EXHIBIT 99.2
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes the material U.S. federal income tax
consequences relating to the taxation of Brandywine Realty Trust as a REIT and
the ownership and disposition of Brandywine's common shares.
If Brandywine offers one or more series of preferred shares or debt
securities under this prospectus, information about any income tax consequences
to holders of those preferred shares or debt securities will be included in an
applicable prospectus supplement.
Because this is a summary that is intended to address only material
federal income tax consequences relating to the ownership and disposition of
Brandywine's common shares that will apply to all holders, this summary may not
contain all the information that may be important to you. As you review this
discussion, you should keep in mind that:
the tax consequences to you may vary depending on your particular tax
situation;
special rules that are not discussed below may apply to you if, for
example, you are a tax-exempt organization, a broker-dealer, a
non-U.S. person, a trust, an estate, a regulated investment
company, a financial institution, an insurance company, or
otherwise subject to special tax treatment under the Code;
this summary does not address state, local or non-U.S. tax
considerations (See " - Other Tax Consequences");
this summary deals only with our common shareholders that hold common
shares as "capital assets" within the meaning of Section 1221
of the Code; and
this discussion is not intended to be, and should not be construed as,
tax advice.
You are urged both to review the following discussion and to consult
with your own tax advisor to determine the effect of ownership and disposition
of our common shares on your individual tax situation, including any state,
local or non-U.S. tax consequences.
As used herein, a "U.S. shareholder" means a beneficial owner of our
common shares that is for U.S. federal income tax purposes (1) a citizen or
resident of the U.S., (2) a corporation or partnership created or organized in
or under the laws of the U.S. or any political subdivision thereof, (3) an
estate the income of which is subject to U.S. federal income taxation regardless
of its source or (4) a trust if it (a) is subject to the primary supervision of
a court within the U.S. and one or more U.S. persons have the authority to
control all substantial decisions of the trust or (b) has a valid election in
effect under applicable U.S. Treasury regulations to be treated as a U.S.
person.
The information in this summary is based on the Code, current,
temporary and proposed Treasury regulations, the legislative history of the
Code, current administrative interpretations and practices of the Internal
Revenue Service, including its practices and policies as endorsed in private
letter rulings, which are not binding on the Internal Revenue Service, and
existing court decisions. Future legislation, regulations, administrative
interpretations and court decisions could change current law or adversely affect
existing interpretations of current law. Any change could apply retroactively.
We have not obtained any rulings from the Internal Revenue Service concerning
the tax treatment of the matters discussed in this summary. Therefore, it is
possible that the Internal Revenue Service could challenge the statements in
this summary, which do not bind the Internal Revenue Service or the courts, and
that a court could agree with the Internal Revenue Service.
On October 22, 2004, President Bush signed into law the American Jobs
Creation Act of 2004 (the "Act"). The Act makes a number of changes to the REIT
rules in the Code, generally taking effect in our taxable year beginning January
1, 2005. The following summary includes a discussion of the material changes
made by the Act.
TAXATION OF BRANDYWINE AS A REIT
Brandywine first elected to be taxed as a REIT for the taxable year
ended December 31, 1986, and has operated and expects to continue to operate in
such a manner so as to remain qualified as a REIT for Federal income tax
purposes. An entity that qualifies for taxation as a REIT and distributes to its
shareholders an amount at least equal to 90% of its REIT taxable income
(determined without regard to the deduction for dividends paid and by excluding
any net capital gain) plus 90% of its income from foreclosure property (less the
tax imposed on such income) is generally not subject to Federal corporate income
taxes on net income that it currently distributes to shareholders. This
treatment substantially eliminates the "double taxation" (at the corporate and
shareholder levels) that generally results from investment in a corporation.
However, we will be subject to Federal income tax as follows:
1. We will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
2. Under certain circumstances, we may be subject to the
"alternative minimum tax" on our items of tax preference, if any.
3. If we have net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property, other than
foreclosure property, held primarily for sale to customers in the ordinary
course of business) such income will be subject to a 100% tax. See " - Sale of
Partnership Property."
4. If we should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), and nonetheless have maintained
our qualification as a REIT because certain other requirements have been met, we
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which we fail the 75% or 95% test, multiplied by a fraction
intended to reflect our profitability.
5. If we should fail to distribute during each calendar year
at least the sum of (1) 85% of our REIT ordinary income for such year, (2) 95%
of our REIT capital gain net income for such year, and (3) any undistributed
taxable income from prior years, we would be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
6. If we have (1) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property acquired
by us by foreclosure or otherwise or default on a loan secured by the property)
which is held primarily for sale to customers in the ordinary course of business
or (2) other nonqualifying income from foreclosure property, we will be subject
to tax on such income at the highest corporate rate.
7. If we were to acquire any asset from a taxable "C"
corporation in a carry-over basis transaction, we could be liable for specified
tax liability inherited from that "C" corporation with respect to that
corporation's "built-in gain" in its assets. Built-in gain is the amount by
which an asset's fair market value exceeds its adjusted tax basis. We would not
be subject to tax on the built in gain, however, if we do not dispose of the
acquired property within the 10-year period following acquisition of such
property.
QUALIFICATION OF BRANDYWINE AS A REIT
The Code defines a REIT as a corporation, trust or association:
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 as a domestic corporation but for
Sections 856 through 859 of the Code;
4. that is neither a financial institution nor an insurance
company subject to certain provisions of the Code;
5. the beneficial ownership of which is held by 100 or more
persons;
6. during the last half of each taxable year not more than 50%
in value of the outstanding shares of which is owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include specified
entities);
7. that makes an election to be taxable as a REIT, or has made
this election for a previous taxable year which has not been revoked or
terminated, and satisfies all relevant filing and other administrative
requirements established by the Internal Revenue Service that must be met to
elect and maintain REIT status;
8. that uses a calendar year for federal income tax purposes
and complies with the record keeping requirements of the Code and the Treasury
Regulations; and
9. that meets other applicable tests, described below,
regarding the nature of its income and assets and the amount of its
distributions.
