending upon the type of property disposed of and the previously claimed depreciation with respect to this property. If for any taxable year we designate capital gain dividends for U.S. stockholders, then the portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares. We will similarly designate the portion of any capital gain dividend that is to be taxed to noncorporate U.S. stockholders at the maximum rates of 15% (scheduled to increase to 20% for taxable years beginning after December 31, 2010) or 25% so that the designations will be proportionate among all classes of our shares.
Distributions in excess of current or accumulated earnings and profits will not be taxable to a U.S. stockholder to the extent that they do not exceed the stockholder’s adjusted tax basis in the stockholder’s shares, but will reduce the stockholder’s basis in those shares. To the extent that these excess distributions exceed the adjusted basis of a U.S. stockholder’s shares, they will be included in income as capital gain, with long-term gain generally taxed to noncorporate U.S. stockholders at a maximum rate of 15% (scheduled to increase to 20% for taxable years beginning after December 31, 2010). No U.S. stockholder may include on his federal income tax return any of our net operating losses or any of our capital losses.
Dividends that we declare in October, November or December of a taxable year to U.S. stockholders of record on a date in those months will be deemed to have been received by stockholders on December 31 of that taxable year, provided we actually pay these dividends during the following January. Also, items that are treated differently for regular and alternative minimum tax purposes are to be allocated between a REIT and its stockholders under Treasury regulations which are to be prescribed. It is possible that these Treasury regulations will require tax preference items to be allocated to our stockholders with respect to any accelerated depreciation or other tax preference items that we claim.
A U.S. stockholder will generally recognize gain or loss equal to the difference between the amount realized and the stockholder’s adjusted basis in our shares that are sold or exchanged. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the stockholder’s holding period in the shares exceeds one year. In addition, any loss upon a sale or exchange of our shares held for six months or less will generally be treated as a long-term capital loss to the extent of our long-term capital gain dividends during the holding period.
Effective for federal tax returns with due dates after October 22, 2004, the Code imposes a penalty for the failure to properly disclose a “reportable transaction.” A reportable transaction currently includes, among other things, a sale or exchange of our shares resulting in a tax loss in excess of (i) $10 million in any single year or $20 million in any combination of years in the case of our shares held by a C corporation or by a partnership with only C corporation partners or (ii) $2 million in any single year or $4 million in any combination of years in the case of our shares held by any other partnership or an S corporation, trust or individual, including losses that flow through pass through entities to individuals. A taxpayer discloses a reportable transaction by filing IRS Form 8886 with its federal income tax return and, in the first year of filing, a copy of Form 8886 must be sent to the IRS’s Office of Tax Shelter Analysis. The penalty for failing to disclose a reportable transaction is generally $10,000 in the case of a natural person and $50,000 in any other case.
Noncorporate U.S. stockholders who borrow funds to finance their acquisition of our shares could be limited in the amount of deductions allowed for the interest paid on the indebtedness incurred. Under Section 163(d) of the Code, interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment is generally deductible only to the extent of the investor’s net investment income. A U.S. stockholder’s net investment income will include ordinary income dividend distributions received from us and, if an appropriate election is made by the stockholder, capital gain dividend distributions received from us; however, distributions treated as a nontaxable return of the stockholder’s basis will not enter into the computation of net investment income.
32
Taxation of Tax-Exempt Stockholders
In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a REIT to a tax-exempt employees’ pension trust did not constitute “unrelated business taxable income,” even though the REIT may have financed some of its activities with acquisition indebtedness. Although revenue rulings are interpretive in nature and subject to revocation or modification by the IRS, based upon the analysis and conclusion of Revenue Ruling 66-106, our distributions made to stockholders that are tax-exempt pension plans, individual retirement accounts, or other qualifying tax-exempt entities should not constitute unrelated business taxable income, provided that the stockholder has not financed its acquisition of our shares with “acquisition indebtedness” within the meaning of the Code, and provided further that, consistent with our present intent, we do not hold a residual interest in a real estate mortgage investment conduit.
Tax-exempt pension trusts that own more than 10% by value of a “pension-held REIT” at any time during a taxable year may be required to treat a percentage of all dividends received from the pension-held REIT during the year as unrelated business taxable income. This percentage is equal to the ratio of:
| (1) | the pension-held REIT’s gross income derived from the conduct of unrelated trades or businesses, determined as if the pension-held REIT were a tax-exempt pension fund, less direct expenses related to that income, to |
| (2) | the pension-held REIT’s gross income from all sources, less direct expenses related to that income, |
except that this percentage shall be deemed to be zero unless it would otherwise equal or exceed 5%. A REIT is a pension-held REIT if:
| · | the REIT is “predominantly held” by tax-exempt pension trusts; and |
| · | the REIT would fail to satisfy the “closely held” ownership requirement discussed above if the stock or beneficial interests in the REIT held by tax-exempt pension trusts were viewed as held by tax-exempt pension trusts rather than by their respective beneficiaries. |
A REIT is predominantly held by tax-exempt pension trusts if at least one tax-exempt pension trust owns more than 25% by value of the REIT’s stock or beneficial interests, or if one or more tax-exempt pension trusts, each owning more than 10% by value of the REIT’s stock or beneficial interests, own in the aggregate more than 50% by value of the REIT’s stock or beneficial interests. Because of the share ownership concentration restrictions in our declaration of trust and bylaws, we believe that we are not and will not be a pension-held REIT. However, because our shares are publicly traded, we cannot completely control whether or not we are or will become a pension-held REIT.
Social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, are subject to different unrelated business taxable income rules, which generally will require them to characterize distributions from a REIT as unrelated business taxable income. In addition, these prospective investors should consult their own tax advisors concerning any “set aside” or reserve requirements applicable to them.
Taxation of Non-U.S. Stockholders
The rules governing the United States federal income taxation of non-U.S. stockholders are complex, and the following discussion is intended only as a summary of these rules. If you are a non-U.S. stockholder, we urge you to consult with your own tax advisor to determine the impact of United States federal, state, local, and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your investment in our shares.
33
In general, a non-U.S. stockholder will be subject to regular United States federal income tax in the same manner as a U.S. stockholder with respect to its investment in our shares if that investment is effectively connected with the non-U.S. stockholder’s conduct of a trade or business in the United States (and, if provided by an applicable income tax treaty, is attributable to a permanent establishment or fixed base the non-U.S. stockholder maintains in the United States). In addition, a corporate non-U.S. stockholder that receives income that is or is deemed effectively connected with a trade or business in the United States may also be subject to the 30% branch profits tax under Section 884 of the Code, which is payable in addition to regular United States federal corporate income tax. The balance of this discussion of the United States federal income taxation of non-U.S. stockholders addresses only those non-U.S. stockholders whose investment in our shares is not effectively connected with the conduct of a trade or business in the United States.
