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As Filed Pursuant to Rule 424(b)(3)
Registration No. 333-57853
PROSPECTUS
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1,829,300 SHARES
LEXINGTON CORPORATE PROPERTIES TRUST
COMMON SHARES
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Lexington Corporate Properties Trust (the "Company") is a self-managed and
self-administered real estate investment trust that acquires, owns and manages a
geographically diversified portfolio of net leased office, industrial and retail
properties. The Company currently owns controlling interests in 59 properties
and minority interests in two additional properties (the "Properties," and each
a "Property"). The Properties are located in 28 states, have approximately 8.8
million net rentable square feet and, under the terms of their applicable
leases, currently generate approximately $62.9 million in annual net effective
rent. In addition, the Company has entered into agreements to purchase an
additional three properties for an aggregate consideration of approximately
$64.8 million, all of which are build-to-suit properties currently under
construction.
This Prospectus relates to the possible issuance by the Company of up to
1,829,300 common shares (the "Redemption Shares") of beneficial interest, par
value $.0001 per share (the "Common Shares"), of the Company if, and to the
extent that, holders of up to 1,829,300 units of limited partnership interest
(the "Units") in Lepercq Corporate Income Fund, L.P. ("LCIF" or the "Operating
Partnership") (of which Lex GP-1, Inc. ("Lex GP-1") a Delaware corporation and a
direct wholly-owned subsidiary of the Company, is the sole general partner and
of which the Company owns a controlling limited partner interest through Lex
LP-1, Inc. ("Lex LP-1") a Delaware corporation and a direct wholly-owned
subsidiary of the Company) tender such Units for redemption.
The Unit holders and any agents, dealers or underwriters that participate
with the Unit holders in the distribution of the Redemption Shares may be deemed
to be "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), in which case any commissions received by such
agents, dealers or underwriters and any profit on the resale of the Redemption
Shares purchased by them may be deemed underwriting commissions or discounts
under the Securities Act. See "Registration Rights" for indemnification
arrangements between the Company and the Unit holders.
The Company will not receive any of the proceeds from the issuance of the
Redemption Shares but has agreed to bear certain expenses of registration of the
Redemption Shares under federal and state securities laws, other than
commissions and discounts of agents or dealers and transfer taxes, if any. The
Company will acquire Units in LCIF in exchange for any Redemption Shares that
the Company may issue to Unit holders pursuant to this Prospectus.
The Common Shares are listed on the New York Stock Exchange (the "NYSE")
under the symbol "LXP." To ensure that the Company maintains its qualification
as a REIT, ownership by any person of more than 5% of the Common Shares is
restricted, with certain exceptions. See "Capital Shares of the Company."
On June 22, 1998, the last reported sale price of a Common Share on the
NYSE was $14.50. The Company's current annualized distribution per Common Share
is $1.16.
SEE "RISK FACTORS" ON PAGES 6 TO 8 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON
SHARES OFFERED HEREBY.
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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 SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, is required to file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material also can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. In addition, such material may be electronically
accessed at the Commission's site on the World Wide Web located at
http://www.sec.gov.
The Company's Common Shares are listed on the New York Stock Exchange (the
"NYSE") and reports, proxy and information statements, and other information
concerning the Company can be inspected at the offices of the NYSE at 20 Broad
Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3, of which this Prospectus forms a part (together with any amendments
thereto, the "Registration Statement"), under the Securities Act of 1933, as
amended (the "Securities Act"). As permitted by the rules and regulations of the
Commission, this Prospectus omits certain information, exhibits and undertakings
contained in the Registration Statement. Such additional information, exhibits
and undertakings may be inspected and obtained from the Commission's principal
office in Washington, D.C. upon payment of the fees prescribed by the
Commission. The summaries or descriptions of documents in this Prospectus are
not necessarily complete. Reference is made to the copies of such documents
attached hereto or otherwise filed as a part of the Registration Statement for a
full and complete statement of their provisions, and such summaries and
descriptions are, in each case, qualified in their entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In December 1997, the Company was reorganized as a Maryland real estate
investment trust. See "The Company." References herein to the Company include
references to the Company's predecessor corporations. The following documents or
information have been filed by the Company with the Commission and are
incorporated herein by reference:
1. The Company's Quarterly Report on Form 10-Q (Commission File No.
1-12386) for the quarter ended March 31, 1998, filed on May 15, 1998.
2. The Company's Annual Report on Form 10-K (Commission File No.
1-12386) for the year ended December 31, 1997, filed on March 31, 1998.
3. The Company's Current Report on Form 8-K (Commission File No.
1-12386), filed on January 16, 1998.
4. The Company's 1998 Proxy Statement on Schedule 14-A (Commission
File No. 1-12386), filed on April 22, 1998.
All documents subsequently filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of the offering of all
securities covered by this Prospectus will be deemed incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
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THE COMPANY HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO
WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, UPON THE WRITTEN OR ORAL
REQUEST OF SUCH PERSON TO THE COMPANY AT 355 LEXINGTON AVENUE, NEW YORK, NEW
YORK 10017, ATTENTION: T. WILSON EGLIN, PRESIDENT AND CHIEF OPERATING OFFICER,
ANY OR ALL OF THE DOCUMENTS REFERRED TO ABOVE (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS) WHICH HAVE BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
TELEPHONE REQUESTS MAY BE DIRECTED TO (212) 692-7260.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, but not limited
to, statements regarding the anticipated development and expansion of the
Company's business, anticipated annual rental revenue, acquisitions and
distributions, sources of and potential financings, the future operating
performance of the Company and other statements contained herein regarding
matters that are not historical facts are "forward-looking" statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995).
Because such statements include risks and uncertainties, actual results and
events may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results and events
to differ materially from those expressed or implied by such forward-looking
statements include, but are not limited to, the factors set forth under "Risk
Factors" in this Prospectus.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and related Notes thereto
included elsewhere in this Prospectus or otherwise incorporated herein or
therein by reference. All references to the "Company" refer to Lexington
Corporate Properties Trust, a Maryland real estate investment trust, and those
entities owned or controlled, directly or indirectly, by Lexington Corporate
Properties Trust.
THE COMPANY
Lexington Corporate Properties Trust (the "Company") is a self-managed and
self-administered real estate investment trust ("REIT") that acquires, owns and
manages a geographically diversified portfolio of net leased office, industrial
and retail properties. As of the date of this Prospectus, the Company owns
controlling interests in 59 properties and minority interests in two additional
properties (the "Properties," and each a "Property"). Substantially all of the
Company's leases are "net leases," under which the tenant is responsible for all
costs of real estate taxes, insurance, ordinary maintenance and structural
repairs. The Properties are located in 28 states, have approximately 8.8 million
net rentable square feet and, under the terms of their applicable leases,
currently generate approximately $62.9 million in annual net effective rent. The
Company's tenants, many of which are nationally recognized, include Bank One
Arizona, N.A., Circuit City Stores, Inc., FirstPlus Financial Group, Inc., The
Hartford Fire Insurance Company, Honeywell, Inc., Lockheed Martin Corporation,
Northwest Pipeline Corporation, Ryder Integrated Logistics and Wal-Mart Stores,
Inc.
The Company's senior executive officers average 17 years of experience in
the real estate investment and net lease business. Management has diversified
the Company's portfolio by geographical location, tenant industry segment, lease
term expiration and property type with the intention of providing steady
internal growth with low volatility. Management believes that such
diversification should help insulate the Company from regional recession,
industry specific downturns and price fluctuations by property type. Since
January 1, 1998, the Company has also enhanced the value of its portfolio by
acquiring $91.2 million of properties, aggregating approximately 1.1 million net
rentable square feet and accounting for approximately $8.8 million in annual net
effective rent. In addition, the Company has entered into agreements to purchase
an additional three properties for an aggregate consideration of approximately
$64.8 million, all of which are build-to-suit properties currently under
construction. As part of management's ongoing efforts, the Company expects to
continue to effect portfolio and individual property acquisitions and
dispositions, expand existing Properties, attract investment grade quality
tenants, extend lease maturities in advance of expiration and refinance
outstanding indebtedness, when advisable.
The Company, through a predecessor entity, commenced operations in 1993 as
a REIT, with two operating partnership subsidiaries. This operating partnership
structure enables the Company to acquire property by issuing to a seller, as a
form of consideration, interests ("OP Units") in the Company's subsidiary
operating partnerships. The OP Units are redeemable, after certain dates, for
Common Shares. See "Distributions On OP Units." Management believes that this
corporate structure facilitates the Company's ability to raise capital and to
acquire portfolio and individual properties by enabling the Company to structure
transactions which may defer tax gains for a contributor of property while
preserving the Company's available cash for other purposes, including the
payment of distributions. The Company has used OP Units as a form of
consideration in connection with the acquisition of 18 of its Properties.
The principal executive offices of the Company are located at 355 Lexington
Avenue, New York, New York 10017, and its telephone number is (212) 692-7260.
RISK FACTORS
An investment in the Redemption Shares involves various risks. For a
discussion of factors that should be considered in evaluating such an
investment, see "Risk Factors."
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DISTRIBUTION POLICY
Distributions are paid to the Company's shareholders on a quarterly basis
if, as and when declared by the Board of Trustees. The Company's current
annualized distribution per Common Share is $1.16. In order to maintain the
Company's status as a REIT, the Company must make annual distributions to its
shareholders of at least 95% of its "REIT taxable income," plus 95% of any
after-tax net income from foreclosure properties, in each case less any excess
non-cash income. See "Federal Income Tax Considerations of Holding Shares in a
REIT". Although the Company expects to continue its policy of paying quarterly
distributions, there can be no assurance that the current level of distributions
will be maintained by the Company.
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RISK FACTORS
Tax Consequences to Unit Holders of Redemption of Units. LCIF's
Partnership Agreement provides that the redemption of Units will be treated by
the Company, LCIF and the redeeming Unit holder as a sale of the Units by such
Unit holder to the Company at the time of redemption. Such sale will be fully
taxable to the redeeming Unit holder. See "Redemption of Units -- Tax Treatment
of Redemption of Units."
