February 16, 2005
Mail Stop 0409
Kevin B. Habicht
Chief Financial Officer
Commercial Net Lease Realty, Inc.
450 South Orange Avenue, Suite 900
Orlando, Florida 32801
Re: Commercial Net Lease Realty, Inc.
Registration Statement on Form S-4 Filed January 19, 2005
Registration No. 333-122145
Dear Mr. Habicht:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
General
1. Please confirm that you will file with the Commission all
materials used to aid in the solicitation of proxies. Please
supplementally provide us with copies of these materials and
indicate
the date they were first used. Please provide us with a form of
the
proxy card.
2. Supplementally, please provide us with any pictures, graphics
or
artwork that will be used in the prospectus.
3. Please provide the information about NNN required by the
following
items, or advise us where it is already disclosed in or
incorporated
into the registration statement:
* Information required by Item 12 of Form S-11;
* Information required by Item 13 of Form S-11; and
* Information required by Item 14, Instruction 3 of Form S-11.
4. Please include the information required by Item 403 of
Regulation
S-K with respect to the security ownership of NNN. Also, please
disclose that none of the existing officers and directors of NAPE
will serve as a director or an executive officer of NNN following
the
merger.
Prospectus Cover Page
5. Please disclose the trading market and the ticker symbol of the
common stock offered pursuant to this prospectus. Refer to Item
501(b)(4) of Regulation S-K.
6. Please disclose the value of the NNN shares to be received for
each share of NAPE based on the NNN trading price immediately
prior
to the execution of the merger agreement. In addition, please
disclose the special dividend.
7. Please highlight the risk factors cross reference by prominent
type or in another manner. Refer to Item 501(b)(5) of Regulation
S-
K.
Questions and Answers About the Merger, page iii
8. Please revise so that the Q&A section does not repeat
information
in the summary. Refer to the direction provided in Rule 421 of
Regulation C and Release 33-7497.
What will I receive in the Merger for my Shares?, page iii
9. Please expand the disclosure to state the price per share of
NAPE
common stock on January 14, 2005. Also disclose the price per
share
of both companies as of the most recent date practicable.
Why is NAPE proposing to merge with Nape Acquisition, Inc.? How
will
I benefit?, page iii
10. Please revise your discussion of dividends to refer to the
total
dividends paid to shareholders or the respective historical
dividend
yields, rather than the dividend per share.
Why is the board of directors recommending that I vote for the
merger?, page iv
11. Please summarize the referenced factors.
12. The discussion of the reasons why management and the board of
directors is recommending approval of the merger should be
presented
in a balanced format to present the detriments of the offer. The
detriments should be presented in a question immediately following
this question or within this question and presented in the same
format as the benefits are being presented.
Introduction, page vii
13. The information under this heading appears to repeat
information
that you have already provided on the proxy statement/prospectus
cover page, in the Q&A, and in the summary. Please remove this
section from your document or tell us why you believe it is
material
to investors.
Risk Factors, page 26
14. Please include risk factors that discuss the following
characteristics of the merger:
* The exchange ratio is fixed so that the value of the
consideration
to be paid in the merger may fluctuate.
* There are potential conflicts of interest, including payments to
NAPE executive officers.
* There is no assurance that NNN will continue to pay dividends at
historical rates.
15. Please include risk factors that discuss the following
characteristics of NNN`s business and organization:
* Property vacancies;
* Investments in office properties generally, and the recent
office
investment in particular;
* Mezzanine lending; and
* REIT qualification.
Vote Required, page 13
16. Please revise to quantify the vote required to approve the
merger. Currently, you state that the merger must be approved by
NAPE shareholders, but the percentage of votes needed for approval
is
not clear.
The Merger, page 13
Background, page 13
17. Please describe the reasons why Mr. Di Paglia initially
contacted
NNN to discuss a potential transaction. Indicate whether he
discussed this contact with the NAPE board or if he made the
initial
contact independently. Also, discuss alternatives to a
transaction
with NNN that the NAPE board considered, if any, and the reasons
the
board did not pursue those alternatives.
18. Please provide a more detailed description of the unsolicited
third party indication of interest that NAPE received on November
16,
2004. Identify the bidder or describe in reasonable detail the
business, size, and other relevant information about the bidder.