A distribution by us to a non-U.S. stockholder that is not attributable to gain from the sale or exchange of a United States real property interest and that is not designated as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of current or accumulated earnings and profits. Generally, an ordinaryA distribution of this type will generally be subject to United States federal income dividendtax and withholding at the rate of 30%, or at a lower rate if the non-U.S. stockholder has in the manner prescribed by the IRS demonstrated its entitlement to benefits under a tax treaty. In the case of any in kind distributions of property, we or other applicable withholding agents will collect the amount required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the property that the non-U.S. stockholder would otherwise receive, and the non-U.S. stockholder may bear brokerage or other costs for this withholding procedure. Because we cannot determine our current and accumulated earnings and profits until the end of the taxable year, withholding at the rate of 30% or applicable lower treaty rate will generally be imposed on the gross amount of any distribution to a non-U.S. stockholder that we make and do not designate a capital gain dividend. Notwithstanding this withholding on distributions in excess of our current and accumulated earnings and profits, these distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S. stockholder’s adjusted basis in our shares, and the nontaxable return of capital will reduce the adjusted basis in these shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the non-U.S. stockholder’s adjusted basis in our shares, the 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 exchange of these shares, as discussed below. A non-U.S. stockholder may seek a refund from the IRS of amounts withheld on distributions to him in excess of our current and accumulated earnings and profits.
From time to time, some of our distributions may be attributable to the sale or exchange of United States real property interests. However, capital gain dividends that are received by a non-U.S. stockholder, including dividends attributable to our sales of United States real property interests, and that are deductible by us in respect of our 2005 taxable year and thereafter will be subject to the taxation and withholding regime applicable to ordinary income dividends and the branch profits tax will not apply, provided that (1) the capital gain dividends are received with respect to a class of shares that is “regularly traded” on a domestic “established securities market” such as the New York Stock Exchange, or the NYSE, both as defined by applicable Treasury regulations, and (2) the non-U.S. stockholder does not own more than 5% of that class of shares at any time during the one-year period ending on the date of distribution of the capital gain dividends. If both of these provisions are satisfied, qualifying non-U.S. stockholders will not be subject to withholding on capital gain dividends as though those amounts were effectively connected with a United States withholdingtrade or business, and qualifying non-U.S. stockholders will not be required to file United States federal income tax equal to 30%returns or pay branch profits tax in respect of the gross amount
of the distribution unless such tax is reduced or eliminated by an applicable
tax treaty. A distribution of cash in excess of the Company's earnings and
profitsthese capital gain dividends. Instead, these dividends will be treated firstsubject to United States federal income tax and withholding as ordinary dividends, currently at a 30% tax rate unless reduced by applicable treaty, as discussed below. Although there can be no assurance in this regard, we believe that our common stock and each class of our preferred stock have been and will remain “regularly traded” on a domestic “established securities market” within the meaning of applicable Treasury regulations; however, we can provide no assurance that our shares will continue to be “regularly traded” on a domestic “established securities market” in future taxable years.
Except as discussed above, for any year in which we qualify as a return of capital that will reduce a
Non-U.S. Stockholder's basis in its shares of Stock (but not below zero) and
then as gain from the disposition of such shares, the tax treatment of which is
described under the rules discussed below with respect to dispositions of
shares.
Distributions by the CompanyREIT, distributions that are attributable to gain from the sale or exchange of a United States real property interest will be taxed to a Non-U.S.
Stockholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S.
Stockholdernon-U.S. stockholder as if suchthese distributions were gains "effectively connected"effectively connected with a trade or business in the United States trade or business.conducted by the non-U.S. stockholder. Accordingly, a Non-U.S. Stockholdernon-U.S. stockholder that does not qualify for the special rule above will be taxed on these amounts at the normal capital gain rates applicable to a Domestic Stockholder
(subjectU.S. stockholder, subject to any applicable alternative minimum tax and to a special alternative minimum tax in the case of non-residentnonresident alien individuals). Distributions
subjectindividuals; such a non-U.S. stockholder will be required to FIRPTAfile a United States federal income tax return reporting these amounts, even if applicable withholding is imposed as described below; and such a non-U.S. stockholder that is also a corporation may also be subject to aowe the 30% branch profits tax under Section 884 of the Code in the handsrespect of a corporate Non-U.S. Stockholder that is not entitled to treaty exemption.
The Companythese amounts. We or other applicable withholding agents will be required to withhold from distributions to Non-U.S.
Stockholders,such non-U.S. stockholders, and remit to the IRS, (i) 35% of designated capital gain
dividends (or, if greater, 35% of the maximum amount of any distributionsdistribution that could be designated as a capital gain dividends) and (ii) 30% of ordinary dividends paid
out of earnings and profits.dividend. In addition, for purposes of this withholding rule, if the Company designateswe designate prior distributions as capital gain dividends, then subsequent distributions up to the amount of suchthe designated prior distributions will be treated as capital gain dividendsdividends. The amount of any tax withheld is creditable against the non-U.S. stockholder’s United States federal income tax liability, and the non-U.S. stockholder may file for purposesa refund from the IRS of withholding. A distributionany amount of withheld tax in excess of that tax liability.
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Effective generally from and after 2006, a special “wash sale” rule applies to a non-U.S. stockholder who owns any class of our shares if (1) the Company's earnings
and profits may be subject to 30% dividend withholding ifstockholder owns more than 5% of that class of shares at any time during the timeone-year period ending on the date of the distribution it cannotdescribed below, or (2) that class of our shares is not, within the meaning of applicable Treasury regulations, “regularly traded” on a domestic “established securities market” such as the NYSE. Although there can be determined whetherno assurance in this regard, we believe that our common stock and each class of our preferred stock have been and will remain “regularly traded” on a domestic “established securities market” within the distributionmeaning of applicable Treasury regulations, all as discussed above; however, we can provide no assurance that our shares will continue to be “regularly traded” on a domestic “established securities market” in future taxable years. We thus anticipate this wash sale rule to apply, if at all, only to a non-U.S. stockholder that owns more than 5% of either our common stock or any class of our preferred stock. Such a non-U.S. stockholder will be treated as having made a “wash sale” of our shares if it (1) disposes of an interest in our shares during the 30 days preceding the ex-dividend date of a distribution by us that, but for such disposition, would have been treated by the non-U.S. stockholder in whole or in part as gain from the sale or exchange of a United States real property interest, and then (2) acquires or enters into a contract to acquire a substantially identical interest in our shares, either actually or constructively through a related party, during the 61-day period beginning 30 days prior to the ex-dividend date. In the event of such a wash sale, the non-U.S. stockholder will have gain from the sale or exchange of a United States real property interest in an amount in excess of the Company's current or accumulated earnings and profits.