Risks Involved in Single Tenant Leases. The Company focuses its
acquisition activities in net leased real properties or interests therein. Due
to the fact that the Company's net leased real properties are leased to single
tenants, the financial failure of or other default by a tenant resulting in the
termination of a lease is likely to cause a significant reduction in the
operating cash flow of the lessor and might decrease the value of the property
leased to such tenant. See "The Company -- The Net Lease Real Estate Business."
Dependence on Major Tenants. Revenues from several of the Company's
Properties constitute a significant percentage of the Company's consolidated
rental revenues. The default, financial distress or bankruptcy of any of the
tenants of such Properties could cause interruptions in the receipt of lease
revenues from such tenants and/or result in vacancies in the respective
Properties, which would reduce the revenues of the Company until the affected
property is relet, and could decrease the ultimate sale value of each such
Property. Upon the expiration of the leases that are currently in place with
respect to these Properties, the Company may not be able to re-lease the vacant
property at a comparable lease rate or without incurring additional expenditures
in connection with such re-leasing.
Leverage. The Company has incurred, and may continue to incur,
indebtedness (secured and unsecured) in furtherance of its activities. Neither
the Declaration of Trust nor any policy statement formally adopted by the Board
of Trustees limits either the total amount of indebtedness or the specified
percentage of indebtedness (based upon the total market capitalization of the
Company) which may be incurred. Accordingly, the Company could become more
highly leveraged, resulting in increased risk of default on obligations of the
Company and in an increase in debt service requirements which could adversely
affect the financial condition and results of operations of the Company and the
Company's ability to pay distributions. The Company's currently existing Credit
Facility (as defined below) limits the amount of indebtedness the Company may
incur to 60% of the Company's total market capitalization.
Possible Inability to Refinance Balloon Payment on Mortgage Debt. A
significant number of the Company's Properties are subject to mortgages with
balloon payments. A balloon payment relating to one Property, of approximately
$5.6 million, is due in 1999. The Company's secured revolving credit facility
with Fleet National Bank (the "Credit Facility") matures in 1999. Also, on May
19, 1995, the Company, through its wholly-owned subsidiary, LXP Funding Corp.,
completed a $70 million secured debt offering, secured by fifteen of the
Company's Properties, by issuing commercial mortgage pass-through certificates,
which mature in 2005. See Note 5 of the Company's Consolidated Financial
Statements included in the Company's 1997 Annual Report on Form 10-K. The
ability of the Company to make such balloon payments will depend upon its
ability either to refinance the mortgage related thereto or to sell the related
property. The ability of the Company to accomplish such goals will be affected
by various factors existing at the relevant time, such as the state of the
national and regional economies, local real estate conditions, available
mortgage rates, the Company's equity in the mortgaged properties, the financial
condition of the Company, the operating history of the mortgaged properties, and
tax laws.
Uncertainties Relating to Lease Renewals and Re-letting of Space. The
Company will be subject to the risks that, upon expiration of leases for space
located in the Company's Properties, the premises may not be re-let or the terms
of re-letting (including the cost of concessions to tenants) may be less
favorable than current lease terms. If the Company were unable to re-let
promptly all or a substantial portion of its commercial units or if the rental
rates upon such re-letting were significantly lower than expected rates, the
Company's net income and ability to make expected distributions to shareholders
would be adversely affected. There can be no assurance that the Company will be
able to retain tenants in any of the Company's Properties upon the expiration of
their leases.
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Defaults on Cross-Collateralized Properties. Although the Company does not
generally cross-collateralize any of its properties, management may determine to
do so from time to time. As of the date of this Prospectus, two of the Company's
Properties in Florida were cross-collateralized and fifteen of the Company's
Properties were the subject of a segregated pool of assets with respect to which
commercial mortgage pass-through certificates (as discussed above) were issued.
To the extent that any of the Company's Properties are cross-collateralized, any
default by the Company under the mortgage relating to one such Property will
result in a default under the financing arrangements relating to any other
Property which also provides security for such mortgage.
Possible Liability Relating to Environmental Matters. Under various
federal, state and local environmental laws, statutes, ordinances, rules and
regulations, an owner of real property may be liable for the costs of removal or
remediation of certain hazardous or toxic substances at, on, in or under such
property, as well as certain other potential costs relating to hazardous or
toxic substances (including government fines and penalties and damages for
injuries to persons and adjacent property). Such laws often impose liability
without regard to whether the owner knew of, or was responsible for, the
presence or disposal of such substances. Such liability may be imposed on the
owner in connection with the activities of an operator of, or tenant at, the
property. The cost of any required remediation, removal, fines or personal or
property damages and the owner's liability therefore could exceed the value of
the property and/or the aggregate assets of the owner. In addition, the presence
of such substances, or the failure to properly dispose of or remove such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral, which, in turn, would
reduce the Company's revenues and ability to make distributions. A property can
also be adversely affected either through physical contamination or by virtue of
an adverse effect upon value attributable to the migration of hazardous or toxic
substances, or other contaminants that have or may have emanated from other
properties. Although the Company's tenants are primarily responsible for any
environmental damages and claims related to the leased premises, in the event of
the bankruptcy or inability of the tenant of such premises to satisfy any
obligations with respect thereto, the Company may be required to satisfy such
obligations. In addition, under certain environmental laws, the Company, as the
owner of such properties, may be held directly liable for any such damages or
claims irrespective of the provisions of any lease.
From time to time, in connection with the conduct of the Company's
business, and prior to the acquisition of any property from a third party or as
required by the Company's financing sources, the Company authorizes the
preparation of Phase I environmental reports and, when necessary, Phase II
environmental reports, with respect to its Properties. Based upon such
environmental reports and management's ongoing review of its Properties, as of
the date of this Prospectus, management was not aware of any environmental
condition with respect to any of the Company's Properties which management
believed would be reasonably likely to have a material adverse effect on the
Company. There can be no assurance, however, that (i) the discovery of
environmental conditions, the existence or severity of which were previously
unknown, (ii) changes in law, (iii) the conduct of tenants, or (iv) activities
relating to properties in the vicinity of the Properties will not expose the
Company to material liability in the future.
Changes in laws increasing the potential liability for environmental
conditions existing on properties or increasing the restrictions on discharges
or other conditions may result in significant unanticipated expenditures or may
otherwise adversely affect the operations of the Company's tenants, which could
adversely affect the Company's financial condition or results of operations.
Risks Relating to Acquisitions. A significant element of the Company's
business strategy is the enhancement of its portfolio through acquisitions of
additional properties. The consummation of any future acquisition will be
subject to satisfactory completion of the Company's extensive valuation analysis
and due diligence review and to the negotiation of definitive documentation.
There can be no assurance that the Company will be able to identify and acquire
additional properties or that it will be able to finance acquisitions in the
future. In addition, there can be no assurance that any such acquisition, if
consummated, will be profitable for the Company. If the Company is unable to
consummate the acquisition of additional properties in the future, there can be
no assurance that the Company will be able to increase the cash available for
distribution to shareholders.
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Concentration of Ownership by Certain Investors. In three separate
closings in 1997, the Company sold 2,000,000 Class A Senior Cumulative
Convertible Preferred Shares of Beneficial Interest in the Company (the
"Convertible Preferred Shares") to Five Arrows Realty, L.L.C. ("Five Arrows").
The Convertible Preferred Shares are convertible to Common Shares on a
one-to-one basis at $12.50 per share. In March 1997, the Company sold to an
institutional investor in a private placement 8% Exchangeable Redeemable Secured
Notes (the "Exchangeable Notes") in the aggregate principal amount of $25
million. The Exchangeable Notes are exchangeable at $13.00 per share for the
Company's Common Shares beginning in the year 2000, subject to adjustment.
Significant concentrations of ownership by certain investors may allow such
investors to exert a greater influence over the management and affairs of the
Company.
Uninsured Loss. The Company carries comprehensive liability, fire,
extended coverage and carries rent loss insurance on most of its Properties,
with policy specifications and insured limits customarily carried for similar
properties. However, with respect to certain of the Properties where the leases
do not provide for abatement of rent under any circumstances, the Company
generally does not maintain rent loss insurance. In addition, there are certain
types of losses (such as due to wars or acts of God) that generally are not
insured because they are either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, the
Company could lose capital invested in a Property, as well as the anticipated
future revenues from a Property, while remaining obligated for any mortgage
indebtedness or other financial obligations related to the Property. Any such
loss would adversely affect the financial condition of the Company. Management
believes that the Properties are adequately insured in accordance with industry
standards.
Adverse Effects of Changes in Market Interest Rates. The trading prices of
equity securities issued by REITs have historically been affected by changes in
broader market interest rates, with increases in interest rates resulting in
decreases in trading prices, and decreases in interest rates resulting in
increases in such trading prices. An increase in market interest rates could
therefore adversely affect the trading prices of any equity securities issued by
the Company.
Competition. The real estate industry is highly competitive. The Company's
principal competitors include national REITs, many of which are substantially
larger and have substantially greater financial resources than the Company.
Failure to Qualify as a REIT. Management believes that the Company has met
the requirements for qualification as a REIT for federal income tax purposes
beginning with its taxable year ended December 31, 1993 and intends to continue
to meet such requirements in the future. However, qualification as a REIT
involves the application of highly technical and complex provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), for which there are only
limited judicial or administrative interpretations. No assurance can be given
that the Company has qualified or will remain qualified as a REIT. The Code
provisions and income tax regulations applicable to REITs are more complex than
those applicable to corporations. The determination of various factual matters
and circumstances not entirely within the Company's control may affect its
ability to qualify as a REIT. In addition, no assurance can be given that
legislation, regulations, administrative interpretations or court decisions will
not significantly change the requirements for qualification as a REIT or the
federal income tax consequences of such qualification. If the Company does not
qualify as a REIT, the Company would not be allowed a deduction for
distributions to shareholders in computing its income subject to tax at the
regular corporate rates. The Company also could be disqualified from treatment
as a REIT for the four taxable years following the year during which
qualification was lost. Cash available for distribution to the Company's
shareholders would be significantly reduced for each year in which the Company
does not qualify as a REIT. Although the Company currently intends to continue
to qualify as a REIT, it is possible that future economic, market, legal, tax or
other considerations may cause the Company, without the consent of the
shareholders, to revoke the REIT election or to otherwise take action that would
result in disqualification.