Conditions (1) through (4) must be satisfied during the entire taxable
year, and condition (5) must be satisfied during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. We have previously issued Common Shares in sufficient proportions to
allow us to satisfy requirements (5) and (6) (the "100 Shareholder" and
"five-or-fewer" requirements). In addition, our Declaration of Trust provides
restrictions regarding the transfer of our shares that are intended to assist us
in continuing to satisfy the requirements described in conditions (5) and (6)
above. See " - Description of Shares of Beneficial Interest - Restrictions on
Transfer." However, these restrictions may not ensure that we will, in all
cases, be able to satisfy the requirements described in conditions (5) and (6)
above. In addition, we have not obtained a ruling from the Internal Revenue
Service as to whether the provisions of our Declaration of Trust concerning
restrictions on transfer and conversion of Common Shares to "Excess Shares" will
allow us to satisfy conditions (5) and (6). If we fail to satisfy such share
ownership requirements, our status as a REIT will terminate. However, for
taxable years beginning on or after January 1, 2005, the Act provides that if
the failure to meet the share ownership requirements is due to reasonable cause
and not due to willful neglect, we may avoid termination of our REIT status by
paying a penalty of $50,000.
To monitor compliance with condition (6) above, a REIT is required to
send annual letters to its shareholders requesting information regarding the
actual ownership of its shares. If we comply with the annual letters requirement
and do not know or, exercising reasonable diligence, would not have known of our
failure to meet condition (6) above, then we will be treated as having met
condition (6) above.
QUALIFIED REIT SUBSIDIARIES
We currently have several wholly-owned subsidiaries which are
"qualified REIT subsidiaries" and we may have additional wholly-owned "qualified
REIT subsidiaries" in the future. The Code provides that a corporation that is a
"qualified REIT subsidiary" shall not be treated as a separate corporation, and
all assets, liabilities and items of income, deduction and credit of a
"qualified REIT subsidiary" shall be treated as assets, liabilities and items of
income, deduction and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, other than a taxable REIT subsidiary (discussed below), all of the
capital stock of which is owned by the REIT and that has not elected to be a
"Taxable REIT Subsidiary." In applying the requirements described herein, all of
our "qualified REIT subsidiaries" will be ignored, and all assets, liabilities
and items of income, deduction and credit of such subsidiaries will be treated
as our assets, liabilities and items of income, deduction and credit. These
subsidiaries, therefore, will not be subject to federal corporate income
taxation, although they may be subject to state and local taxation.
TAXABLE REIT SUBSIDIARIES
We currently have several "taxable REIT subsidiaries," and may have
additional taxable REIT subsidiaries in the future. A REIT may hold any direct
or indirect interest in a corporation that qualifies as a "taxable REIT
subsidiary" as long as the value of the REIT's holdings of taxable REIT
subsidiary securities do not exceed 20% of the value of the REIT's total assets.
To qualify as a taxable REIT subsidiary, the subsidiary and the REIT must make a
joint election to treat the subsidiary as a taxable REIT subsidiary. A taxable
REIT subsidiary also includes any corporation (other than a REIT or a qualified
REIT subsidiary) in which a taxable REIT subsidiary directly or indirectly owns
more than 35% of the total voting power or value. See " - Asset Tests" below. A
taxable REIT subsidiary will pay tax at regular corporate income rates on any
taxable income it earns.
A taxable REIT subsidiary can perform tenant services without causing
the REIT to receive impermissible tenant services income under the REIT income
tests. However, several provisions regarding the arrangements between a REIT and
its taxable REIT subsidiaries ensure that a taxable REIT subsidiary will be
subject to an appropriate level of federal income taxation. For example, a
taxable REIT subsidiary is limited in its ability to deduct interest payments
made to a REIT. In addition, a REIT will be obligated to pay a 100% penalty tax
on some payments that it receives or on certain expenses deducted by the taxable
REIT subsidiary if the economic arrangements between the REIT, the REIT's
tenants and the taxable REIT subsidiary are not comparable to similar
arrangements among unrelated parties.
OWNERSHIP OF PARTNERSHIP INTERESTS BY A REIT
A REIT that is a partner in a partnership is deemed to own its
proportionate share of the assets of the partnership and is deemed to receive
the income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership retains the same
character in the hands of the REIT. Accordingly, our proportionate share of the
assets, liabilities and items of income of the Operating Partnership are treated
as assets, liabilities and items of income of ours for purposes of applying the
requirements described herein. Brandywine has control over the Operating
Partnership and most of the partnership and limited liability company
subsidiaries of the Operating Partnership and intends to operate them in a
manner that is consistent with the requirements for qualification of Brandywine
as a REIT.
INCOME TESTS
In order to qualify as a REIT, Brandywine must generally satisfy two
gross income requirements on an annual basis. First, at least 75% of our gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property (including "rents from real property"
and, in certain circumstances, interest) or from certain types of temporary
investments. Second, at least 95% of our gross income (excluding gross income
from prohibited transactions) for each taxable year must be derived from the
same items which qualify under the 75% gross income test, and from dividends,
interest and gain from the sale or disposition of securities.