Under recently issued proposed Treasury Regulations, the Company would have the
optionequal to either treat the entire distribution as a dividend or to determine
the amount of the distribution subject to withholding based on a reasonable
estimate of the portion of the distribution that, is notbut for the wash sale, would have been a dividend basedgain from the sale or exchange of a United States real property interest. As discussed above, a non-U.S. stockholder’s gain from the sale or exchange of a United States real property interest can trigger increased United States taxes, such as the branch profits tax applicable to non-U.S. corporations, and increased United States tax filing requirements.
If for any taxable year we designate capital gain dividends for our stockholders, then the portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on expected earnings and profits. a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares.
Tax treaties may reduce the Company's
withholding obligations.obligations on our distributions. Under some treaties, however, rates below 30% that are applicable to ordinary income dividends from United States corporations may not apply to ordinary income dividends from a REIT or may apply only if the REIT meets certain additional conditions. You must generally use an applicable IRS Form W-8, or substantially similar form, to claim tax treaty benefits. If the amount of tax withheld by the Company with respect to a distribution to a Non-U.S. Stockholdernon-U.S. stockholder exceeds the stockholder'sstockholder’s United States federal income tax liability with respect to suchthe distribution, (as determined under the rules described in the two preceding paragraphs), the Non-U.S. Stockholdernon-U.S. stockholder may file for a refund of suchthe excess from the IRS. It should be noted that theThe 35% withholding tax rate discussed above on some capital gain dividends currently corresponds to the maximum income tax rate applicable to corporations,corporate non-U.S. stockholders but is higher than the 28%current 15% and 25% maximum raterates on capital gains generally applicable to noncorporate non-U.S. stockholders. Treasury regulations also provide special rules to determine whether, for purposes of individuals.
Unlessdetermining the applicability of a tax treaty, our distributions to a non-U.S. stockholder that is an entity should be treated as paid to the entity or to those owning an interest in that entity, and whether the entity or its owners are entitled to benefits under the tax treaty. In the case of any in kind distributions of property, we or other applicable withholding agents will have to collect the amount required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the property that the non-U.S. stockholder would otherwise receive, and the non-U.S. stockholder may bear brokerage or other costs for this withholding procedure.
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If our shares of Stock constitute a "Unitedare not “United States real property interest"interests” within the meaning of FIRPTA,Section 897 of the Code, then a non-U.S. stockholder’s gain on sale of suchthese shares by a Non-U.S.
Stockholder generally will not be - 26 -
subject to United States taxation. Thefederal income taxation, except that a nonresident alien individual who was in the United States for 183 days or more during the taxable year may be subject to a 30% tax on this gain. Our shares of Stock of the Company will not constitute a United States real property interest if the Company iswe are a "domestically“domestically controlled REIT."” A domestically controlled REIT is a REIT in which at all times during a specified testingthe preceding five-year period less than 50% in value of its shares is held directly or indirectly by Non-U.S. Stockholders. The Company
believesforeign persons. We believe that it is,we have been and expects to continue to be,will remain a domestically controlled REIT and therefore that thethus a non-U.S. stockholder’s gain on sale of our shares in the Company will not be subject to taxation under FIRPTA.United States federal income taxation. However, because theour shares of Stock will beare publicly traded, we can provide no assurance can be given that the Companywe have been or will continue to beremain a domestically controlled REIT. Notwithstanding the foregoing, capital gainIf we are not
subject to FIRPTA will be taxable to a Non-U.S. Stockholder if the Non-U.S.
Stockholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and certain other
conditions apply, in which case the nonresident alien individual will be
subject to a 30% tax on such individual's capital gains. If the Company did not
constitute a domestically controlled REIT, whether a Non-U.S. Stockholder'snon-U.S. stockholder’s gain on sale of our shares of Stock wouldwill not be subject to tax under FIRPTAUnited States federal income taxation as a sale of a United States real property interest, would depend on whether theif that class of shares were
"regularly traded" (asis “regularly traded,” as defined by applicable Treasury Regulations)regulations, on an established securities market (e.g.,like the NYSE, on whichand the non-U.S. stockholder has at all times during the preceding five years owned 5% or less by value of that class of shares. In this regard, because the shares of Stock are
listed) and on the size of the selling stockholder'sothers may be redeemed, a non-U.S. stockholder’s percentage interest in the Company.a class of our shares may increase even if it acquires no additional shares in that class. If the gain on the sale of the Company'sour shares were subject to United States federal income taxation, under
FIRPTA, the Non-U.S. Stockholder wouldnon-U.S. stockholder will generally be subject to the same treatment as a Domestic StockholderU.S. stockholder with respect to suchits gain, (subjectwill be required to applicable
alternative minimumfile a United States federal income tax return reporting that gain, and a special alternative minimumcorporate non-U.S. stockholder might owe branch profits tax inunder Section 884 of the case of
nonresidential alien individuals). In any event, aCode. A purchaser of our shares of Stock from a Non-U.S. Stockholdernon-U.S. stockholder will not be required under FIRPTA to withhold on the purchase price if the purchased shares of Stock are "regularly traded"regularly traded on an established securities market or if the Company iswe are a domestically controlled REIT. Otherwise, under FIRPTA thea purchaser of our shares of Stockfrom a non-U.S. stockholder may be required to withhold 10% of the purchase price paid to the non-U.S. stockholder and to remit suchthe withheld amount to the IRS.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
Backup Withholding and Information Reporting
Information reporting and backup withholding may apply to distributions or proceeds paid to our stockholders under the circumstances discussed below. The following discussion summarizes certain Federalbackup withholding rate is currently 28% and is scheduled to increase to 31% after 2010. Amounts withheld under backup withholding are generally not an additional tax and may be refunded by the IRS or credited against the REIT stockholder’s federal income tax considerationsliability. In the case of any in kind distributions of property by us to a stockholder, we or other applicable solelywithholding agents will have to collect any applicable backup withholding by reducing to cash for remittance to the Company's investment inIRS a sufficient portion of the Operating
Partnership. The discussion does not cover stateproperty that our stockholder would otherwise receive, and the stockholder may bear brokerage or local tax laws or any
Federal tax laws other than income tax laws.
Classification as a Partnership
The Companycosts for this withholding procedure.