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DESCRIPTION OF CAPITAL SHARES
The description of the Company's Capital Shares set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Company's Declaration of Trust and By-laws, copies of which are incorporated by
reference as exhibits to the Registration Statement of which this Prospectus is
a part. See "Available Information" and "Incorporation of Certain Documents by
Reference."
AUTHORIZED CAPITAL
The Company has an aggregate of 40,000,000 authorized Common Shares,
40,000,000 Excess Shares and 10,000,000 undesignated Preferred Shares (2,000,000
of which have been designated Class A Senior Cumulative Convertible Preferred
Shares) available for issuance under its Declaration of Trust. Such shares
(other than reserved shares) may be issued from time to time by the Company in
the discretion of the Board of Trustees to raise additional capital, acquire
assets, including additional real properties, redeem or retire debt or for any
other business purpose. In addition, the undesignated Preferred Shares may be
issued in one or more additional classes with such designations, preferences and
relative, participating, optional or other special rights including, without
limitation, preferential dividend or voting rights, and rights upon liquidation,
as shall be fixed by the Board of Trustees. Also, the Board of Trustees is
authorized to classify and reclassify any unissued capital shares by setting or
changing, in any one or more respects, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such capital shares. Such authority
includes, without limitation, subject to the provisions of the Declaration of
Trust, authority to classify or reclassify any unissued capital shares into a
class or classes of preferred shares, preferences shares, special shares or
other shares, and to divide and reclassify shares of any class into one or more
series of such class. In certain circumstances, the issuance of Preferred
Shares, or the exercise by the Board of Trustees of such rights to classify or
reclassify shares, could have the effect of deterring individuals or entities
from making tender offers for the Common Shares or seeking to change incumbent
management.
As of the date of this Prospectus, the Company has also filed with the
Commission a Registration Statement (Registration No. 333-49351) pursuant to
which it may offer, from time to time, in one or more series (i) Common Shares,
(ii) Preferred Shares and (iii) debt securities (the "Debt Securities"), which
may be senior or subordinated debt securities, with an aggregate public offering
price of up to $250,000,000. The Common Shares, Preferred Shares and Debt
Securities may be offered, separately or together, in separate classes or
series, in amounts, at prices and on terms to be determined from time to time.
DESCRIPTION OF COMMON SHARES
Under the Declaration of Trust, the Company has authority to issue
40,000,000 Common Shares, par value $.0001 per share. Under the Maryland General
Corporation Law (the "MGCL"), shareholders generally are not responsible for a
corporation's debts or obligations.
As of the date of this Prospectus, the Company had outstanding 16,652,077
Common Shares and had reserved for possible issuance upon redemption of Units of
partnership interest in its operating partnerships an additional 4,949,848
Common Shares. All of the Common Shares and any Common Shares issued upon
redemption of Units are tradable without restriction under the Securities Act
(unless such shares are held by affiliates of the Company), either pursuant to
the Registration Statement of which this Prospectus is a part, pursuant to
registration rights granted by the Company or otherwise. See "Registration
Rights."
No prediction can be made as to the effect, if any, that future sales of
Common Shares, or the availability of shares for future sale, will have on the
market price prevailing from time to time. Sales of substantial amounts of
Common Shares (including shares issued upon the redemption of Units or the
exercise of options), or the perception that such sales could occur, could
adversely affect the prevailing market price of the shares.
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DESCRIPTION OF PREFERRED SHARES
Under the Declaration of Trust, the Company has authority to issue
10,000,000 Preferred Shares, 2,000,000 of which, designated as Class A Senior
Cumulative Convertible Preferred Shares (the "Convertible Preferred Shares"),
are outstanding as of the date of this Prospectus, as described below. Preferred
Shares may be issued from time to time, in one or more series, as authorized by
the Board of Trustees of the Company. Prior to the issuance of shares of each
series, the Board of Trustees is required by the MGCL and the Declaration of
Trust to fix for each series, subject to the provisions of the Declaration of
Trust regarding excess shares, $.0001 par value per share ("Excess Shares"), the
terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption, as are permitted by MGCL. The Convertible Preferred
Shares are, and any other class of Preferred Shares will, if issued, be fully
paid and nonassessable and the Convertible Preferred Shares are not, and any
other class of Preferred Shares will not, if issued, be subject to preemptive
rights. The Board of Trustees could authorize the issuance of Preferred Shares
with terms and conditions that could have the effect of discouraging a takeover
or other transaction that holders of Common Shares might believe to be in their
best interests or in which holders of some, or a majority, of the Common Shares
might receive a premium for their shares over the then market price of such
Common Shares.
TERMS OF CLASS A SENIOR CUMULATIVE CONVERTIBLE PREFERRED SHARES
In December 1996, the Company entered into an agreement with Five Arrow
Realty Securities L.L.C. ("Five Arrows") providing for the sale of up to
2,000,000 Convertible Preferred Shares. In three separate closings in 1997, the
Company sold all 2,000,000 Convertible Preferred Shares for an aggregate price
of $25 million. The Convertible Preferred Shares, which are convertible into
Common Shares on a one-for-one basis at $12.50 per share, subject to adjustment,
are entitled to quarterly distributions equal to the greater of $.295 per share
or the product of 1.05 and the per share quarterly distribution on Common
Shares. The Convertible Preferred Shares may be redeemed by the Company after
five years at a 6% premium over the liquidation preference of $12.50 per share
(plus accrued and unpaid dividends), with such premium declining to zero on or
after December 31, 2011. Each Convertible Preferred Share is entitled to one
vote and holders are entitled to vote on all matters submitted to a vote of
holders of outstanding Common Shares. In connection with such sale, the Company
has entered into certain related agreements with Five Arrows, providing, among
other things, for certain demand and piggyback registration rights with respect
to such shares and the right to designate a member or members of the Board of
Trustees of the Company. Five Arrows' designee, John D. McGurk, is currently
serving as a member of the Board of Trustees of the Company.
TERMS OF EXCHANGEABLE NOTES
In March 1997, the Company sold to an institutional investor in a private
placement 8% Exchangeable Redeemable Secured Notes (the "Exchangeable Notes") in
the aggregate principal amount of $25 million. The Exchangeable Notes are
exchangeable at $13.00 per share for the Company's Common Shares beginning in
the year 2000, subject to adjustment.
TRANSFER AGENT
The transfer agent and registrar for the Common Shares is ChaseMellon
Shareholder Services LLC.
DESCRIPTION OF UNITS
The material terms of the Units, including a summary of certain provisions
of LCIF's Partnership Agreement (the "Partnership Agreement"), are set forth
below. The following description of the terms and provisions of the Units and
certain other matters does not purport to be complete and is subject to and
qualified in its entirety by reference to applicable provisions of Delaware law
and the Partnership Agreement. For a comparison of the voting and other rights
of holders of Units and the Company's shareholders, see "Redemption of
Units -- Comparison of Ownership of Units and Common Shares."
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GENERAL
The Company is the sole stockholder of Lex GP-1, Inc., a Delaware
corporation which is the general partner of the Operating Partnership. As of the
date of this Prospectus, the Company is also the sole stockholder of Lex LP-1,
Inc. ("Lex LP-1"), a Delaware corporation which holds a 71.35% limited
partnership interest in the Operating Partnership. The Company indirectly holds
Units in the Operating Partnership through these entities.
Holders of Units hold limited partner interests in the Operating
Partnership, and all holders of Units are entitled to share in cash
distributions from, and in the profits and losses of, the Operating Partnership.
Each Unit may not receive distributions in the same amount as paid on each
Common Share.
Holders of Units have the rights to which limited partners are entitled
under the Partnership Agreement and the Delaware Revised Uniform Limited
Partnership Act (the "Act"). The Units have not been registered pursuant to the
federal or state securities laws and are not listed on any exchange or quoted on
any national market system.
PURPOSES, BUSINESS AND MANAGEMENT
The purpose of the Operating Partnership includes the conduct of any
business that may be conducted lawfully by a limited partnership formed under
the Act, except that the Partnership Agreement requires the business of the
Operating Partnership to be conducted in such a manner that will permit the
Company to continue to be classified as a REIT under Sections 856 through 860 of
the Code, unless the Company ceases to qualify as a REIT for reasons other than
the conduct of the business of the Operating Partnership. Subject to the
foregoing limitation, the Operating Partnership may enter into partnerships,
joint ventures or similar arrangements and may own interests in any other
entity.
The Company, as sole stockholder of the general partner of the Operating
Partnership, has the exclusive power and authority to conduct the business of
the Operating Partnership subject to the consent of the limited partners in
certain limited circumstances discussed below. No limited partner may take part
in the operation, management or control of the business of the Operating
Partnership by virtue of being a holder of Units.
ABILITY TO ENGAGE IN OTHER BUSINESSES; CONFLICTS OF INTEREST
The general partner may acquire assets directly and engage in activities
outside of the Operating Partnership, including activities in direct or indirect
competition with the Operating Partnership. Other persons (including officers,
directors, employees, agents and other affiliates of the Company) are not
prohibited under the Partnership Agreement from engaging in other business
activities and will not be required to present any business opportunities to the
Operating Partnership.
DISTRIBUTIONS; ALLOCATIONS OF INCOME AND LOSS
The Partnership Agreement provides for the distribution of Operating Cash
Flow, as determined in the manner provided in the Partnership Agreement, to the
Company and certain limited partners in proportion to their percentage interests
in the Operating Partnership. "Operating Cash Flow" means, for any period,
operating revenue from leases on real property investments, partnership
distributions with respect to partnerships in which the Operating Partnership
has interests and interest on uninvested funds and other cash investment
returns, less operating expenses, capital expenditures and regularly scheduled
principal and interest payments (exclusive of balloon payments due at maturity)
on outstanding mortgage and other indebtedness. Neither the Company nor the
limited partners are entitled to any preferential or disproportionate
distributions of Operating Cash Flow and in no event may a partner receive a
distribution of Operating Cash Flow with respect to a Unit if such partner is
entitled to receive a distribution of Operating Cash Flow with respect to a
Common Share for which such Unit has been redeemed or exchanged. The Partnership
Agreement generally provides for the allocation to the general partner and the
limited partners of items of Operating Partnership income and loss in accordance
with their representative percentage interests in the Operating Partnership.