Rents received by a REIT will qualify as "rents from real property" in
satisfying the gross income requirements described above only if several
conditions are met. First, the amount of rent must not be based in whole or in
part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of gross
receipts or sales. Second, subject to certain limited exceptions, rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the REIT, or a direct or indirect owner of 10% or more of
the REIT, directly or constructively, owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property." Finally,
in order for rents received with respect to a property to qualify as "rents from
real property," the REIT generally must not operate or manage the property or
furnish or render services to tenants, except through an "independent
contractor" who is adequately compensated and from whom the REIT derives no
income, or through a taxable REIT subsidiary. The "independent contractor"
requirement, however, does not apply to the extent the services provided by the
REIT are "usually or customarily rendered" in connection with the rental of
space for occupancy only, and are not otherwise considered "rendered to the
occupant." In addition, a de minimis rule applies with respect to non-customary
services. Specifically, if the value of the non-customary service income with
respect to a property (valued at no less than 150% of the direct costs of
performing such services) is 1% or less of the total income derived from the
property, then all rental income except the non-customary service income will
qualify as "rents from real property." A taxable REIT subsidiary may provide
services (including noncustomary services) to a REIT's tenants without
"tainting" any of the rental income received by the REIT, and will be able to
manage or operate properties for third parties and generally engage in other
activities unrelated to real estate.
We do not anticipate receiving rent that is based in whole or in part
on the income or profits of any person (except by reason of being based on a
fixed percentage or percentages of gross receipts or sales consistent with the
rules described above). We also do not anticipate receiving more than a de
minimis amount of rents from any related party tenant or rents attributable to
personal property leased in connection with real property that will exceed 15%
of the total rents received with respect to such real property.
We provide services to our properties that we own through the Operating
Partnership, and we believe that all of such services will be considered
"usually or customarily rendered" in connection with the rental of space for
occupancy only so that the provision of such services will not jeopardize the
qualification of rent from the properties as "rents from real property." In the
case of any services that are not "usual and customary" under the foregoing
rules, we will employ an "independent contractor" or a taxable REIT subsidiary
to provide such services.
The Operating Partnership may receive certain types of income that will
not qualify under the 75% or 95% gross income tests. In particular, dividends
received from a taxable REIT subsidiary will not qualify under the 75% test. We
believe, however, that the aggregate amount of such items and other
non-qualifying income in any taxable year will not cause Brandywine to exceed
the limits on non-qualifying income under either the 75% or 95% gross income
tests.
If Brandywine fails to satisfy one or both of the 75% of 95% gross
income tests for any taxable year, Brandywine may nevertheless qualify as a REIT
for such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will be generally available if (1) the failure to meet
such tests was due to reasonable cause and not due to willful neglect, (2) we
have attached a schedule of the sources of our income to our return, and (3) any
incorrect information on the schedule was not due to fraud with intent to evade
tax. In addition, for taxable years beginning on or after January 1, 2005, the
Act provides that we must also file a disclosure schedule with the IRS after we
determine that we have not satisfied one of the gross income tests. It is not
possible, however, to state whether in all circumstances Brandywine would be
entitled to the benefit of these relief provisions. As discussed above in
"Taxation of Brandywine as a REIT," even if these relief provisions apply, a tax
would be imposed based on the excess net income.
Any gain realized by us on the sale of any property held as inventory
or other property held primarily for sale to customers in the ordinary course of
business, including Brandywine's share of this type of gain realized by the
Operating Partnership, will be treated as income from a prohibited transaction
that is subject to a 100% penalty tax. Under existing law, whether property is
held as inventory or primarily for sale to customers in the ordinary course of a
trade or business is a question of fact that depends on all the facts and
circumstances of a particular transaction. We intend to hold properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning and operating properties, and to make occasional
sales of properties as are consistent with our investment objectives. We cannot
provide any assurance, however, that the Internal Revenue Service might not
contend that one or more of these sales are subject to the 100% penalty tax.
ASSET TESTS
At the close of each quarter of each taxable year, Brandywine must
satisfy the following tests relating to the nature of our assets:
First, at least 75% of the value of our total assets must be
represented by cash or cash items (which generally include receivables),
government securities, "real estate assets" (which generally include interests
in real property, interests in mortgages on real property and shares of other
REITs), or, in cases where we receive proceeds from shares of beneficial
interest or publicly offered long-term (at least five-year) debt, temporary
investments in stock or debt instruments during the one-year period following
our receipt of such proceeds.
Second, of the investments not included in the 75% asset class, the
value of any one issuer's securities we own may not exceed 5% of the value of
our total assets ("5% test"); and we may not own more than 10% of the vote or
value of any one issuer's outstanding securities ("10% test"), except for our
interests in the Operating Partnership, noncorporate subsidiaries, taxable REIT
subsidiaries and any qualified REIT subsidiaries, and except (with respect to
the 10% value test) certain "straight debt" securities.
Effective for taxable years beginning after December 31, 2000, the Act
expands the safe harbor under which certain types of securities are disregarded
for purposes of the 10% value limitation to include (i) straight debt securities
(including straight debt securities that provides for certain contingent
payments); (ii) any loan to an individual or an estate; (iii) any rental
agreement described in Section 467 of the Code, other than with a "related
person"; (iv) any obligation to pay rents from real property; (v) certain
securities issued by a State or any political subdivision thereof, or the
Commonwealth of Puerto Rico; (vi) any security issued by a REIT; and (vii) any
other arrangement that, as determined by the Secretary of the Treasury, is
excepted from the definition of a security. In addition, for purposes of
applying the 10% value limitation, (a) a REIT's interest as a partner in a
partnership is not considered a security; (b) any debt instrument issued by a
partnership is not treated as a security if at least 75% of the partnership's
gross income is from sources that would qualify for the 75% REIT gross income
test, and (c) any debt instrument issued by a partnership is not treated as a
security to the extent of the REIT's interest as a partner in the partnership.
Third, not more than 20% of the value of our assets may be represented
by securities of one or more taxable REIT subsidiaries.
For purposes of the 75% asset test, the term "interest in real
property" includes an interest in land and improvements thereon, such as
buildings or other inherently permanent structures, including items that are
structural components of such buildings or structures, a leasehold of real
property, and an option to acquire real property, or a leasehold of real
property.