A U.S. stockholder will be entitledsubject to include in its income its distributive
sharebackup withholding when it receives distributions on our shares or proceeds upon the sale, exchange, redemption, retirement or other disposition of our shares, unless the Operating Partnership's income and to deduct its distributive
shareU.S. stockholder properly executes, or has previously properly executed, under penalties of perjury an IRS Form W-9 or substantially similar form that:
| · | provides the U.S. stockholder’s correct taxpayer identification number; and |
| · | certifies that the U.S. stockholder is exempt from backup withholding because it is a corporation or comes within another exempt category, it has not been notified by the IRS that it is subject to backup withholding, or it has been notified by the IRS that it is no longer subject to backup withholding. |
If the Operating Partnership's losses only if the Operating Partnership
is classified, for Federal income tax purposes, (i) as a partnership rather
than as an association taxable as a corporation and (ii) not as a "publicly
traded partnership." Under recently finalized Treasury Regulations, an entity
such as the Company that has more than one owner and was in existence and
claimed partnership classification prior to January 1, 1997 (the "Effective
Date"), will be classified as a partnership rather than as an association
taxable as a corporation for periods beginning on the Effective Date, provided
it does not elect to change its classification. In general, the entity's
claimed partnership classification will be respected for all periods prior to
the Effective Date if it had a reasonable basis for its claimed classification.
- 27 -
The Operating PartnershipU.S. stockholder has not requested,provided and does not intend to
request, a ruling fromprovide its correct taxpayer identification number on the IRS Form W-9 or substantially similar form, it may be subject to penalties imposed by the IRS, and the REIT or other withholding agent may have to withhold a portion of any distributions or proceeds paid to it. Unless the U.S. stockholder has established on a properly executed IRS Form W-9 or substantially similar form that it will be treated as a partnership for
Federal income tax purposes. Instead, Kramer Levin will deliver its opinion
that, based on the provisions of the Partnership Agreement, certain factual
assumptions and certain representations described in the opinion, the Operating
Partnership will, for all taxable years since its inception, be treated as a
partnership and not asis a corporation or an association taxable as a corporation
for Federal income tax purposescomes within another exempt category, distributions or proceeds on our shares paid to it during the calendar year, and not as a "publicly traded partnership."
Unlike a tax ruling, an opinion of counsel is not binding on the IRS or the
courts.
If for any reason the Operating Partnership was taxable as a corporation
rather than as a partnership for Federal income tax purposes, the Company would
not be able to satisfy the income and asset requirements for status as a REIT.
See "-- Taxation of the Company -- Income Tests," and "-- Taxation of the
Company -- Asset Tests," above. In addition, any change in the Operating
Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur a tax liability without any related cash
distribution. See "-- Taxation of the Company -- Annual Distribution
Requirements," above. Further, items of income and deduction of the Operating
Partnership would not pass through to its partners, and its partners would be
treated as stockholders for tax purposes. The Operating Partnership would be
required to pay income tax at regular corporate tax rates on its net income and
distributions to partners would constitute dividends that would not be
deductible in computing the Operating Partnership's taxable income.
Partners, Not the Operating Partnership, Subject to Tax
A partnership is not a taxable entity for Federal income tax purposes.
Rather, the Company will be required to take into account its allocable share
of the Operating Partnership's income, gains, losses, deductions and credits
for any taxable year of the Operating Partnership ending within or with the
taxable year of the Company without regard to whether the Company has received
or will receive any cash distributions from the Operating Partnership.
Operating Partnership Allocations
The allocation of income, gains, losses and deductions among partners will
generally be determined in accordance with the provisions of the Partnership
Agreement. However, the allocations provided in the Partnership Agreement will
be disregarded for tax purposes under section 704(b) of the Code if they do not
comply with the provisions of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
If an allocation is not recognized for Federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The Operating Partnership's
allocations of income, gains, losses and deductions are intended to comply with
the requirements of section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
- 28 -
Tax Allocations With Respect to Pre-Contribution Gain
Pursuant to section 704(c) of the Code, items of 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 for Federal income tax purposes in a manner such that the
contributor is charged with, or benefits from, 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 and the adjusted tax basis of the
contributed property at the time of contribution (the "Book-Tax Difference").
In general, the fair market value of the Properties contributed to the
Operating Partnership was in excess of their adjusted tax bases. The
Partnership Agreement requires allocations of income, gains, losses and
deductions attributable to each item of contributed property be made in a
manner that is consistent with section 704(c) of the Code. As a result, the tax
depreciation available with respect to such property will be allocated first to
the partners other than the partner that contributed the property, to the
extent of, and in proportion to, such other partners' share of book
depreciation, and then, if any tax depreciation remains, to the partner that
contributed the property. Accordingly, the depreciation deductions allocable to
the parties for tax purposes will not correspond to the percentage interests of
the partners. While the Company will generally be allocated tax depreciation
deductions with respect to the Properties in excess of its percentage interest
in the Operating Partnership, its share of tax depreciation may be less than
the depreciation deductions that would have been allocated to the Company had
the basis of the Properties been equal to their fair market value. Upon the
disposition of any item of contributed property, any gain attributable to the
excess, if any, at such time of basis for book purposes over basis for tax
purposes would be allocated for tax purposes to the contributing partner.
Basis in Partnership Interests
The Company's adjusted tax basis in its partnership interest in the
Operating Partnership generally will be (i) equal to the amount of cashtax withheld, if any, will be reported to it and the
basis of any other property contributed to the Operating Partnership by the
Company; (ii) increased by (a) its allocable share of the Operating
Partnership's income and (b) its allocable share of indebtedness of the
Operating Partnership; and (iii) reduced, but not below zero, by the Company's
allocable share of (a) the Operating Partnership's loss and (b) the amount of
cash distributed to the Company, the basis of property distributed to the
Company and by constructive distributions resulting from a reduction in the
Company's share of the indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the recognition
of such loss 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 in the Operating Partnership below zero, such
distributions (including such constructive distributions) would constitute
taxable income to the Company. Such distributions and constructive
distributions normally will be characterized as a capital gain, and if the
Company's
- 29 -
partnership interest in the Operating Partnership has been held for longer than
the long-term capital gain holding period (currently one year), such
distributions and constructive distributions will constitute long-term capital
gain.
Depreciation Deductions Available to the Partnerships
The Operating Partnership's assets other than cash consist largely of
appreciated property contributed by its partners. Assets contributedIRS.
36
Distributions on our shares to a partnership in a tax-free transaction carry over their depreciation schedules.
Accordingly, the Operating Partnership's depreciation deductions for its real
property are based largely on the historic depreciation schedules for the
Properties. The real property is being depreciated over a range of 15 to 31.5
years using various methods of depreciation which were determined at the time
that each item of depreciable property was placed in service. Any real property
purchased or developed by the Operating Partnership will be depreciated over at
least 39 years.