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BORROWING BY THE PARTNERSHIP
Without the consent of holders of a majority of Units held by limited
partners admitted to the Operating Partnership upon the acquisition of their
interests in Properties in exchange for Units in consideration therefore (the
"Special Limited Partners"), the general partner is not authorized to cause the
Operating Partnership to borrow money and to issue and guarantee debt.
REIMBURSEMENT OF COMPANY; TRANSACTIONS WITH THE GENERAL PARTNER AND ITS
AFFILIATES
Neither Lex GP-1 nor the Company receives any compensation for Lex GP-1's
services as general partner of the Operating Partnership. Lex GP-1 and Lex LP-1,
however, as partners in the Operating Partnership, have the same right to
allocations and distributions as other partners of the Operating Partnership. In
addition, the Operating Partnership will reimburse Lex GP-1 and the Company for
all expenses incurred by them related to the operation of, or for the benefit
of, the Operating Partnership. In the event that certain expenses are incurred
for the benefit of the Operating Partnership and other entities (including the
Company), such expenses are allocated by the Company, as sole stockholder of the
general partner of the Operating Partnership, to the Operating Partnership and
such other entities in a manner as the Company, as sole stockholder of the
general partner of the Operating Partnership, in its sole and absolute
discretion deems fair and reasonable. The Operating Partnership will reimburse
the Company for all expenses incurred by it relating to any other offering of
additional Units or capital stock (in such case based on the percentage of the
net proceeds therefrom contributed to or otherwise made available to the
Operating Partnership). The Operating Partnership also will reimburse the
Company for all expenses it incurs in connection with the Registration Statement
of which this Prospectus is a part. The Company has guaranteed the obligations
of the Operating Partnership in connection with the redemption of the Units
pursuant to this Prospectus.
Except as expressly permitted by the Partnership Agreement, the Company and
its affiliates may not engage in any transactions with the Operating Partnership
except on terms that are fair and reasonable and no less favorable to the
Operating Partnership than would be obtained from an unaffiliated third party.
LIABILITY OF GENERAL PARTNER AND LIMITED PARTNERS
Lex GP-1, as the general partner of the Operating Partnership, is
ultimately liable for all general recourse obligations of the Operating
Partnership to the extent not paid by the Operating Partnership. Lex GP-1 is not
liable for the nonrecourse obligations of the Operating Partnership.
The limited partners of the Operating Partnership are not required to make
additional contributions to the Operating Partnership. Assuming that a limited
partner does not take part in the control of the business of the Operating
Partnership and otherwise acts in conformity with the provisions of the
Partnership Agreement, the liability of the limited partner for obligations of
the Operating Partnership under the Partnership Agreement and the Act is
limited, subject to certain limited exceptions, generally to the loss of the
limited partner's investment in the Operating Partnership represented by his or
her Units. The Operating Partnership will operate in a manner the general
partner deems reasonable, necessary and appropriate to preserve the limited
liability of the limited partners.
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The Partnership Agreement generally provides that Lex GP-1, as general
partner of the Operating Partnership (and the Company as the sole stockholder of
the general partner of the Operating Partnership) will incur no liability to the
Operating Partnership or any limited partner for losses sustained or liabilities
incurred as a result of errors in judgment or of any act or omission if the
Company carried out its duties in good faith. In addition, Lex GP-1 and the
Company are not responsible for any misconduct or negligence on the part of
their agents, provided Lex GP-1 and the Company appointed such agents in good
faith. Lex GP-1 and the Company may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants and
advisors, and any action it takes or omits to take in reliance upon the opinion
of such persons, as to matters that Lex GP-1 and the Company reasonably believe
to be
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within their professional or expert competence, shall be conclusively presumed
to have been done or omitted in good faith and in accordance with such opinion.
The Partnership Agreement also provides for indemnification of Lex GP-1 and
the Company, the directors and officers of Lex GP-1 and the Company, and such
other persons as Lex GP-1 and the Company may from time to time designate
against any judgments, penalties, fines, settlements and reasonable expenses
actually incurred by such person in connection with the proceeding unless it is
established that: (1) the act or omission of the indemnified person was material
to the matter giving rise to the proceeding and either was committed in bad
faith or was the result of active and deliberate dishonesty; (2) the indemnified
person actually received an improper personal benefit in money, property or
services; or (3) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
SALES OF ASSETS
Under the Partnership Agreement, Lex GP-1 generally has the exclusive
authority to determine whether, when and on what terms the assets of the
Operating Partnership will be sold. The Operating Partnership, however, is
prohibited under the Partnership Agreement and certain contractual agreements
from selling certain assets, except in certain limited circumstances. Lex GP-1
may not consent to a sale of all or substantially all of the assets of the
Operating Partnership and a merger of the Operating Partnership with another
entity requires the consent of holders of a majority of the outstanding Units
held by the Special Limited Partners.
REMOVAL OF THE GENERAL PARTNER; TRANSFER; TRANSFER OF THE GENERAL PARTNER'S
INTEREST
The Partnership Agreement provides that the limited partners may not remove
Lex GP-1 as general partner of the Operating Partnership. Lex GP-1 may not
transfer any of its interests as the general partner of the Operating
Partnership and the Company may not transfer any of its indirect interests as a
limited partner in the Operating Partnership except to each other or Lex LP-1
except in connection with a merger or sale of all or substantially all of its
assets. The Company also may not sell all or substantially all of its assets, or
enter into a merger, unless the sale or merger includes the sale of all or
substantially all of the assets of, or the merger of, the Operating Partnership
with partners of the Operating Partnership receiving substantially the same
consideration as holders of Common Shares.
RESTRICTIONS ON TRANSFER OF UNITS BY LIMITED PARTNERS
Unit holders now may transfer, subject to certain limitations, the economic
rights associated with their Units without the consent of the general partner,
thereby eliminating the ability of the general partner to block, except in very
limited circumstances, such assignments. However, a transferee will not be
admitted to the Operating Partnership as a substituted limited partner without
the consent of the general partner. In addition, Unit holders may dispose of
their Units by exercising their rights to have their Units redeemed for Common
Shares. See "Redemption of Units."
REDEMPTION OF UNITS
Subject to certain limitations and on certain specified dates, Unit holders
may require that the Operating Partnership redeem their Units, by providing the
Operating Partnership with a notice of redemption. The redeeming Unit holder
will receive Common Shares in accordance with the terms set forth in the
Partnership Agreement. See "Redemption of Units."
ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP INTERESTS
Lex GP-1 is authorized, in its sole and absolute discretion and without the
consent of the limited partners, to cause the Operating Partnership to issue
additional Units to itself, to the limited partners or to other persons for such
consideration and on such terms and conditions as Lex GP-1 deems appropriate. In
addition, Lex GP-1 may cause the Operating Partnership to issue additional
partnership interests in different series or
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classes, which may be senior to the Units. Subject to certain exceptions, no
additional Units may be issued to the Company, Lex GP-1 or Lex LP-1.
MEETINGS; VOTING
The Partnership Agreement provides that limited partners shall not take
part in the operation, management or control of the Operating Partnership's
business. The Partnership Agreement does not provide for annual meetings of the
limited partners, and the Operating Partnership does not anticipate calling such
meetings.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
The Partnership Agreement may be amended with the consent of Lex GP-1, Lex
LP-1 and the Special Limited Partners representing a majority of Units held by
such Special Limited Partners. Notwithstanding the foregoing, Lex GP-1 has the
power, without the consent of the limited partners, to amend the Partnership
Agreement in certain limited circumstances.
DISSOLUTION, WINDING UP AND TERMINATION
The Operating Partnership will continue until December 31, 2093, unless
sooner dissolved and terminated. The Operating Partnership will be dissolved
prior to the expiration of its term, and its affairs wound up upon the
occurrence of the earliest of: (1) the withdrawal of Lex GP-1 as general partner
without the permitted transfer of the Company's interest to a successor general
partner (except in certain limited circumstances); (2) the sale of all or
substantially all of the Operating Partnership's assets and properties; (3) the
entry of a decree of judicial dissolution of the Operating Partnership pursuant
to the provisions of the Act or the entry of a final order for relief in a
bankruptcy proceeding of the general partner; or (4) the entry of a final
judgment ruling that the general partner is bankrupt or insolvent. Upon
dissolution, Lex GP-1, as general partner, or any liquidator will proceed to
liquidate the assets of the Operating Partnership and apply the proceeds
therefrom in the order of priority set forth in the Partnership Agreement.
REGISTRATION RIGHTS
The Company has filed the Registration Statement of which this Prospectus
is a part pursuant to its obligations in conjunction with certain agreements
entered into in connection with the acquisition of certain properties. Under
these agreements, executed in conjunction with the parties listed therein, the
Company is obligated to use its reasonable efforts to keep the Registration
Statement continuously effective for a period expiring on the date on which all
of the Common Shares covered by these agreements have been sold pursuant to the
Registration Statement or Rule 144(k) of the Securities Act. Any shares that
have been sold pursuant to such agreements, or have been otherwise transferred
and new certificates for them have been issued without legal restriction on
further transfer of such shares, will no longer be entitled to the benefits of
those agreements.
The Company has no obligation under these agreements to retain any
underwriter to effect the sale of the shares covered thereby and the
Registration Statement shall not be available for use for an underwritten public
offering of such shares.
Pursuant to these agreements, the Company agreed to pay all expenses of
effecting the registration of the Redemption Shares (other than underwriting
discounts and commissions, fees and disbursements of counsel, and transfer
taxes, if any) pursuant to the Registration Statement.
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REDEMPTION OF UNITS
GENERAL
Each Unit holder may, subject to certain limitations, require that the
Operating Partnership redeem his or her Units, by delivering a notice to the
Operating Partnership. The Company has provided a guaranty of the Operating
Partnership's obligations. Upon redemption, such Unit holder will receive one
Common Share (subject to certain anti-dilution adjustments) in exchange for each
Unit held by such holder.