Describe the reasons the board determined that offer was
inadequate
and indicate whether the bid was submitted to the entire board for
approval.
19. With respect to each stage of the negotiations, please
disclose
the involvement, if any, of third party financial advisors,
including
the preparation of financial analyses. Also, please clarify the
date
on which NAPE engaged Houlihan Lokey as its financial advisor.
20. Please disclose the extent to which the NAPE board of
directors
was briefed on the negotiations prior to December 17, 2004.
NAPE`s Reasons for the Merger, page 15
21. Refer to the third negative factor listed on page 16. Please
revise to quantify the costs that NAPE will incur if the merger is
not completed. Similarly, please quantify the costs to NNN
referenced in the first bullet point on page 17.
NNN`s Reasons for the Merger, page 16
22. Please revise the third bullet point to quantify the accretion
to
FFO and net income that NNN`s management anticipates as a result
of
the merger. If the NNN board did not quantify the amount of
accretion, please disclose that fact and explain how the board
determined that the transaction would be immediately accretive.
Similarly, please revise the fifth bullet point to quantify the
anticipated cost savings and reductions in expenses.
Opinion of NAPE`s Financial Advisor, page 17
23. Please supplementally provide us with copies of any materials
prepared by or for the financial advisor in connection with its
fairness opinions, including, among other things, any "board
books,"
drafts of fairness opinions provided to the board of directors and
any summaries of presentations made to the board of directors. We
may have further comment on your disclosure once we have had the
opportunity to review those materials.
24. Please summarize the process by which you selected your
financial
advisor.
25. Please revise to identify the change of control acquisitions
that
Houlihan Lokey considered in the "Comparable Transaction"
approach.
Expand the tabular presentation to include multiples for each
transaction considered, in addition to the high, low, median, and
mean numbers you have already provided.
26. Please revise the "Concluded Equity Value" range disclosed on
page 19 to conform to the immediately preceding sentence.
27. Please briefly describe how the financial advisor selected the
respective discount and terminal cap rates used in the "Sum of the
Parts" approach.
28. Please briefly describe how the range of values shown in the
"Sum
of the Parts" and "Discounted Cash Flow Approach" subsections is
calculated. In particular, please explain why the value is
presented
in a range if the discount rate and terminal cap rates are fixed.
29. Please disclose the EBITDA multiples for each comparable
company.
Interests of Certain Persons in the Merger, page 22
30. Please disclose who negotiated the terms of the release and
whether it was approved by NAPE`s independent board members.
31. Please disclose the date on which the Di Paglia employment
agreement was approved by the NAPE board of directors.
32. Please supplementally advise us whether the Di Paglia
employment
agreement has been filed as an exhibit to NAPE`s Exchange Act
filings.
33. Please disclose the initial effective date and termination
date
of Mr. Di Paglia`s employment agreement. Also, please clarify
what
you mean by the phrase "10 year contract." The annual renewal
feature suggests that this may be a one-year contract under which
Mr. Di Paglia will receive 10 years of compensation in the event
of a
termination other than for disability or cause.
34. Please provide additional detail on the calculation of the
amounts to be paid to Mr. Di Paglia and Ms. Fasano. In
particular,
please disclose the amount of broker`s or finder`s fees to which
each
of them would be entitled. In addition, please disclose the lump
sum
fee that would be required to be paid under Mr. Di Paglia`s
agreement.
Comparison of Stockholder Rights, page 40
Restrictions on Business Combinations, page 44
35. Please disclose the opt in/opt out features of the Maryland
business combination and control share statutes, the current
status
of NNN and the ability of NNN to change that status without
shareholder approval.
Financial Statements
36. Supplementally explain how you considered SAB Topic T.1.B.3
with
regards to the $20.8 million dividend to be issued by NAPE in
conjunction with the merger.
Commercial Net Lease Realty, Inc. Form 10-Q for the nine-month
period
ended September 30, 2004
Note 1. Basis of Presentation
Principles of Consolidation, page 6
37. You state that under the guidelines of FIN 46 R, Services met
the
criteria of a variable interest entity which requires
consolidation
of NNN. Also, you state that you hold a variable interest in, but
are not the primary beneficiary of CNL Plaza Ltd. and CNL
Commercial
Finance, Inc., both of which are variable interest entities. In a
supplemental letter, explain to us your basis in determining that
Services, CNL Plaza Ltd. and CNL Commercial Finance, Inc. are
variable interest entities and why you are or are not considered
the
primary beneficiaries of these entities.