Sale of Partnership Property
Generally, any gain realized by the Operating Partnership on the sale of
property held by the Operating Partnership, if the property is held for more
than one year, will be long-term capital gain, except for any portion of such
gain that is treated as depreciation or cost recovery recapture. However, under
the REIT requirements, the Company's share as a partner of any gain realized by
the Operating Partnership on the sale of any property held by the Operating
Partnership as inventory or other property held primarily for sale to customers
in the ordinary course of the Operating Partnership's trade or business will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. See "-- Taxation of the Company," above. Such prohibited
transaction income will also have an adverse effect upon the Company's ability
to satisfy the income tests for status as a REIT. Under existing law, whether
property is held as inventory or primarily for sale to customers in the
ordinary course of the Operating Partnership's trade or business is a question
of fact that depends on all the facts and circumstances with respect to the
particular transaction. A safe harbor to avoid classification as a prohibited
transaction exists as to real estate assets held for the production of rental
income by a REIT for at least four years where in any taxable year the REIT has
made no more than seven sales of property or, in the alternative, the aggregate
of the adjusted bases of all the properties sold does not exceed 10% of the
adjusted bases of all of the REIT's properties during the year and the
expenditures includible in a property's basis made during the four year period
prior to disposition do not exceed 30% of the property's net sales price. The
Operating Partnership has held and intends to continue to hold the Properties
for investment with a view to long-term appreciation, to engage in the business
of acquiring, developing, owning, and operating and leasing the Properties and
to make such occasional sales of the Properties, including peripheral land, as
are consistent with the Company's and the Operating Partnership's investment
objectives. No assurance can be given, however, that every property sale by the
Operating Partnership will constitute a sale of property held for investment.
Conversion Rights
In the event that the Company acquires limited partnership units in the
Operating Partnership ("OP Units") from Messrs. Agree, Rosenberg and Weiner by
reason of the exercise
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of conversion rights, the Company will have a basis in the OP Units so acquired
equal to the fair market value of the stock it issues, or the amount of cash it
pays, in exchange for such OP Units. If the Operating Partnership makes an
election under section 754, the portion of the Operating Partnership's basis in
its assets with respect to the Company will be adjusted to reflect the price
paid for the OP Units. If the Company acquires all the OP Units, the Operating
Partnership will terminate and the Company will, as a result, directly own all
the Properties directly held by the Operating Partnership, and the basis of
those Properties in the hands of the Company would be determined by reference
to the Company's basis in its partnership interest in the Operating
Partnership.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its Domestic Stockholders and the IRS the amount
of distributions paidnon-U.S. stockholder during each calendar year and the amount of tax withheld, if any. Under certain circumstances, Domestic Stockholdersany, will generally be reported to the non-U.S. stockholder and to the IRS. This information reporting requirement applies regardless of whether the non-U.S. stockholder is subject to withholding on distributions on our shares or whether the withholding was reduced or eliminated by an applicable tax treaty. Also, distributions paid to a non-U.S. stockholder on our shares may be subject to backup withholding, at a rate of 31% with respect to distributions paid. Backup
withholding will apply only ifunless the holder (i) fails to furnishnon-U.S. stockholder properly certifies its taxpayer
identification number ("TIN") (which, fornon-U.S. stockholder status on an individual, would be his Social
Security number), (ii) furnishes an incorrect TIN, (iii) is notified byIRS Form W-8 or substantially similar form in the IRS
that it has failed properly to report payments of interest and dividends, or
(iv) under certain circumstances, fails to certify, under penalty of perjury,
that it has furnished a correct TIN and has not been notified by the IRS that
it is subject to backup withholding for failure to report interest and dividend
payments. Backup withholding will not apply with respect to payments made to
certain exempt recipients, such as corporations and tax-exempt organizations.
Domestic Stockholders should consult their own tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
Domestic Stockholder will be allowed as a credit against such Domestic
Stockholder's United States Federal income tax liability and may entitle such
Domestic Stockholder to a refund, provided that the required information is
furnished to the IRS.
Additional issues may arise pertaining tomanner described above. Similarly, information reporting and backup withholding with respectwill not apply to Non-U.S. Stockholders. For example,proceeds a non-U.S. stockholder receives upon the Company may
be required to withhold a portionsale, exchange, redemption, retirement or other disposition of capital gain distributions to any
stockholders who fail to certify their non-foreignour shares, if the non-U.S. stockholder properly certifies its non-U.S. stockholder status to the Company. See
"-- Special Tax Considerations for Foreign Stockholders." Non-U.S. Stockholders
should consult their tax advisors with respect to any suchon an IRS Form W-8 or substantially similar form. Even without having executed an IRS Form W-8 or substantially similar form, however, in some cases information reporting and backup withholding requirements.
STATE AND LOCAL TAXES
The Company will not apply to proceeds that a non-U.S. stockholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares if the non-U.S. stockholder receives those proceeds through a broker’s foreign office.
Other Tax Consequences
Our tax treatment and itsthat of our stockholders may be modified by legislative, judicial, or administrative actions at any time, which actions may be retroactive in effect. The rules dealing with federal income taxation are constantly under review by the Congress, the IRS and the Treasury Department, and statutory changes, new regulations, revisions to existing regulations, and revised interpretations of established concepts are issued frequently. Likewise, the rules regarding taxes other than federal income taxes may also be modified. No prediction can be made as to the likelihood of passage of new tax legislation or other provisions, or the direct or indirect effect on us and our stockholders. Revisions to tax laws and interpretations of these laws could adversely affect the tax or other consequences of an investment in our shares. We and our stockholders may also be subject to taxation by state, local or local
taxation in various state or localother jurisdictions, including those in which the
Company, itswe or our stockholders or the Operating Partnership transact business or reside. The state and localThese tax treatment of the Company and its stockholdersconsequences may not conformbe comparable to the Federalfederal income tax consequences discussed above.
Consequently, prospective stockholders should consult their own tax advisors
regarding the effect
37
PLAN OF DISTRIBUTION
The common stock, preferred stock, depositary shares and warrants may be sold:
| · | to or through underwriting syndicates represented by managing underwriters; |
| · | through one or more underwriters without a syndicate for them to offer and sell to the public; |
| · | through dealers or agents; or |
| · | to investors directly in negotiated sales or in competitively bid transactions. |
The prospectus supplement for each series of state and local tax laws on an investmentsecurities we sell will describe that offering, including:
| · | the name or names of any underwriters; |
| · | the purchase price and the proceeds to us from that sale; |
| · | any underwriting discounts and other items constituting underwriters’ compensation; |
| · | any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers; and |
| · | any securities exchanges on which the securities may be listed. |
Underwriters
If underwriters are used in the Company.