The Operating Partnership and the Company will satisfy any redemption right
exercised by a Unit holder through the Company's issuance of the Redemption
Shares pursuant to this Prospectus, whereupon the Company will acquire the Units
being redeemed and will become the owner of the Units. Such an acquisition of
Units by the Company will be treated as a sale of the Units by the redeeming
Unit holders to the Company for federal income tax purposes. See "-- Tax
Treatment of Redemption of Units" below. Upon redemption, such Unit holder's
right to receive distributions from the Operating Partnership with respect to
the Units redeemed will cease. The Unit holder will have rights to dividend
distributions as a shareholder of the Company from the time of its acquisition
of the Redemption Shares.
A Unit holder must notify Lex GP-1 and the Company of his or her desire to
require the Operating Partnership to redeem Units by sending a notice in the
form attached as an exhibit to the Partnership Agreement, a copy of which is
available from the Company. A Unit holder must request the redemption of all
Units held by such holder. No redemption can occur if the delivery of Redemption
Shares would be prohibited under the provisions of the Declaration of Trust
designed to protect the Company's qualification as a REIT.
TAX TREATMENT OF REDEMPTION OF UNITS
The following discussion summarizes certain federal income tax
considerations that may be relevant to a limited partner who exercises his right
to redeem a Unit.
The Partnership Agreement provides that the redemption of Units will be
treated by the Company, the Operating Partnership and the redeeming Unit holder
as a sale of the Units by such Unit holder to the Company at the time of the
redemption. Such sale will be fully taxable to the redeeming Unit holder.
The determination of gain or loss from the sale or other disposition will
be based on the difference between the Unit holder's amount realized for tax
purposes and his tax basis in such Unit. The amount realized will be measured by
the fair market value of property received (e.g., Redemption Shares) plus the
portion of the Operating Partnership's liabilities allocable to the Unit sold.
In general, a Unit holder's tax basis is based on the cost of the Unit, adjusted
for the holder's allocable share of Operating Partnership income, loss and
distributions, and can be determined by reference to the Operating Partnership's
Schedule K-1's. To the extent that the amount realized exceeds the Unit holder's
basis for the Unit disposed of, such Unit holder will recognize gain. It is
possible that the amount of gain recognized or even the tax liability resulting
from such gain could exceed the fair market value of the Redemption Shares
received upon such disposition. EACH UNIT HOLDER SHOULD CONSULT WITH ITS OWN TAX
ADVISOR FOR THE SPECIFIC TAX CONSEQUENCES RESULTING FROM A REDEMPTION OF ITS
UNITS.
Generally, any gain recognized upon a sale or other disposition of Units
will be treated as gain attributable to the sale or disposition of a capital
asset. To the extent, however, that the amount realized upon the sale of a Unit
attributable to a Unit holder's share of "unrealized receivables" of the
Operating Partnership (as defined in Section 751 of the Code) exceeds the basis
attributable to those assets, such excess will be treated as ordinary income.
Unrealized receivables include, to the extent not previously included in
Operating Partnership income, any rights to payment for services rendered or to
be rendered. Unrealized receivables also include amounts that would be subject
to recapture as ordinary income if the Operating Partnership had sold its assets
at their fair market value at the time of the transfer of a Unit.
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act") and as
described more fully below in "Federal Income Tax Considerations -- 1997 Act,"
for individuals, trusts and estates, the maximum rate of tax on the net capital
gain from a sale or exchange occurring after July 28, 1997 of a long-term
capital asset
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(i.e., a capital asset held for more than 18 months) has been reduced from 28%
to 20%, and the maximum rate for mid-term capital assets (i.e., capital assets
held for more than one year but not more than 18 months) remains at 28%. The
maximum rate for net capital gains attributable to the sale of depreciable real
property held for more than 18 months is 25% to the extent of the prior
depreciation deductions for "unrecaptured Section 1250 gain" (that is,
depreciation deductions not otherwise recaptured as ordinary income under the
existing depreciation recapture rules).
The 1997 Act provides the IRS with the authority to issue regulations that
could, among other things, apply these rates on a look-through basis in the case
of "pass-through" entities such as the Operating Partnership. The IRS has not
yet issued such regulations, and if it does not issue such regulations in the
future, the rate of tax that would apply to the disposition of a Unit by an
individual, trust or estate would be determined based upon the period of time
over which such individual, trust or estate held such Unit, (i.e., whether the
Unit is a long-term capital asset, a mid-term capital asset, or a short-term
capital asset). No assurances can be provided that the IRS will not issue
regulations that would provide that the rate of tax that would apply to the
disposition of a Unit by an individual, trust or estate would be determined
based upon the nature of the assets of the Operating Partnership and the periods
of time over which the Operating Partnership held such assets. Moreover, no
assurances can be provided that such regulations would not be applied
retroactively. If such regulations were to apply to the disposition of a Unit,
any gain on such disposition likely would be treated partly as gain from the
sale of a long-term capital asset, partly as gain from the sale of a mid-term
capital asset, partly as gain from the sale of a short-term capital asset and
partly as gain from the sale of depreciable real property.
There is a risk that a redemption by the Operating Partnership of Units
issued in exchange for a contribution of property to the Operating Partnership
may cause the original transfer of property to the Operating Partnership in
exchange for Units to be treated as a "disguised sale" of property. Section 707
of the Code and the Treasury Regulations thereunder (the "Disguised Sale
Regulations") generally provide that, unless one of the prescribed exceptions is
applicable, a partner's contribution of property to a partnership and a
simultaneous or subsequent transfer of money or other consideration (which may
include the assumption of or taking subject to a liability) from the partnership
to the partner will be presumed to be a sale, in whole or in part, of such
property by the partner to the partnership. Further, the Disguised Sale
Regulations provide generally that, in the absence of an applicable exception,
if money or other consideration is transferred by a partnership to a partner
within two years of the partner's contribution of property, the transactions are
presumed to be a sale of the contributed property unless the facts and
circumstances clearly establish that the transfers do not constitute a sale. The
Disguised Sale Regulations also provide that if two years have passed between
the transfer of money or other consideration and the contribution of property,
the transactions will be presumed not to be a sale unless the facts and
circumstances clearly establish that the transfers constitute a sale. EACH UNIT
HOLDER IS ADVISED TO CONSULT WITH ITS OWN TAX ADVISOR TO DETERMINE WHETHER A
REDEMPTION OF UNITS COULD BE SUBJECT TO THE DISGUISED SALE REGULATIONS.
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COMPARISON OF OWNERSHIP OF UNITS AND COMMON SHARES
The information below highlights a number of the significant differences
between the Operating Partnership and the Company relating to, among other
things, form of organization, permitted investments, policies and restrictions,
management structure, compensation and fees, investor rights and federal income
taxation, and compares certain legal rights associated with the ownership of
Units and Common Shares, respectively. These comparisons are intended to assist
Unit holders of the Operating Partnership in understanding how their investment
will be changed if their Units are redeemed for Common Shares. This discussion
is summary in nature and does not constitute a complete discussion of these
matters, and Unit holders should carefully review the balance of this Prospectus
and the Registration Statement of which this Prospectus is a part for additional
important information about the Company.
THE OPERATING PARTNERSHIP THE COMPANY
FORM OF ORGANIZATION AND ASSETS OWNED
The Operating Partnership is organized as a Delaware The Company is a Maryland statutory real estate
limited partnership. The Operating Partnership owns investment trust. The Company believes that it has
interests (directly through subsidiaries) in operated so as to qualify as a REIT under the Code,
Properties. See "The Company." commencing with its taxable year ended December 31,
1993, and intends to continue to so operate. The
Company's interest in the Operating Partnership gives
the Company an indirect investment in the properties
owned by the Operating Partnership. In addition, the
Company owns (either directly or through interests in
subsidiaries other than the Operating Partnership)
interests in other Properties.
LENGTH OF INVESTMENT
The Operating Partnership has a stated termination The Company has a perpetual term and intends to
date of December 31, 2093. continue its operations for an indefinite time
period.
PURPOSE AND PERMITTED INVESTMENTS
The Operating Partnership's purpose is to conduct any Under its Declaration of Trust, the Company may
business that may be lawfully conducted by a limited engage in any lawful activity permitted by the
partnership organized pursuant to the Act, provided General Corporation Law of the State of Maryland. The
that such business is to be conducted in a manner Company is now permitted by the Partnership Agreement
that permits the Company to be qualified as a REIT to engage in activities not related to the business
unless the Company ceases to qualify as REIT. The of the Operating Partnership, including activities in
Operating Partnership may not take, or refrain from direct or indirect competition with the Operating
taking, any action which, in the judgment of the Partnership, and may own assets other than its
general partner (which is wholly-owned by the interest in the Operating Partnership and such other
Company) (i) could adversely affect the ability of assets necessary to carry out its responsibilities
the Company to continue to qualify as a REIT, (ii) under the Partnership Agreement and its Declaration
could subject the general partner to any additional of Trust. In addition, the Company has no obligation
taxes under Section 857 or Section 4981 of the Code, to present opportunities to the Operating Partnership
or any other Section of the Code, or (iii) could and the Unit holders have no rights by virtue of the
violate any law or regulation of any governmental Partnership Agreement in any outside business
body (unless such action, or inaction, is ventures of the Company.
specifically consented to by the general partner).
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ADDITIONAL EQUITY
The Operating Partnership is authorized to issue The Board of Trustees may issue, in its discretion,
Units and other partnership interests (including additional equity securities consisting of Common
partnership interests of different series or classes Stock or Preferred Stock; provided, that the total
that may be senior to Units) as determined by the number of shares issued does not exceed the
general partner, in its sole discretion. authorized number of shares of capital stock set
forth in the Company's Declaration of Trust. The
proceeds of equity capital raised by the Company are
not required to be contributed to the Operating
Partnership.
BORROWING POLICIES
The Operating Partnership has no restrictions on The Company is not restricted under its governing
borrowings, and the general partner has full power instrument from incurring borrowings. The Company is
and authority to borrow money on behalf of the not required to incur its indebtedness through the
Operating Partnership. Operating Partnership.