For purposes of the asset tests, we are deemed to own our proportionate
share of the assets of the Operating Partnership, any qualified REIT subsidiary,
and each noncorporate subsidiary, rather than our interests in those entities.
At least 75% of the value of our total assets have been and will be represented
by real estate assets, cash and cash items, including receivables and government
securities. In addition, except for our interests in the Operating Partnership,
the noncorporate subsidiaries, another REIT, any taxable REIT subsidiary and any
qualified REIT subsidiary, we have not owned, and will not own (1) securities of
any one issuer the value of which exceeds 5% of the value of our total assets,
or (2) more than 10% of the vote or value of any one issuer's outstanding
securities. We have not owned, and will not own, securities of taxable REIT
subsidiaries with an aggregate value in excess of 20% of the value of our
assets.
As noted above, one of the requirements for qualification as a REIT is
that a REIT not own more than 10% of the vote or value of any corporation other
than the stock of a qualified REIT subsidiary (of which the REIT is required to
own all of such stock), a taxable REIT subsidiary and stock in another REIT. The
Operating Partnership owns all or substantially all of the voting securities of
several entities that have elected to be taxed as corporations and are taxable
REIT subsidiaries. We and each taxable REIT subsidiary have jointly made a
taxable REIT subsidiary election and, therefore, ownership of such subsidiaries
will not violate the 10% test.
We own 100% of the common shares of eight entities that have elected or
will elect to be treated as real estate investment trusts ("Captive REITs").
Provided that each of the Captive REITs continues to qualify as a REIT
(including satisfaction of the ownership, income, asset and distribution tests
discussed herein) the common shares of the Captive REITs will qualify as real
estate assets under the 75% test. However, if any Captive REIT fails to qualify
as a REIT in any year, then the common shares of such Captive REIT will not
qualify as real estate assets under the 75% test. In addition, because we own
more than 10% of the common shares of each Captive REIT, Brandywine would not
satisfy the 10% test if any Captive REIT were to fail to qualify as a REIT.
Accordingly, Brandywine's qualification as a REIT depends upon the ability of
each Captive REIT to continue to qualify as a REIT.
After initially meeting the asset tests at the close of any quarter,
Brandywine will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the 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. We intend to maintain adequate records of the value of our assets
to ensure compliance with the asset tests, and to take such other action 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. If we fail to cure any noncompliance with the asset tests
within such time period, our status as a REIT would be lost.
For taxable years beginning on or after January 1, 2005, the Act
provides relief from certain failures to satisfy the REIT asset tests. If the
failure relates to the 5% test or 10% test, and if the failure is de minimis
(does not exceed the lesser of $10 million or 1% of our assets as of the end of
the quarter), we may avoid the loss of our REIT status by disposing of
sufficient assets to cure the failure within 6 months after the end of the
quarter in which the failure was identified. For failures to meet the asset
tests that are more than a de minimis amount, we may avoid the loss of our REIT
status if: the failure was due to reasonable cause, we file a disclosure
schedule at the end of the quarter in which the failure was identified, we
dispose of sufficient assets to cure the failure within 6 months after the end
of the quarter, and we pay a tax equal to the greater of $50,000 or the highest
corporate tax rate multiplied by the net income generated by the non-qualifying
assets.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, Brandywine is required to distribute
dividends (other than capital gain dividends) to our shareholders in an amount
at least equal to (1) the sum of (a) 90% of its "REIT taxable income" (computed
without regard to the dividends paid deduction and the REIT's net capital gain)
and (b) 90% of the net income (after tax), if any, from foreclosure property,
minus (2) certain "excess" non-cash income. In addition, if we dispose of a
built-in gain asset during the 10 year period following its acquisition, we will
be required to distribute at least 90% of the built-in gain (after tax), if any,
recognized on the disposition of such asset. Such distributions must be paid in
the taxable year to which they relate, or in the following taxable year if
declared before Brandywine timely files its tax return for such year and if paid
on or before the first regular dividend payment after such declaration. To the
extent that we do not distribute all of our net capital gain or we distribute at
least 95%, but less than 100%, of our "REIT taxable income," as adjusted, we
will be subject to tax on the undistributed amount at regular corporate tax
rates. Furthermore, if we should fail to distribute during each calendar year at
least the sum of (1) 85% of our REIT ordinary income for such year, (2) 95% of
our REIT net capital gain income for such year and (3) any undistributed taxable
income from prior periods, we would be subject to a 4% excise tax on the excess
of such required distribution over the amounts actually distributed.
Brandywine intends to make timely distributions sufficient to satisfy
the annual distribution requirements. In this regard, the limited partnership
agreement of the Operating Partnership authorizes Brandywine, as general
partner, to operate the partnership in a manner that will enable it to satisfy
the REIT requirements and avoid the imposition of any federal income or excise
tax liability. It is possible that we, from time to time, may not have
sufficient cash or other liquid assets to meet the 90% distribution requirement
due primarily to the expenditure of cash for nondeductible items such as
principal amortization or capital expenditures. In order to meet the 90%
distribution requirement, we may borrow or may cause the Operating Partnership
to arrange for short-term or other borrowing to permit the payment of required
distributions or declare a consent dividend, which is a hypothetical
distribution to shareholders out of our earnings and profits. The effect of such
a consent dividend (which, in conjunction with distributions actually paid, must
not be preferential to those shareholders who agree to such treatment) would be
that such shareholders would be treated for federal income tax purposes as if
they had received such amount in cash, and they then had immediately contributed
such amount back to Brandywine as additional paid-in capital. This would result
in taxable income to those shareholders without the receipt of any actual cash
distribution but would also increase their tax basis in their shares by the
amount of the taxable income recognized.