- 31 -
EMPLOYEE BENEFIT PLANS
A PROSPECTIVE INVESTOR THAT IS AN EMPLOYEE BENEFIT PLAN OF ANY SORT, WHETHER OR
NOT SUBJECT TO ERISA, IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER APPLICABLE PROVISIONS OF THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), THE CODE, AND
STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK
BY SUCH PLAN.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA
andsale, we will execute an underwriting agreement with those underwriters relating to the prohibited transaction provisions of Section 4975securities that we will offer. Unless otherwise set forth in the prospectus supplement, the obligations of the Code that mayunderwriters to purchase these securities will be relevant to prospective investors. This discussion does not purport to deal
with all aspects of ERISA or the Code that may be relevant to particular
investors in light of their particular circumstances.
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to ERISA (a "Plan"), should consider the fiduciary
standards under ERISA in the contextconditions. The underwriters will be obligated to purchase all of the Plan's particular circumstances
before authorizing an investment of a portion of such Plan's assets in the
Offered Securities. In particular, such fiduciary should consider (i) whether
the investment satisfies the diversification requirements of Section
404(a)(1)(c) of ERISA, (ii) whether the investment is in accordance with the
documents and instruments governing the Plan as required by Section
404(a)(1)(D) of ERISA (including the Plan's funding policy), (iii) whether the
investment is for the exclusive purpose of providing benefits to participants
in the Plan and their beneficiaries or defraying reasonable administrative
expenses of the Plan, and (iv) whether the investment is prudent under ERISA.
In additionthese securities if any are purchased.
The securities subject to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA, and the corresponding provisions of the
Code, prohibit a wide range of transactions involving the assets of a Plan or
an individual retirement account ("IRA") and persons who have certain specified
relationships to the Plan or an IRA ("parties in interest" within the meaning
of ERISA, "disqualified persons" within the meaning of the Code). Thus, a
fiduciary of a Plan or an IRA considering an investment in the Offered
Securities also should consider whether the acquisition or the continued
holding of the Offered Securities might constitute or give rise to a direct or
indirect prohibited transaction.
The United States Department of Labor (the "DOL") has issued final
regulations (the "Regulations") setting out the standards it will apply in
determining what constitutes assets of an employee benefit plan under ERISA.
Under the Regulations, if a Plan or an IRA acquires an equity interest in an
entity, which interest is neither a "publicly offered security" nor a security
issued by an investment company registered under the Investment Company Act of
1940, as amended, the Plan's and IRA's assets would include, for purposes of
the fiduciary responsibility provisions of ERISA and the Code, both the equity
interest and an undivided interest in each of the entity's underlying assets
unless certain specified exceptions apply. The Regulations define a
publicly-offered security as security that is "widely held," "freely
transferable," and either a part of a class of securities registered under the
Exchange Act, or sold pursuant to an effective registration statement under the
Securities Act (provided the securities
- 32 -
are registered under the Exchange Act within 120 days after the end of the
fiscal year of the issuer during which the offering occurred). The Offered
Securitiesunderwriting agreement will be sold in an offering registered under the Securities Act and
are or will be registered under the Exchange Act.
The Regulations provide that a security is "widely held" only if it is part
of a class of securities that is owned by 100 or more investors independent of
the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control.
The Regulations provide that whether a security is "freely transferable" is
a factual question to be determined on the basis of all relevant facts and
circumstances. The DOL Regulations further provide that when a security is part
of an offering in which the minimum investment is $10,000 or less certain
restrictions ordinarily will not, alone or in combination, affect the finding
that such securities are freely transferable. The Company believes that the
restrictions imposed under the Articles on the transfer of the capital stock
are limited to the restrictions on transfer generally permitted under the
Regulations and are not likely to result in the failure of the capital stock to
be "freely transferable." The Company also believes that certain restrictions
that apply to the capital stock held by the Company or which may be derived
from contractual arrangements requestedacquired by the underwriters in connection with
Offered Securities offered pursuantfor their own account and may be resold by them from time to an underwritten agreement are unlikely
to resulttime in the failure of the capital stock to be "freely transferable." The
Regulations only establish a presumption in favor of the finding of free
transferability, and, therefore, no assurance can be given that the DOL and the
U.S. Treasury Department will not reach a contrary conclusion.
Assuming that the Offered Securities will be "widely held," the Company
believes that the Offered Securities will be publicly offered securities for
purposes of the Regulations and that the assets of the Company will not be
deemed to be "plan assets" of any Plan or IRA that invests in the Offered
Securities.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to
investors directly or through agents. Any such underwriter or agent involved in
the offer and sale of the Offered Securities will be named in the applicable
Prospectus Supplement.
Underwriters may offer and sell the Offered Securitiestransactions, including negotiated transactions, at a fixed public offering price or at varying prices which may be changed, at prices related to the prevailing market pricesdetermined at the time of sale or at negotiated prices. The Company also may, from time to
time, authorize underwriters acting as the Company's agents to offer and sell
the Offered Securities upon the terms and conditions as are set forth in the
applicable Prospectus Supplement. In connection with the sale of the Offered
Securities, underwriterssale. Underwriters may be deemed to have received compensation from the
Companyus in the form of underwriting discounts or commissions and may also receive commissions from the purchasers of the Offered Securitiesthese securities for whom they may act as agent. Underwriters may sell the Offered Securitiesthese securities to or through dealers, and suchdealers. These dealers may receive compensation in the
- 33 -
form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agent. Any underwriting compensationinitial public offering price and any discounts or concessions allowed or reallowed or paid to dealers may be changed from time to time.
Underwriters could make sales in privately negotiated transactions and/or any other method permitted by law, including sales deemed to be an “at-the-market” offering, sales made directly on the CompanyNYSE, the existing trading market for our common stock, or sales made to underwriters or agentsthrough a market maker other than on an exchange. The name of any such underwriter or agent involved in the offer and sale of our common stock, the amounts underwritten, and the nature of its obligations to take our common stock will be described in the applicable prospectus supplement.
We also may sell the securities in connection with the offering of the Offered Securities, and any discounts,
concessionsa remarketing upon their purchase, in connection with a redemption or commissions allowedrepayment, by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Offered Securitiesa remarketing firm acting as principal for its own account or as our agent. Remarketing firms may be deemed to be underwriters in connection with the securities that they remarket.
We may authorize underwriters to solicit offers by institutions to purchase the securities subject to the underwriting agreement from us, at the public offering price stated in the prospectus supplement under delayed delivery contracts providing for payment and any discountsdelivery on a specified date in the future. If we sell securities under these delayed delivery contracts, the prospectus supplement will state that as well as the conditions to which these delayed delivery contracts will be subject and the commissions received by
them andpayable for that solicitation.
38
Agents
We may also sell any profit realized by them on resale of the Offered Securitiessecurities through agents designated by us from time to time. We will name any agent involved in the offer or sale of these securities and will list commissions payable by us to these agents in the prospectus supplement. These agents will be acting on a best efforts basis to solicit purchases for the period of its appointment, unless we state otherwise in the prospectus supplement.