OTHER INVESTMENT RESTRICTIONS
Other than restrictions precluding investments by the Neither the Company's Declaration of Trust nor its
Operating Partnership that would adversely affect the By-laws impose any restrictions upon the types of
qualification of the Company as a REIT, there are not investments made by the Company.
restrictions upon the Operating Partnership's
authority to enter into certain transactions,
including among others, making investments, lending
Operating Partnership funds, or reinvesting the
Operating Partnership's cash flow and net sale or
refinancing proceeds.
MANAGEMENT CONTROL
All management powers over the business and affairs The Board of Trustees has exclusive control over the
of the Operating Partnership are vested in the Company's business and affairs subject only to the
general partner of the Operating Partnership, and no restrictions in the Declaration of Trust and the
limited partner of the Operating Partnership has any By-laws. The Board of Trustees consists of seven
right to participate in or exercise control or trustees, which number may be increased or decreased
management power over the business and affairs of the by vote of at least a majority of the entire Board of
Operating Partnership except (1) the general partner Trustees pursuant to the By-laws of the Trust, but
of the Operating Partnership may not dispose of all may never be fewer than the minimum permitted by the
or substantially all of the Operating Partnership's General Corporation Law of the State of Maryland. At
assets without the consent of the holders of each annual meeting of the shareholders, the
two-thirds of the outstanding Units, and (2) there successors of the class of trustees whose terms
are certain limitations on the ability of the general expire at that meeting will be elected. The policies
partner of the Operating Partnership to cause or adopted by the Board of Trustees may be altered or
permit the Operating Partnership to dissolve. See eliminated without a vote of the shareholders.
"-- Vote Required to Dissolve the Operating Accordingly, except for their vote in the elections
Partnership or the Company" below. The general of trustees, shareholders have no control over the
partner may not be removed by the limited partners of ordinary business policies of the Company.
the Operating Partnership with or without cause.
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FIDUCIARY DUTIES
Under Delaware law, the general partner of the Under Maryland law, the trustees must perform their
Operating Partnership is accountable to the Operating duties in good faith, in a manner that they
Partnership as a fiduciary and, consequently, is reasonably believe to be in the best interests of the
required to exercise good faith and integrity in all Company and with the care of an ordinarily prudent
of its dealings with respect to partnership affairs. person in a like position. Trustees of the Company
However, under the Partnership Agreement, the general who act in such a manner generally will not be liable
partner is under no obligation to take into account to the Company for monetary damages arising from
the tax consequences to any partner of any action their activities.
taken by it, and the general partner is not liable
for monetary damages for losses sustained or
liabilities incurred by partners as a result of
errors of judgment or of any act or omission,
provided that the general partner has acted in good
faith.
MANAGEMENT LIABILITY AND INDEMNIFICATION
As a matter of Delaware law, the general partner has The Company's Declaration of Trust provides that the
liability for the payment of the obligations and liability of the Company's trustees and officers to
debts of the Operating Partnership unless limitations the Company and its shareholders for money damages is
upon such liability are stated in the document or limited to the fullest extent permitted under
instrument evidencing the obligation. Under the Maryland law. The Declaration of Trust and state law
Partnership Agreement, the Operating Partnership has provide indemnification to trustees and officers to
agreed to indemnify the general partner and any the same extent that such trustees and officers,
director or officer of the general partner from and whether serving the Company, or, at its request, any
against all losses, claims, damages, liabilities other entity, to the full extent permitted under
(joint or several) expenses (including legal fees and Maryland law.
expenses), judgments, fines, settlements and other
amounts incurred in connection with any actions
relating to the operations of the Operating
Partnership in which the general partner or such
director or officer is involved, unless: (1) the act
was in bad faith and was material to the action; (2)
such party received an improper personal benefit; or
(3) in the case of any criminal proceeding, such
party had reasonable cause to believe the act was
unlawful. The reasonable expenses incurred by an
indemnitee may be reimbursed by the Operating
Partnership in advance of the final disposition of
the proceeding upon receipt by the Operating
Partnership of an affirmation by such indemnitee of
his, her or its good faith belief that the standard
of conduct necessary for indemnification has been met
and an undertaking by such indemnitee to repay the
amount if it is determined that such standard was not
met.
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ANTI-TAKEOVER PROVISIONS
Except in limited circumstances (see "Voting Rights" The Declaration of Trust and By-laws of the Company
below), the general partner of the Operating contain a number of provisions that may have the
Partnership has exclusive management power over the effect of delaying or discouraging an unsolicited
business and affairs of the Operating Partnership. proposal for the acquisition of the Company or the
The general partner may not be removed by the limited removal of incumbent management. These provisions
partners with or without cause. Under the Partnership include, among others: (1) authorized capital shares
Agreement, a limited partner may transfer his or her that may be issued as Preferred Shares in the
interest as a limited partner (subject to certain discretion of the Board of Trustees, with superior
limited exceptions set forth in the Partnership voting rights to the Common Shares; (2) a requirement
Agreement), without obtaining the approval of the that trustees may be removed only for cause and only
general partner except that the general partner may, by a vote of holders of at least 80% of the
in its sole discretion, prevent the admission to the outstanding Common Shares; and (3) provisions
Operating Partnership of substituted limited designed to avoid concentration of share ownership in
partners. a manner that would jeopardize the Company's status
as a REIT under the Code.
VOTING RIGHTS
All decisions relating to the operation and The Company is managed and controlled by a Board of
management of the Operating Partnership are made by Trustees presently consisting of seven members. Each
the general partner. See "Description of Units." As trustee is to be elected by the shareholders at
of the date of this Prospectus, the Company held, annual meetings of the Company. Maryland law requires
through various subsidiaries, approximately 71.35% of that certain major corporate transactions, including
the outstanding limited partner units in LCIF. As most amendments to the Declaration of Trust, may not
Units are redeemed by partners, the Company's be consummated without the approval of shareholders
percentage ownership of LCIF will increase. as set forth below. All Common Shares have one vote,
and the Declaration of Trust permits the Board of
Trustees to classify and issue Preferred Shares in
one or more series having voting power which may
differ from that of the Common Shares. See
"Description of Capital Shares."
The following is a comparison of the voting rights of the limited partners of the Operating Partnership
and
the shareholders of the Company as they relate to certain major transactions:
A. AMENDMENT OF THE PARTNERSHIP AGREEMENT OR THE DECLARATION OF TRUST.
The Partnership Agreement may be amended with the Amendments to the Company's Declaration of Trust must
consent of Lex GP-1, Lex LP-1 and the Special Limited be approved by the Board of Trustees and generally by
Partners representing a majority of Units held by at least two-thirds of the votes entitled to be cast
such Special Limited Partners. Certain amendments at a meeting of shareholders.
that affect the fundamental rights of a limited
partner must be approved by each affected limited
partner. In addition, the general partner may,
without the consent of the limited partners, amend
the Partnership Agreement as to certain ministerial
matters.
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B. VOTE REQUIRED TO DISSOLVE THE OPERATING PARTNERSHIP OR THE COMPANY.
The Operating Partnership may be dissolved upon the Under Maryland law, the Board of Trustees must obtain
occurrence of certain events, none of which require approval of holders of at least two-thirds of the
the consent of the limited partners. outstanding Common Shares in order to dissolve the
Company.
C. VOTE REQUIRED TO SELL ASSETS OR MERGE.
Under the Partnership Agreement, the sale, exchange, Under Maryland law, the sale of all or substantially
transfer or other disposition of all or substantially all of the assets of the Company or merger or
all of the Operating Partnership's assets or a merger consolidation of the Company requires the approval of
or consolidation of the Operating Partnership the Board of Trustees and holders of two-thirds of
requires the consent of holders of a majority of the the outstanding Common Shares. No approval of the
outstanding Units held by the Special Limited shareholders is required for the sale of less than
Partners. The general partner of the Operating all or substantially all of the Company's assets.
Partnership has the exclusive authority the sell
individual assets of the Operating Partnership.
COMPENSATION, FEES AND DISTRIBUTIONS
The general partner does not receive any compensation The non-employee trustees and officers of the Company
for its services as general partner of the Operating receive compensation for their services.
Partnership. As a partner in the Operating
Partnership, however, the general partner has the
same right to allocations and distributions as other
partners of the Operating Partnership. In addition,
the Operating Partnership will reimburse the general
partner (and the Company) for all expenses incurred
relating to the ongoing operation of the Operating
Partnership and any other offering of additional
partnership interests in the Operating Partnership.
LIABILITY OF INVESTORS
Under the Partnership Agreement and applicable state Under Maryland law, shareholders are not personally
law, the liability of the limited partners for the liable for the debts or obligations of the Company.
Operating Partnership's debts and obligations is
generally limited to the amount of their investment
in the Operating Partnership.
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NATURE OF INVESTMENT
The Units constitute equity interests entitling each Common Shares constitute equity interests in the
limited partner to his pro rata share of cash Company. The Company is entitled to receive its pro
distributions made to the limited partners of the rata share of distributions made by the Operating
Operating Partnership. The Operating Partnership Partnership with respect to the Units, and the
generally intends to retain and reinvest proceeds of distributions made by the other direct subsidiaries
the sale of property or excess refinancing proceeds of the Company. Each shareholder will be entitled to
in its business. his pro rata share of any dividends or distributions
paid with respect to the Common Shares. The dividends
payable to the shareholders are not fixed in amount
and are only paid if, when and as declared by the
Board of Trustees. In order to continue to qualify as
a REIT, the Company generally must distribute at
least 95% of its net taxable income (excluding
capital gains), and any taxable income (including
capital gains) not distributed will be subject to
corporate income tax.
POTENTIAL DILUTION OF RIGHTS
The general partner of the Operating Partnership is The Board of Trustees may issue, in its discretion,
authorized, in its sole discretion and without additional shares, and has the authority to issue
limited partner approval, to cause the Operating from authorized capital a variety of other equity
Partnership to issue additional limited partnership securities of the Company with such powers,
interests and other equity securities for any preferences and rights as the Board of Trustees may
partnership purpose at any time to the limited designate at the time. The issuance of additional
partners or to other persons (including the general shares of either Common Shares or other similar
partner on terms established by the general partner). equity securities may result in the dilution of the
interests of the shareholders.