Under certain circumstances, Brandywine may be able to rectify a
failure to meet the distribution requirement for a given year by paying
"deficiency dividends" to shareholders in a later year that may be included in
Brandywine's deduction for distributions paid for the earlier year. Thus,
Brandywine may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Brandywine will be required to pay to the Internal Revenue
Service interest based upon the amount of any deduction taken for deficiency
dividends.
FAILURE TO QUALIFY
For taxable years beginning on or after January 1, 2005, the Act
provides relief for many failures to satisfy the REIT requirements. In addition
to the relief provisions for failures to satisfy the income and asset tests
(discussed above), the Act provides additional relief for other failures to
satisfy REIT requirements. If the failure is due to reasonable cause and not due
to willful neglect, and we elect to pay a penalty of $50,000 for each failure,
we can avoid the loss of our REIT status.
If Brandywine fails to qualify for taxation as a REIT in any taxable
year and the relief provisions do not apply, it will be subject to tax
(including any applicable corporate alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which Brandywine fails to qualify will not be deductible to us. In such event,
to the extent of Brandywine's current and accumulated earnings and profits, all
distributions to shareholders will be taxable to them as dividends, and, subject
to certain limitations of the Code, corporate distributees may be eligible for
the dividends received deduction. Under current law, such dividends should be
taxable to individual shareholders at the 15% rate for qualified dividends
provided that applicable holding period requirements are met. Unless entitled to
relief under specific statutory provisions, Brandywine also will be disqualified
from taxation as a REIT for the four taxable years following the year during
which qualification was lost. It is not possible to state whether in all
circumstances Brandywine would be entitled to such statutory relief.
INCOME TAXATION OF THE OPERATING PARTNERSHIP, SUBSIDIARY PARTNERSHIPS AND THEIR
PARTNERS
The following discussion summarizes certain Federal income tax
considerations applicable to Brandywine's investment in the Operating
Partnership and the Operating Partnership's subsidiary partnerships and limited
liability companies (referred to as the "Subsidiary Partnerships").
CLASSIFICATION OF THE OPERATING PARTNERSHIP AND SUBSIDIARY PARTNERSHIPS AS
PARTNERSHIPS
Brandywine owns all of its Properties or the economic interests therein
through the Operating Partnership. Brandywine will be entitled to include in its
income its distributive share of the income and to deduct its distributive share
of the losses of the Operating Partnership (including the Operating
Partnership's share of the income or losses of the Subsidiary Partnerships) only
if the Operating Partnership and the Subsidiary Partnerships (collectively, the
"Partnerships") are classified for Federal income tax purposes as partnerships
rather than as associations taxable as corporations. For taxable periods prior
to January 1, 1997, an organization formed as a partnership was treated as a
partnership for Federal income tax purposes rather than as a corporation only if
it had no more than two of the four corporate characteristics that the Treasury
Regulations used to distinguish a partnership from a corporation for tax
purposes. These four characteristics were continuity of life, centralization of
management, limited liability and free transferability of interests.
Neither the Operating Partnership nor any of the Subsidiary
Partnerships requested a ruling from the Internal Revenue Service that it would
be treated as a partnership for Federal income tax purposes.
Effective January 1, 1997, Treasury Regulations eliminated the
four-factor test described above and, instead, permit partnerships and other
non-corporate entities to be taxed as partnerships for federal income tax
purposes without regard to the number of corporate characteristics possessed by
such entity. Under those Treasury Regulations, both the Operating Partnership
and each of the Subsidiary Partnerships will be classified as partnerships for
federal income tax purposes except for any entity for which an affirmative
election is made by the entity to be taxed as a corporation. Under a special
transitional rule in the Treasury Regulations, the Internal Revenue Service will
not challenge the classification of an existing entity such as the Operating
Partnership or a Subsidiary Partnership for periods prior to January 1, 1997 if:
(1) the entity has a "reasonable basis" for its classification; (2) the entity
and each of its members recognized the federal income tax consequences of any
change in classification of the entity made within the 60 months prior to
January 1, 1997; and (3) neither the entity nor any of its members had been
notified in writing on or before May 8, 1996 that its classification was under
examination by the Internal Revenue Service. Neither the Operating Partnership
nor any of the Subsidiary Partnerships changed its classification within the 60
month period preceding May 8, 1996, nor was any one of them notified that its
classification as a partnership for federal income tax purposes was under
examination by the Internal Revenue Service.
If for any reason the Operating Partnership or a Subsidiary Partnership
were classified as an association taxable as a corporation rather than as a
partnership for Federal income tax purposes, Brandywine would not be able to
satisfy the income and asset requirements for REIT status. See " - Income Tests"
and " - Asset Tests." In addition, any change in any such Partnership's status
for tax purposes might be treated as a taxable event, in which case we might
incur a tax liability without any related cash distribution. See " - Annual
Distribution Requirements." Further, items of income and deduction of any such
Partnership would not pass through to its partner (e.g., Brandywine), and its
partners would be treated as shareholders for tax purposes. Any such Partnership
would be required to pay income tax at corporate tax rates on its net income and
distributions to its partners would constitute dividends that would not be
deductible in computing such Partnership's taxable income.
PARTNERSHIP ALLOCATIONS
Although a partnership agreement will generally determine the
allocation of income and losses among partners, such allocations will be
disregarded for tax purposes if they do not comply with the provisions of
Section 704(b) of the Code and the Treasury Regulations promulgated thereunder,
which require that partnership allocations respect the economic arrangement of
the partners.
If an allocation is not recognized for Federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The Operating Partnership's
allocations of taxable income and loss are intended to comply with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES
We believe that the fair market values of the properties contributed
directly or indirectly to the Operating Partnership in various transactions were
different than the tax basis of such Properties. 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 of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (the "Pre-Contribution Gain or Loss").