Direct Sales
We may be
deemedsell any of the securities directly to be underwriting discountspurchasers. In this case, we will not engage underwriters or agents in the offer and commissions, undersale of these securities.
Indemnification
We may indemnify underwriters, dealers or agents who participate in the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnificationdistribution of securities against and contribution toward certain
civil liabilities, including liabilities under the Securities Act.
Underwriters,Act and agree to contribute to payments which these underwriters, dealers andor agents may engage in transactions with, or perform
services for, or be customersrequired to make.
No Assurance of the Company in the ordinary course of
business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase the Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts ("Contracts") providing for payment and delivery on the date
or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate amount of the Offered Securities sold
pursuant to Contracts shall be not less nor more than, the respective amounts
stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized,Liquidity
The securities offered hereby may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but willa new issue of securities with no established trading market. Any underwriters that purchase securities from us may make a market in all cases be
subject to the approval of the Company. Contractsthese securities. The underwriters will not be subjectobligated, however, to make a market and may discontinue market-making at any conditions except (i) the purchase by an institutiontime without notice to holders of the Offered Securities
covered by its Contracts shall not atsecurities. We cannot assure you that there will be liquidity in the time of delivery be prohibited under
the lawstrading market for any securities of any jurisdiction in the United States to which such institution is
subject; and (ii) if the Offered Securities are being sold to underwriters, the
Company shall have sold to such underwriters the total amount of the Offered
Securities less the amount thereof covered by the Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
LEGAL MATTERS
The legality of the shares of Common Stock and Preferred Stock offered
hereby will be passed upon for the Company by Piper & Marbury L.L.P.,
Baltimore, Maryland. In addition, the description of Federal income tax
consequences contained in this Prospectus under the caption entitled "Federal
Income Tax Considerations" is based upon the opinion of Kramer, Levin, Naftalis
& Frankel, New York, New York.
- 34 -
series.
EXPERTS
The financial statements and schedule forof Agree Realty Corporation and its
predecessor entities includedappearing in Agree Realty Corporation’s Annual Report (Form 10-K) for the Form 10-K referred to and incorporated by
reference in this Prospectusyear ended December 31, 2008 have been audited by BDO Seidman,Baker Tilly Virchow Krause, LLP, independent certifiedregistered public accountants, to the extent and for the periodsaccounting firm, as set forth in their report thereon, included therein, and incorporated herein by reference. Such financial statements are incorporated herein by reference and are incorporated herein in reliance upon such report given uponon the authority of saidsuch firm as experts in auditingaccounting and accounting.
- 35 -
auditing.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed upon for us by DLA Piper LLP (US). Any underwriters, dealers or agents will be advised about the other issues relating to any offering by their own legal counsel.
39
PART IIII. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Other Expenses of Issuance and Distribution.
The Registrant estimates thatfollowing table sets forth estimated costs and expenses payableof the sale and distribution of the securities being registered, all of which will be paid by the Registrant in
connection withregistrant. All amounts are estimated except the offering described in this Registration Statement will be
as follows:
Total
-------- SEC registration fee (actual)....................................... $ 37,879
NYSE Filing Fee..................................................... *
Accounting feesfee.
| Securities and Exchange Commission registration fee | $ | 6,975 | ||
| Printing and engraving fees | 50,000 | |||
| Legal fees and expenses | 150,000 | |||
| Accounting fees and expenses | 150,000 | |||
| Miscellaneous | 143,025 | |||
| Total | $ | 500,000 |
Item 15.Indemnification of Directors and expenses........................................ *
Legal fees and expenses............................................. *
Blue Sky fees and expenses (including legal fees)................... *
Printing and engraving expenses..................................... *
Miscellaneous expenses.............................................. *
--------
Total............................................................. $ *
========
- ---------------------------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company isOfficers.
Maryland General Corporation Law, or MGCL, permits a Maryland corporation. 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 liability resulting from:
| · | actual receipt of an improper benefit or profit in money, property or services; or |
| · | active and deliberate dishonesty established by a final judgment and which is material to the cause of action. |
The Operating Partnership,Company’s charter contains such a provision that eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law. These limitations of whichliability do not apply to liabilities arising under the Company isfederal securities laws and do not generally affect the sole general partner, is a Delaware limited partnership. availability of equitable remedies such as injunctive relief or rescission.
The Company'sCompany’s officers and directors are and will be indemnified under Maryland and
Delaware law the Charter of the Company and the Partnership AgreementCompany’s articles of the
Operating Partnershipincorporation, as amended, against certain liabilities. The Company's CharterCompany’s charter requires it to indemnify its directors and officers to the fullest extent permitted from time to time by the laws of the State of Maryland. The
Maryland General Corporation Lawlaw 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 in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, (i)among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they aremay be made, or threatened to be made, a party by reason of their service in those or other capacities unless it is established that that:
| · | the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty; |
| · | the director or officer actually received an improper personal benefit in money, property or services; or |
| · | in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. |
However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis of that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer was material toupon the matter giving rise to the proceeding and (a) was committed in bad faith or
(b) was the result of active and deliberate dishonesty, (ii) the director or
officer actually received an improper personal benefit in money, property or
services, or (iii) in the case of any criminal proceeding, the director or
officer had reasonable cause to believe that the act or omission was unlawful.
The Maryland General Corporation Law permits the charter of a Maryland
corporation to include a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money damages, subject to
specified restrictions. The Company's Charter contains such a provision. The
law does not, however, permit the liability of directors and officers to the
corporation or its stockholders to be limited to the extent that (1) it is
provedcorporation’s receipt of:
| · | a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and |
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the person actually received an improper personal benefit or (2) a judgment or
other final adjudication is entered in a proceeding based on a finding that the
person's action, or failure to act was material to the cause of action
adjudicated in the proceeding; and was (a) committed in bad faith or (b) the
result of active and deliberate dishonesty.
The Partnership Agreement of the Operating Partnership also provides for
indemnification of the Company and its officers and directors to the same
extent as in the Company's Charter, and limits the liability of the Company and
its officers and directors to the Operating Partnership and its partners to the
same extent the Company's Charter limits liability of officers and directors to
the Company and its stockholders.
| · | a written undertaking by him or her on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met. |
The Company maintains liability insurance for each director and officer for certain losses arising from claims or charges made against them while acting in their capacities as the Company’s directors or officers of the Company.
ITEM 16. EXHIBITS.