LIQUIDITY
Limited partners may generally transfer their Units The Redemption Shares will be freely transferable as
without the general partner's consent, except that registered securities under the Securities Act. The
the general partner may, in its sole discretion, Common Shares are listed on the NYSE. The breadth and
prevent the admission to the Operating Partnership of strength of this secondary market will depend, among
substituted limited partners. Each limited partner other things, upon the number of shares outstanding,
has the right to tender his or her Units for the Company's financial results and prospects, the
redemption by the Operating Partnership. See general interest in the Company's and other real
"General" above. estate investments, and the Company's dividend yield
compared to that of other debt and equity securities.
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FEDERAL INCOME TAXATION
The Operating Partnership is not subject to federal The Company has elected to be taxed as a REIT. So long
income taxes. Instead, each holder of Units includes as it qualifies as a REIT, the Company will be
its allocable share of the Operating Partnership's permitted to deduct distributions paid to its
taxable income or loss in determining its individual shareholders, which effectively will reduce the
federal income tax liability. The maximum federal "double taxation" that typically results when a
income tax rate for individuals under current law is corporation earns income and distributes that income
39.6%. to its shareholders in the form of dividends. A
qualified REIT, however, is subject to federal income
A Unit holder's share of income and loss generated by tax on income that is not distributed and also may be
the Operating Partnership generally is subject to the subject to federal income and excise taxes in certain
"passive activity" limitations. Under the "passive circumstances. The maximum federal income tax rate for
activity" rules, income and loss from the Operating corporations under current law is 35%.
Partnership that is considered "passive income"
generally can be offset against income and loss from Dividends paid by the Company will be treated as
other investments that constitute "passive "portfolio" income and cannot be offset with losses
activities." Cash distributions from the Operating from "passive activities." The maximum federal income
Partnership are not taxable to a holder of a Unit tax rate for individuals under current law is 39.6%.
except to the extent such distributions exceed such Distributions made by the Company to its taxable
holder's basis in its interest in the Operating domestic shareholders out of current or accumulated
Partnership (which will include such holder's earnings and profits will be taken into account by
allocable share of the Operating Partnership's taxable them as ordinary income. Distributions that are
income and nonrecourse debt). designated as capital gain dividends generally will be
taxed as long-term capital gain, subject to certain
Each year, holders of Units will receive a Schedule limitations. Distributions in excess of current or
K-1 containing detailed tax information for inclusion accumulated earnings and profits will be treated as a
in preparing their federal income tax returns. non-taxable return of basis to the extent of a
shareholder's adjusted basis in its Common Shares,
Holders of Units are required, in some cases, to file with the excess taxed as capital gain.
state income tax returns and/or pay state income taxes
in the states in which the Operating Partnership owns Each year, shareholders will receive an Internal
property, even if they are not residents of those Revenue Service Form 1099 used by corporations to
states. report dividends paid to their shareholders.
Shareholders who are individuals generally will not be
required to file state income tax returns and/or pay
state income taxes outside of their state of residence
with respect to the Company's operations and
distributions. The Company may be required to pay
state income taxes in certain states.
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USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the
Redemption Shares.
DISTRIBUTIONS ON OP UNITS
The Company's operating partnership structure enables the Company to
acquire property by issuing to a seller, as a form of consideration, OP Units.
All OP Units issued as of this date are redeemable at certain times into Common
Shares on a one-for-one basis and certain of such OP Units require the Company
to pay distributions to the holders thereof (although certain OP Units currently
outstanding do not require current distributions). As a result, the Company's
cash available for distribution to holders of Common Shares and Convertible
Preferred Shares is reduced by the amount of the distributions required by the
terms of such OP Units, and the number of Common Shares that will be outstanding
in the future is expected to increase, from time to time, as such OP Units and
Convertible Preferred Shares are redeemed for or converted into Common Shares.
The general partner of the Operating Partnership has the right to redeem the OP
Units held by all, but not less than all, of the OP Unit holders under certain
circumstances, including but not limited to a merger, sale of assets or other
transaction by the Company or such partnerships which would result in a change
of beneficial ownership in the Company or such partnership by 50% or more.
As of the date of this Prospectus, the Company has issued a total of
4,949,848 OP Units (including the Units) of which, in addition to the Units,
169,109 have become redeemable for Common Shares. The average annualized
distribution per OP Unit is $1.05. Of the total OP Units, 919,633 OP Units are
owned by affiliates of the Company including two members of the Company's Board
of Trustees.
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THE COMPANY
The Company is a self-managed and self-administered REIT that acquires,
owns and manages a geographically diversified portfolio of net leased office,
industrial and retail properties. As of the date of this Prospectus, the Company
owns controlling interests in 59 properties and minority interests in two
additional properties (the "Properties," and each a "Property"). Substantially
all of the Company's leases are "net leases," under which the tenant is
responsible for all costs of real estate taxes, insurance, ordinary maintenance
and structural repairs. The Properties are located in 28 states, have
approximately 8.8 million net rentable square feet and, under the terms of their
applicable leases, currently generate approximately $62.9 million in annual net
effective rent. The Company's portfolio is currently 98% occupied. The Company's
tenants, many of which are nationally recognized, include Bank One, Arizona,
N.A., Circuit City Stores, Inc., FirstPlus Financial Group, Inc., The Hartford
Fire Insurance Company, Honeywell, Inc., Lockheed Martin Corporation, Northwest
Pipeline Corporation, Ryder Integrated Logistics and Wal-Mart Stores, Inc.
Management believes that owning, acquiring and managing net leased properties
results in lower operating expenses for the Company than the Company otherwise
would incur through investments in properties which were not net leased.
The Company's senior executive officers average 17 years of experience in
the real estate investment and net lease business. Management has diversified
the Company's portfolio by geographical location, tenant industry segment, lease
term expiration and property type with the intention of providing steady
internal growth with low volatility. Management believes that such
diversification should help insulate the Company from regional recession,
industry specific downturns and price fluctuations by property type. Since
January 1, 1998, the Company has also enhanced the value of its portfolio by
acquiring $91.2 million of properties, aggregating approximately 1.1 million net
rentable square feet and accounting for approximately $8.8 million in annual net
effective rent. In addition, the Company has entered into agreements to purchase
an additional three properties for an aggregate consideration of approximately
$64.8 million, all of which are build-to-suit properties currently under
construction. As part of management's ongoing efforts, the Company expects to
continue to effect portfolio and individual property acquisitions and
dispositions, expand existing Properties, attract investment grade quality
tenants, extend lease maturities in advance of expiration and refinance
outstanding indebtedness when advisable.
THE NET LEASE REAL ESTATE BUSINESS
Under a typical net lease, the tenant is responsible for all costs of real
estate taxes, insurance and ordinary maintenance. Investments in net leased
properties can offer more predictable returns than investments in properties
which are not net leased, as rising costs of operating net leased properties are
typically absorbed by tenants. Investors in net leased properties have,
historically, included limited partnerships, REITs, pension funds and finance
subsidiaries of large corporations.
Net leased properties are often acquired in sale/leaseback transactions. In
a typical sale/leaseback transaction, the purchaser/landlord (such as the
Company) acquires a property from an operating company and simultaneously leases
the property back to the operating company under a long-term lease. A
sale/leaseback transaction is structured to provide the purchaser/landlord with
a consistent stream of income which typically increases periodically pursuant to
the lease. Sale/leaseback transactions are advantageous to the seller/tenant as
they (i) enable the seller/tenant to realize the value of its owned real estate
while continuing occupancy on a long-term basis; (ii) may provide the
seller/tenant with off-balance sheet financing; (iii) may provide the
seller/tenant with increased earnings by replacing generally higher depreciation
and mortgage interest costs with rental costs; and (iv) may reduce the
seller's/tenant's debt-to-equity ratio.
INTERNAL GROWTH; EFFECTIVELY MANAGING ASSETS
Leasing Strategies. The Company seeks to extend its leases in advance of
their expiration in order to maintain a balanced lease rollover schedule.
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Revenue Enhancing Property Expansions. The Company undertakes expansions
of its Properties based on tenant requirements. The Company believes that
selective property expansions can provide it with attractive rates of return and
actively seeks such opportunities.
Opportunistic Property Sales. The Company may determine to sell a
Property, either to the Property's existing tenant or to a third party, if it
deems such disposition to be in the Company's best interest. Since 1993, the
Company has sold two properties. The restrictions applicable to REITs may limit
the Company's ability to dispose of a property. See "Federal Income Tax
Considerations of Holding Shares in a REIT -- Taxation of the Company -- Income
Tests."
Tenant Relations. The Company maintains close contact with its tenants in
order to understand their future real estate needs. The Company monitors the
financial, property maintenance and other lease obligations of its tenants
through a variety of means, including periodic reviews of financial statements
and physical inspections of the Properties. The Company performs annual
inspections of those Properties where it has an ongoing obligation with respect
to the maintenance of the Property and for all Properties during each of the
last three years immediately prior to lease expiration. Biannual physical
inspections are undertaken for all other Properties.
ACQUISITION STRATEGIES
The Company seeks to enhance its net lease property portfolio through
acquisitions of general purpose, efficient, well-located buildings in growing
markets. Management has diversified the Company's portfolio by geographical
location, tenant industry segment, lease term expiration and property type with
the intention of providing steady internal growth with low volatility.
Management believes that such diversification should help insulate the Company
from regional recession, industry specific downturns and price fluctuations by
property type. Prior to effecting any acquisitions, management analyzes the (i)
property's design, construction quality, efficiency, functionality and location
with respect to the immediate submarket, city and region; (ii) lease integrity
with respect to term, rental rate increases, corporate guarantees and property
maintenance provisions; (iii) present and anticipated conditions in the local
real estate market; and (iv) prospects for selling or re-leasing the property on
favorable terms in the event of a vacancy. Management also evaluates each
potential tenant's financial strength, growth prospects, competitive position
within its respective industry and a property's strategic location and function
within a tenant's operations or distribution systems. Management believes that
its comprehensive underwriting process is critical to the assessment of
long-term profitability of any investment by the Company.