The partnership agreement of the Operating Partnership requires allocations of
income, gain, loss and deduction attributable to such contributed property to be
made in a manner that is consistent with Section 704(c) of the Code. Thus, if
the Operating Partnership sells contributed property at a gain or loss, such
gain or loss will be allocated to the contributing partners, and away from us,
generally to the extent of the Pre-Contribution Gain or Loss.
The Treasury Department has issued final regulations under Section
704(c) of the Code which give partnerships flexibility in ensuring that a
partner contributing property to a partnership receives the tax benefits and
burdens of any Pre-Contribution Gain or Loss attributable to the contributed
property. These regulations permit partnerships to use any "reasonable method"
of accounting for Pre-Contribution Gain or Loss. These regulations specifically
describe three reasonable methods, including (1) the "traditional method" under
current law, (2) the traditional method with the use of "curative allocations"
which would permit distortions caused by Pre-Contribution Gain or Loss to be
rectified on an annual basis and (3) the "remedial allocation method" which is
similar to the traditional method with "curative allocations." The partnership
agreement of the Operating Partnership permits us, as general partner, to select
one of these methods to account for Pre-Contribution Gain or Loss.
DEPRECIATION
The Operating Partnership's assets include a substantial amount of
appreciated property contributed by its partners. Assets contributed to a
partnership in a tax-free transaction generally retain the same depreciation
method and recovery period as they had in the hands of the partner who
contributed them to the partnership. Accordingly, a substantial amount of the
Operating Partnership's depreciation deductions for its real property are based
on the historic tax depreciation schedules for the properties prior to their
contribution to the Operating Partnership. The properties are being depreciated
over a range of 15 to 40 years using various methods of depreciation which were
determined at the time that each item of depreciable property was placed in
service. Any depreciable real property purchased by the Partnerships is
currently depreciated over 40 years. In certain instances where a partnership
interest rather than real property is contributed to the Partnership, the real
property may not carry over its recovery period but rather may, similarly, be
subject to the lengthier recovery period.
Section 704(c) of the Code requires that depreciation as well as gain
and loss be allocated in a manner so as to take into account the variation
between the fair market value and tax basis of the property contributed. Thus,
because much of the property contributed to the Operating Partnerships is
appreciated, we will generally receive allocations of tax depreciation in excess
of our percentage interest in the Operating Partnership. Depreciation with
respect to any property purchased by the Operating Partnership subsequent to the
admission of its partners, however, will be allocated among the partners in
accordance with their respective percentage interests in the Operating
Partnership.
As described previously, Brandywine, as a general partner of the
Operating Partnership, may select any permissible method to account for
Pre-Contribution Gain or Loss. The use of certain of these methods may result in
us being allocated lower depreciation deductions than if a different method were
used. The resulting higher taxable income and earnings and profits, as
determined for federal income tax purposes, should decrease the portion of
distributions which may be treated as a return of capital. See "- Taxation of
Taxable Domestic Shareholders."
BASIS IN OPERATING PARTNERSHIP INTEREST
Our adjusted tax basis in each of the partnerships in which we have an
interest generally (1) will be equal to the amount of cash and the basis of any
other property contributed to such partnership by us, (2) will be increased by
(a) our allocable share of such partnership's income and (b) our allocable share
of any indebtedness of such partnership, and (3) will be reduced, but not below
zero, by our allocable share of (a) such partnership's loss and (b) the amount
of cash and the tax basis of any property distributed to us and by constructive
distributions resulting from a reduction in our share of indebtedness of such
partnership.
If our allocable share of the loss (or portion thereof) of any
partnership in which we have an interest would reduce the adjusted tax basis of
our partnership interest in such partnership below zero, the recognition of such
loss will be deferred until such time as the recognition of such loss (or
portion thereof) would not reduce our adjusted tax basis below zero. To the
extent that distributions to us from a partnership, or any decrease in our share
of the nonrecourse indebtedness of a partnership (each such decrease being
considered a constructive cash distribution to the partners), would reduce our
adjusted tax basis below zero, such distributions (including such constructive
distributions) would constitute taxable income to us. Such distributions and
constructive distributions normally would be characterized as long-term capital
gain if our interest in such partnership has been held for longer than the
long-term capital gain holding period (currently 12 months).
SALE OF PARTNERSHIP PROPERTY
Generally, any gain realized by a partnership on the sale of property
held by the partnership for more than 12 months will be long-term capital gain,
except for any portion of such gain that is treated as depreciation or cost
recovery recapture. However, under requirements applicable to REITs under the
Code, our share as a partner of any gain realized by the Operating Partnership
on the sale of any property held as inventory or other property held primarily
for sale to customers in the ordinary course of a trade or business will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. See "- Taxation of Brandywine as a REIT." Such prohibited
transaction income will also have an adverse effect upon our ability to satisfy
the income tests for REIT status. See " - Income Tests." Whether property is
held as inventory or primarily for sale to customers in the ordinary course of a
trade or business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. 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 if the following requirements are
satisfied: (1) the REIT has held the property for at least four years, (2)
aggregate expenditures of the REIT during the four-year period preceding the
sale which are includible in basis do not exceed 30% of the net selling price of
the property, (3) (a) during the taxable year the REIT has made no more than
seven sales of property or, in the alternative, (b) the aggregate of the
adjusted bases of all properties sold during the year does not exceed 10% of the
adjusted bases of all of the REIT's properties during the year, (4) in the case
of property, not acquired through foreclosure or lease termination, the REIT has
held the property for not less than four years for the production of rental
income, and (5) if the requirement of clause (3) (a) is not satisfied,
substantially all of the marketing and development expenditures were made
through an independent contractor. Brandywine, as general partner of the
Operating Partnership, believes that the Operating Partnership intends to hold
its properties for investment with a view to long-term appreciation, to engage
in the business of acquiring, developing, owning, operating and leasing
properties and to make such occasional sales of the properties as are consistent
with its and the Operating Partnership's investment objectives. No assurance can
be given, however, that every property sale by the Partnerships will constitute
a sale of property held for investment.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as Brandywine qualifies as a REIT, distributions made to
Brandywine's taxable U.S. shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends or qualified dividend
income) will be dividends taxable to such U.S. shareholders as ordinary income
and will not be eligible for the dividends received deduction for corporations.