Exhibit No. Description
- ----------- -----------
1.1* Form of Underwriting Agreement
5.1** Opinion of Piper & Marbury L.L.P. regarding the legality of the
securities being offered hereby
8.1* Opinion of Kramer, Levin, Naftalis & Frankel regarding certain
federal income tax matters
12.1** Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
23.1** Consent of BDO Seidman, LLP
23.2** Consent of Piper & Marbury L.L.P. (contained in the opinion being
filed as Exhibit 5.1 hereto)
23.3* Consent of Kramer, Levin, Naftalis & Frankel (contained in the
opinion being filed as Exhibit 8.1 hereto)
24.1** Power of Attorney (included on the signature page to this
Registration Statement)
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* To be filed by amendment or incorporated by reference prior to the
offering of the securities registered hereby, if applicable.
** Filed herewith.
ITEM 17. UNDERTAKINGS.
officers.
Insofar as the foregoing provisions permit indemnification of directors, executive officers or persons controlling the Company for liabilitiesliability arising under the Securities Act, may be permitted to directors, officers and controlling persons of the Registrant pursuant to provisions described in Item 15 above, or otherwise, the
RegistrantCompany has been advisedinformed that, in the opinion of the Commission, suchSEC, this indemnification is against public policy as expressed in the Securities 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 Common
Stock covered hereby, 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
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whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Item 16.Exhibits.
| Exhibit No. | Description | |
| 1 | Form of Underwriting Agreement* | |
| 4.1 | Second Amendment to Rights Agreement, dated as of December 8, 2008, by and between Agree Realty Corporation, a Maryland corporation, and Computershare Trust Company, N.A., f/k/a EquiServe Trust Company, N.A., a national banking association, as successor rights agent to BankBoston, N.A., a national banking association (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on December 9, 2008) | |
| 4.2 | Form of certificate representing shares of common stock | |
| 4.3 | Form of certificate representing shares of preferred stock* | |
| 4.4 | Form of Deposit Agreement* | |
| 4.5 | Form of Depositary Receipt* | |
| 4.6 | Form of Warrant Agreement* | |
| 5 | Opinion of DLA Piper LLP (US) re legality | |
| 8 | Opinion of DLA Piper LLP (US) re tax matters | |
| 12.1 | Statement of computation of ratios of earnings to combined fixed charges and preferred stock dividends | |
| 23.1 | Consent of DLA Piper LLP (US) (included in Exhibits 5 and 8) | |
| 23.2 | Consent of Baker Tilly Virchow Krause, LLP | |
| 24 | Power of Attorney (included on signature page) |
| * | To be filed by amendment of the Registration Statement or as an exhibit to a Current Report on Form 8-K and incorporated herein by reference. |
Item 17. Undertakings.
The undersigned Registrantregistrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: registration statement;
(i) toTo include any prospectus required by Section 10(a)(3) of the Act; Securities Act of 1933;
(ii) toTo reflect in the prospectus any facts or events arising after the effective date of the Registration Statementregistration 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 thisthe 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 as registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Statement; Fee” table in the effective registration statement; and
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(iii) toTo include any material information with respect to the plan of distribution not previously disclosed in the Registration Statementregistration statement or any material change toin such information in the Registration Statement, registration statement;
provided, however, that clausesparagraphs (i), (ii) and (ii)(iii) do not apply if the information required to be included in a post-effective amendment by such clausesthose paragraphs is contained in
periodic reports filed with or furnished to the Commission by the Registrantregistrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934;
(2) 1934 that are incorporated by reference in this registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement.
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 therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;
(3) thereof.
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(A) Each prospectus filed by a registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5) or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii) or (x) for the purpose of providing the information required by Section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which the prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.
That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned Registrant hereby undertakesregistrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
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That, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant'sregistrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan'splan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this Registration Statementthe 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.
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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 foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrantregistrant 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 or amendment to be signed on its behalf by the undersigned, theretothereunto duly authorized, in the City of Farmington Hills, State of Michigan, on February 6, 1997.
AGREE REALTY CORPORATION
By: /s/ RICHARD AGREE
------------------------------------
Name: Richard Agree
Title: President and Chairman of the
Board of Directors
POWER OF ATTORNEY
August 24, 2009.
| AGREE REALTY CORPORATION | ||
| By: | /s/ Richard Agree | |
| Richard Agree | ||
| Chairman and Chief Executive Officer | ||
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Richard Agree, Joey Agree and Kenneth R. Howe and each of Richard Agree, Kenneth Howe and Edward
Rosenbergthem, his true and lawful attorney-in-fact and agent, each acting alone,
with full powerspower of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any orand all amendments to this registration statement, and any additional related registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (including post-effective amendments to the registration statement and any such related registration statements), and to file the same, with all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully forto all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or histheir 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 or amendment has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | |||
| /s/ | Richard Agree | Chairman and Chief Executive | August 24, 2009 | ||
| Richard Agree | Officer | ||||
| /s/ | Joey Agree | President, Chief Operating Officer | August 24, 2009 | ||
| Joey Agree | and | ||||
| /s/ | Farris G. Kalil | Director | August 24, 2009 | ||
| Farris G. Kalil | |||||
| /s/ | Michael Rotchford | Director | August 24, 2009 | ||
| Michael Rotchford | |||||
| /s/ | William S. Rubenfaer | Director | August 24, 2009 | ||
| William S. Rubenfaer | |||||
| /s/ | Leon M. Schurgin | Director | August 24, 2009 | ||
| Leon M. Schurgin | |||||
| /s/ | Gene Silverman | Director | August 24, 2009 | ||
| Gene Silverman | |||||
| /s/ | Kenneth R. Howe | Vice President, Finance | August 24, 2009 | ||
| Kenneth R. Howe | (Principal Financial Officer and | ||||
| Principal Accounting Officer) | |||||
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EXHIBIT INDEX
| Exhibit No. | Description | |
| 1 | Form of Underwriting Agreement* | |
| 4.1 | Second Amendment to Rights Agreement, dated as of December 8, 2008, by and between Agree Realty Corporation, a Maryland corporation, and Computershare Trust Company, N.A., f/k/a EquiServe Trust Company, N.A., a national banking association, as successor rights agent to BankBoston, N.A., a national banking association (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on December 9, 2008) | |
| 4.2 | Form of certificate representing shares of common stock | |
| 4.3 | Form of certificate representing shares of preferred stock* | |
| 4.4 | Form of Deposit Agreement* | |
| 4.5 | Form of Depositary Receipt* | |
| 4.6 | Form of Warrant Agreement* | |
| 5 | Opinion of DLA Piper LLP (US) re legality | |
| 8 | Opinion of DLA Piper LLP (US) re tax matters | |
| 12.1 | Statement of computation of ratios of earnings to combined fixed charges and preferred stock dividends | |
| 23.1 | Consent of DLA Piper LLP (US) (included in Exhibits 5 and 8) | |
| 23.2 | Consent of Baker Tilly Virchow Krause, LLP | |
| 24 | Power of Attorney (included on signature page) |
| * | To be filed by amendment of the |
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