National Properties Corporation Form 10-K for the year ended
December
31, 2003
Financial Statements and Notes
Summary of Accounting Policies
Exchange of Non-monetary Assets
38. You state that: "When the Company disposes of a property, it
will
generally exchange that property for another productive property.
The Company accounts for these non-monetary transactions in
accordance with APB 29 ...Therefore, no gain or loss is recognized
on
the disposed property." We note from page 2 that you completed a
multiple property exchange in 2003 in which you paid $595,000 in
cash
and surrendered three properties in exchange for a Walgreen store
property located in Tulsa, Oklahoma. We also note that one of the
properties exchanged is a garden center property in which the
tenant
exercised an option under the lease to purchase the property in
June
2, 2003 for $2.1 million. Clarify if you received $2 million from
the tenant and if so, explain how you consider the transaction as
a
non-monetary exchange under the guidance of APB 29 and why no gain
or
loss was recognized.
Lease Rentals
39. You state that lease rentals received on commercial real
estate
are accounted for under the operating method; rentals are included
in
income as earned over the term of the lease. Are you following
paragraph 19b of SFAS 13 in recognizing revenues on a straight-
line
basis? So we may better understand your disclosures,
supplementally
explain the operating method and clarify the earning process, in
which rentals (including contingent rent, if applicable) are
included
in income as earned over the term of the lease. Support your
accounting with relevant accounting literature.
Part II. Information Not Required in Prospectus
Exhibit 5.1 - Shaw Pittman Legal Opinion
40. The qualifications included in paragraph d. of the opinion
appear
to be overly broad and inappropriate for the legal opinion.
Please
provide a revised opinion that omits these qualifications.
41. We note that the legal opinion is furnished solely for the
benefit of Commercial Net Lease Realty, Inc. This limitation is
inappropriate because it suggests that NAPE shareholders could not
rely on the opinion in making their investment decision. Please
provide a revised opinion that omits this limitation on reliance.
42. Please provide a revised opinion that includes counsel`s
consent
or file a separate consent as an exhibit to the registration
statement.
Exhibit 8.1 - Dickinson, Mackaman, Tyler & Hagen Tax Opinion
43. Supplementally, please tell us why counsel`s opinion is
conditioned upon receipt of the REIT opinions and an opinion from
Shaw Pittman regarding the status of the merger as a tax free
reorganization. It is not clear why the parties` REIT status is
relevant to the tax treatment of the merger. In addition, it is
not
clear why counsel for NAPE cannot issue an opinion on the tax
treatment of the merger independent of a similar opinion from
counsel
for CNLR.
44. Refer to the last paragraph of the opinion. Counsel`s
statement
that the opinion is furnished solely to National Properties
Corporation appears to be inconsistent with the next sentence,
which
indicates that NAPE shareholders, CNLR shareholders and CNLR`s
counsel may rely on the opinion. Please provide a revised opinion
that omits the limitation on reliance. Please file revised tax
and
REIT opinions from Shaw Pittman that include similar revisions.
Exhibit 8.2 - Shaw Pittman Tax Opinion
45. Supplementally, please tell us why counsel`s opinion is
conditioned upon receipt of an opinion from Dickinson Mackaman
regarding the status of the merger as a tax free reorganization.
It
is not clear why counsel for CNLR cannot issue an opinion on the
tax
treatment of the merger independent of a similar opinion from
counsel
for NAPE.
Exhibit 8.3 - Shaw Pittman REIT Opinion
46. Please revise the opinion to state that the "proposed
organization, manner of operation and diversity of equity
ownership
will enable the company to continue to satisfy the requirements
for
qualification and taxation as a REIT..." [emphasis added]
* * * *
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert this action as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Andrew Mew at (202) 942-2913 or Kathleen
Collins, Branch Chief, at (202) 942-2814 if you have questions
regarding comments on the financial statements and related
matters.
Please contact Michael McTiernan, Attorney-Advisor, at (202) 824-
5445, or me at (202) 942-1960 with any other questions.
Sincerely,
Karen J. Garnett
Assistant Director
cc: Jeffrey Grill, Esq. (via facsimile)
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Commercial Net Lease Realty, Inc.
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