Distributions that are designated as long-term capital gain dividends will be
taxed as long-term capital gains (to the extent they do not exceed our actual
net capital gain for the taxable year) without regard to the period for which
the U.S. shareholder has held its shares of beneficial interest. In general,
U.S. shareholders will be taxable on long term capital gains at a maximum rate
of 15%, except that the portion of such gain that is attributable to
depreciation recapture will be taxable at the maximum rate of 25%. However,
corporate shareholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. For calendar years 2003 through 2008,
distributions that are designated as qualified dividend income will be taxed at
the same rate as long-term capital gains. We may designate a distribution as
qualified dividend income to the extent of (1) qualified dividend income we
receive during the current year (for example, dividends received from a taxable
REIT subsidiary), and (2) income on which we have been subject to corporate
level tax during the prior year (for example, undistributed REIT taxable income)
less the tax paid on that income. We expect that ordinary dividends paid by
Brandywine generally will not be eligible for treatment as qualified dividend
income to any significant extent. Distributions in excess of current and
accumulated earnings and profits will not be taxable to a U.S. shareholder to
the extent that they do not exceed the adjusted basis of the shareholder's
shares, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a U.S. shareholder's shares, such distributions
will be included in income as long-term capital gain (or short-term capital gain
if the shares have been held for 12 months or less) assuming the shares are a
capital asset in the hands of the shareholder. In addition, any distribution
declared by us in October, November or December of any year payable to a
shareholder of record on a specified date in any such month shall be treated as
both paid by Brandywine and received by the shareholder on December 31 of such
year, provided that the distribution is actually paid by Brandywine not later
than the end of January of the following calendar year. Shareholders may not
include in their individual income tax returns any of Brandywine's losses.
In general, a U.S. shareholder will recognize capital gain or loss on
the disposition of common shares equal to the difference between the sales price
for such shares and the adjusted tax basis for such shares. Gain or loss
recognized upon a sale or exchange of common shares by a U.S. shareholder who
has held such shares for more than one year will be treated as long-term capital
gain or loss, respectively, and otherwise will be treated as short-term capital
gain or loss. However, any loss upon a sale or exchange of shares by a U.S.
shareholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent such shareholder has received distributions from us required to be
treated as long-term capital gain. U.S. shareholders who realize a loss on the
sale or exchange of shares may be required to file IRS Form 8886, Reportable
Transaction Disclosure Statement, if the loss exceeds certain thresholds (for
individual taxpayers, the threshold is $2,000,000 for a loss in a single taxable
year). U.S. shareholders should consult with their tax advisors regarding Form
8886 filing requirements.
Distributions from us and gain from the disposition of shares will not
be treated as passive activity income and, therefore, U.S. shareholders will not
be able to apply any "passive losses" against such income. Distributions from us
(to the extent they do not constitute a return of capital or capital gain
dividends) and, on an elective basis, capital gain dividends and gain from the
disposition of shares will generally be treated as investment income for
purposes of the investment income limitation.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, Brandywine will report to its U.S. shareholders and the
Internal Revenue Service the amount of distributions paid (unless the U.S.
shareholder is an exempt recipient such as a corporation) during each calendar
year, and the amount of tax withheld, if any. Under the backup withholding
rules, a shareholder may be subject to backup withholding at the rate of 28%
with respect to distributions paid unless such shareholder (a) is a corporation
or comes within certain other exempt categories and, when required, demonstrates
this fact, or (b) provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A shareholder that does not
provide us with his correct taxpayer identification number may also be subject
to penalties imposed by the Internal Revenue Service. Any amount paid as backup
withholding may be credited against the shareholder's income tax liability. In
addition, we may be required to withhold a portion of capital gain distributions
to any shareholders who fail to certify their non-foreign status to Brandywine.
See "- Taxation of Foreign Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Distributions by us to a shareholder that is a tax-exempt entity should
not constitute "unrelated business taxable income" ("UBTI"), as defined in
Section 512(a) of the Code 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.
In the case of a "qualified trust" (generally, a pension or
profit-sharing trust) holding shares in a REIT, the beneficiaries of the trust
are treated as holding shares in the REIT in proportion to their actuarial
interests in the qualified trust, instead of treating the qualified trust as a
single individual (the "look-through exception"). A qualified trust that holds
more than 10% of the shares of a REIT is required to treat a percentage of REIT
dividends as UBTI if the REIT incurs debt to acquire or improve real property.
This rule applies, however, only if (1) the qualification of the REIT depends
upon the application of the "look through" exception (described above) to the
restriction on REIT shareholdings by five or fewer individuals, including
qualified trusts (see "Description of Shares of Beneficial Interest -
Restrictions on Transfer") and (2) the REIT is "predominantly held" by qualified
trusts, i.e., if either (a) a single qualified trust holds more than 25% by
value of the interests in the REIT or (b) one or more qualified trusts, each
owning more than 10% by value, holds in the aggregate more than 50% of the
interests in the REIT. The percentage of any dividend paid (or treated as paid)
to such a qualified trust that is treated as UBTI is equal to the amount of
modified gross income (gross income less directly connected expenses) from the
unrelated trade or business of the REIT (treating the REIT as if it were a
qualified trust), divided by the total modified gross income of the REIT. A de
minimis exception applies where the percentage is less than 5%.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing United States Federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other shareholders that are not U.S. shareholders (collectively, "Non-U.S.
Shareholders") are complex and no attempt will be made herein to provide more
than a summary of such rules. Prospective Non-U.S. Shareholders should consult
with their own tax advisors to determine the impact of Federal, state and local
income tax laws with regard to an investment in our shares, including any
reporting requirements.
Distributions made by us that are not attributable to gain from sales
or exchanges by us of United States real property interests and not designated
by us as capital gains dividends will be treated as dividends of ordinary income
to the extent that they are made out of current or accumulated earnings and
profits of Brandywine. Such distributions will ordinarily be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in our shares is treated as effectively connected with the
Non-U.S. Shareholder's conduct of a United States trade or business, the
Non-U.S. Shareholder generally will be subject to a tax at graduated rates, in
the same manner as U.S. shareholders are taxed with respect to such
distributions (and may also be subject to the 30% branch profits tax in the case
of a shareholder that is a foreign corporation). We expect to withhold United
States income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Shareholder unless (1) a lower treaty rate
applies and the Non-U.S. shareholder files a W-8BEN (or applicable substitute
form) or (2) the Non-U.S. Shareholder files an IRS Form W-8ECI with us claiming
that the distribution is effectively connected income. Distributions in excess
of our current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that such distributions do not exceed the adjusted
basis of the shareholder's shares, but rather will reduce the adjusted basis of
the shareholder in such shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
Non-Shareholder's shares, such distributions will give rise to tax liability if
the Non-U.S. Shareholder would otherwise be subject to tax on any gain from the
sale or disposition of its shares, as described below. If it cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the
distributions will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable to the shareholder if it is
subsequently determined that such distribution was, in fact, in excess of our
current and accumulated earnings and profits.
For any year in which Brandywine qualifies as a REIT, except as
provided below for certain distributions after January 1, 2005, distributions
that are attributable to gain from sales or exchanges by us of United States
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
United States real property interests are taxed to a Non-U.S. Shareholder as if
such gain were effectively connected with a United States business. Individuals
who are Non-U.S. Shareholders will be required to report such gain on a U.S.
federal income tax return and such gain will taxed at the normal capital gain
rates applicable to U.S. individual shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). Also, distributions subject to FIRPTA may be
subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder not entitled to treaty relief. Brandywine is required by applicable
Treasury Regulations to withhold 35% of any distribution that could be
designated by us as a capital gains dividend. The amount is creditable against
the Non-U.S. Shareholder's U.S. tax liability.
For distributions after January 1, 2005, the Act provides that
distributions attributable to gain from sales or exchanges by us of United
States real property interests are treated as ordinary dividends (not subject to
FIRPTA) if the distribution is made to a Non-U.S. Shareholder with respect to
any class of stock which is "regularly traded" on an established securities
market located in the United States and if the Non-U.S. shareholder did not own
more than 5% of such class of stock at any time during the taxable year.
Accordingly, such distributions will generally be subject to a 30% U.S.
withholding tax (subject to reduction under applicable treaty) and a Non-U.S.
Shareholder will not be required to report the distribution on a U.S. tax
return. In addition, the branch profits tax will not apply to such
distributions.
Gain recognized by a Non-U.S. Shareholder upon a sale of shares
generally will not be taxed under FIRPTA if Brandywine is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the shares of beneficial
interest was held directly or indirectly by foreign persons. It is currently
anticipated that we will be a "domestically controlled REIT," and therefore the
sale of shares by a Non-U.S. Shareholder will not be subject to taxation under
FIRPTA. However, because the shares may be traded, we cannot be sure that we
will continue to be a "domestically controlled REIT." Gain not subject to FIRPTA
will be taxable to a Non-U.S. Shareholder if (1) investment in the shares is
effectively connected with the Non-U.S. Shareholder's United States trade or
business, in which case the Non-U.S. Shareholder will be subject to the same
treatment as U.S. shareholders with respect to such gain or (2) the Non-U.S.
Shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains. If the gain on the sale of shares were to be subject to taxation
under FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as
U.S. shareholders with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals).
If we were not a domestically controlled REIT, a sale of common shares
by a Non-U.S. shareholder would not be subject to taxation under FIRPTA as a
sale of a U.S. real property interest if (1) our preferred shares or common
shares were "regularly traded" on an established securities market within the
meaning of applicable Treasury regulations and (2) the Non-U.S. shareholder did
not actually, or constructively under specified attribution rules under the
Code, own more than 5% of our preferred shares or common shares at any time
during the shorter of the five-year period preceding the disposition or the
holder's holding period.
Even if our common shares were not regularly traded on an established
securities market, a Non-U.S. shareholder would not be subject to taxation under
FIRPTA as a sale of a U.S. real property interest if such Non-U.S. shareholder's
common shares had a fair market value on the date of acquisition that was equal
to or less than 5% of our regularly traded class of shares with the lowest fair
market value. For purposes of this test, if a Non-U.S. shareholder acquired
shares of common shares and subsequently acquired additional shares at a later
date, then all such shares would be aggregated and valued as of the date of the
subsequent acquisition.
STATEMENT OF SHARE OWNERSHIP
Brandywine is required to demand annual written statements from the
record holders of designated percentages of our shares disclosing the actual
owners of the shares. Brandywine must also maintain, within the Internal Revenue
District in which it is required to file its federal income tax return,
permanent records showing the information Brandywine has received as to the
actual ownership of such shares and a list of those persons failing or refusing
to comply with such demand.
OTHER TAX CONSEQUENCES
Brandywine, the Operating Partnership, the Subsidiary Partnerships and
Brandywine's shareholders may be subject to state or local taxation in various
state or local jurisdictions, including those in which it or they transact
business or reside. The state and local tax treatment of Brandywine, the
Operating Partnership, the Subsidiary Partnerships and Brandywine's shareholders
may not conform to the Federal income tax consequences discussed above.
Consequently, prospective shareholders should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in our
securities.