Operating Partnership Structure. The operating partnership structure
enables the Company to acquire property by issuing to a seller, as a form of
consideration, OP Units. Management believes that this structure facilitates the
Company's ability to raise capital and to acquire portfolio and individual
properties by enabling the Company to structure transactions which may defer tax
gains for a contributor of property while preserving the Company's available
cash for other purposes, including the payment of distributions. The Company has
used OP Units as a form of consideration in connection with the acquisition of
18 of its Properties.
Acquisitions of Portfolio and Individual Net Lease Properties. The Company
seeks to acquire portfolio and individual properties that are leased to
creditworthy tenants under long-term net leases. Management believes there is
significantly less competition for the acquisition of property portfolios
containing a number of net leased properties located in more than one geographic
region than there is for single properties. Management also believes that the
Company's geographical diversification, acquisition experience and access to
capital will allow it to compete effectively for the acquisition of such net
leased properties. In December 1997, the Company acquired the CRIT Properties
portfolio totaling 560,486 net rentable square feet in Tennessee, Alabama and
Virginia.
Sale/Leaseback Transactions. The Company seeks to acquire portfolio and
individual net lease properties in sale/leaseback transactions. The Company
selectively pursues sale/leaseback transactions with creditworthy
sellers/tenants with respect to properties that are integral to the
sellers'/tenants' ongoing operations. See "-- The Net Lease Real Estate
Business."
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Build-to-suit Properties. The Company may also acquire, after construction
has been completed, build-to-suit properties that are entirely pre-leased to
their intended corporate users before construction. As a result, the Company
does not assume the risk associated with the construction phase of a project.
The Company has entered into agreements to acquire three build-to-suit
properties.
Acquisitions from Affiliated Net Lease Partnerships. Management believes
that net lease partnerships affiliated with the Company provide it with an
opportunity to acquire properties with which management is already familiar. The
Company has acquired ten Properties and minority interests in two additional
properties from its affiliated limited partnerships. On January 29, 1998, the
Company completed the acquisition of partnership interests in two limited
partnerships, both of which were affiliates of E. Robert Roskind, Chairman of
the Board of Trustees of the Company, in exchange for the Company's operating
partnership units. The assets of the partnership acquired included approximately
$24 million in cash. The units are redeemable for an equal number of Common
Shares and are entitled to receive distributions at the same rate as the Common
Shares.
REIT QUALIFICATION REQUIREMENTS
The Company elected to be taxed as a REIT under Sections 856 through 860 of
the Code, effective for its taxable year ended December 31, 1993 and such
election has not been revoked or terminated. The Company believes that it has
been organized and has operated in a manner so as to qualify as a REIT for each
of its taxable years ending prior to the date hereof and the Company's current
and proposed method of operation should enable it to continue to meet the
requirements for qualification and taxation as a REIT.
REORGANIZATION OF THE COMPANY AS A MARYLAND REAL ESTATE INVESTMENT TRUST
In December 1997, the Company reorganized as a Maryland business trust,
resulting in franchise tax savings for the Company in certain jurisdictions in
which the Company owns properties. The reorganization was effected by merging
the Company's predecessor, a Maryland corporation, with and into the Company. In
the merger, each outstanding share of Common Stock and convertible preferred
stock of the Company's predecessor was converted into one Common Share or
Preferred Share, as the case may be, of the Company. Each Common or Preferred
Share entitles the holder thereof to the same voting rights to which such
shareholder was entitled prior to the merger.
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MANAGEMENT
The trustees and senior executive officers of the Company are as follows:
NAME AGE OFFICE
- ---- --- ------
E. Robert Roskind......................... 52 Chairman of the Board of Trustees and Co-
Chief Executive Officer(1)
Richard J. Rouse.......................... 51 Vice Chairman of the Board of Trustees and
Co-Chief Executive Officer
T. Wilson Eglin........................... 33 President, Chief Operating Officer and
Trustee
Patrick Carroll........................... 34 Chief Financial Officer
Antonia G. Trigiani....................... 36 Chief Administrative Officer and Treasurer
Stephen C. Hagen.......................... 54 Senior Vice President
Paul R. Wood.............................. 37 Vice President, Chief Accounting Officer
and Secretary
Janet M. Kaz.............................. 34 Vice President
Philip L. Kianka.......................... 41 Vice President
Carl D. Glickman.......................... 71 Trustee(1)(2)
Kevin W. Lynch............................ 44 Trustee(2)(3)
John D. McGurk............................ 53 Trustee(1)(2)(3)
Seth M. Zachary........................... 44 Trustee(2)(3)
- ---------------
(1) Member, Executive Committee of the Board of Trustees
(2) Member, Audit Committee of the Board of Trustees.
(3) Member, Compensation Committee of the Board of Trustees.
E. ROBERT ROSKIND has served as the Chairman of the Board of Trustees and
Co-Chief Executive Officer of the Company since October 1993. He founded The LCP
Group, L.P. ("LCP") in 1973 and has been its Chairman since 1976. Prior to
founding LCP, Mr. Roskind headed the real estate net lease financing area of
Lehman Brothers Inc. He is also a general partner for a variety of entities
which serve as the general partner of various partnerships that hold net leased
real properties and other real estate or interests therein. Mr. Roskind is a
director of Berkshire Realty Company, Inc., Krupp Government Income Trust I and
Krupp Government Income Trust II.
RICHARD J. ROUSE became the Vice Chairman of the Board of Trustees in April
1996, has served as the Co-Chief Executive Officer and a trustee of the Company
since October 1993, and was the President of the Company from October 1993 until
April 1996. Mr. Rouse was also a managing director of LCP. He had been
associated with LCP since 1979 and had been engaged there in all aspects of net
lease finance, acquisition and syndication and corporate financing transactions.
T. WILSON EGLIN became the President of the Company in April 1996, has
served as Chief Operating Officer of the Company since October 1993, has been a
trustee of the Company since May 1994, and was the Executive Vice President of
the Company from October 1993 until April 1996. Prior to his association with
the Company, Mr. Eglin had been associated with LCP since 1987 and had been its
Vice President -- Acquisitions from 1990 to 1993. In connection with his
responsibilities with LCP, Mr. Eglin was an officer of affiliated companies that
own and manage over 400 net leased real properties and was involved in all
aspects of real estate acquisition and finance, principally in net leased
transactions.
PATRICK CARROLL became the Chief Financial Officer of the Company in May
1998. From 1993 to May 1998, Mr. Carroll was a Senior Manager in the real estate
unit of Coopers & Lybrand L.L.P., servicing both publicly and privately-held
real estate entities.
ANTONIA G. TRIGIANI has been the Chief Administrative Officer and Treasurer
of the Company since May 1998 and had served as the Chief Financial Officer and
Treasurer of the Company since October 1993. She had been associated with LCP
from 1989 until April 1996, serving as its Vice President -- Asset
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Management from 1990 until April 1996. Prior to joining LCP, Ms. Trigiani was
associated with HRE Properties, a REIT listed on the New York Stock Exchange,
and Merrill Lynch, Hubbard Inc., a real estate division of Merrill Lynch & Co.,
Inc.
STEPHEN C. HAGEN has served as Senior Vice President of the Company since
October 1996. From 1992 to 1994, Mr. Hagen was a principal of Pharus Realty
Investments, a money manager in real estate stocks, and served as Chief
Operating Officer of HRE Properties, a NYSE-listed REIT, from 1989 to 1992.
PAUL R. WOOD has served as Vice President, Chief Accounting Officer and
Secretary of the Company since October 1993. He had been associated with LCP
from 1988 to 1993 and from 1990 to 1993 had been responsible for all accounting
activities relating to the net leased properties managed by LCP and its
affiliates. Prior to joining LCP, Mr. Wood was, from 1987 to 1988, associated
with E.F. Hutton & Company Inc. as a senior accountant.
JANET M. KAZ has served as Vice President of the Company since May 1995,
and prior thereto served as Asset Manager of the Company since October 1993.
Prior to her association with the Company, Ms. Kaz had been a member of LCP's
property acquisition team from 1986 to 1990 and a member of LCP's asset
management team from 1991 to 1993. Ms. Kaz was involved in all aspects of real
estate acquisition, finance and management, principally in net leased
transactions.
PHILIP L. KIANKA joined the Company in 1997 as Vice President of Asset
Management. Prior to joining Lexington, from 1985 through 1997, Mr. Kianka
served as a Vice President and Senior Asset Manager at Merrill Lynch Hubbard,
Inc., a real estate division of Merrill Lynch & Co., Inc. Mr. Kianka was
involved with real estate acquisitions, development and asset management for a
national portfolio of diversified properties.
CARL D. GLICKMAN has served as a trustee and a member of the Audit
Committee of the Board of Trustees of the Company since May 1994 and as a member
of the Compensation Committee of the Board of Trustees until May 1998. He has
been President of the Glickman Organization since 1953. He is on the Board of
Directors of Alliance Tire & Rubber Co., Ltd., Bear, Stearns Companies, Inc. (an
affiliate of Bear, Stearns & Co. Inc.), Continental Health Affiliates, Inc.,
Franklin Corporation, Infu-Tech, Inc., Jerusalem Economic Corporation Ltd. and
OfficeMax Inc., as well as numerous private companies.
KEVIN W. LYNCH has served as a trustee of the Company since May 1996 and is
a founder and principal of The Townsend Group, an institutional real estate
consulting firm founded in 1983. Prior to forming The Townsend Group, Mr. Lynch
was a Vice President for Stonehenge Capital Corporation. Mr. Lynch has been
involved in the commercial real estate industry since 1974, and is a director of
First Industrial Realty Trust.
JOHN D. MCGURK became a member of the Board in January 1997 as the designee
of Five Arrows to the Board of Trustees. He is the founder and President of
Rothschild Realty, Inc., the advisor to Five Arrows Realty Securities L.L.C.
("Five Arrows"). Prior to starting Rothschild Realty, Inc. in 1981, Mr. McGurk
served as a Regional Vice President for The Prudential Insurance Company of
America where he oversaw its New York City real estate loan portfolio, equity
holdings, joint ventures and projects under development. Mr. McGurk is a member
of the Urban Land Institute, Pension Real Estate Association, Real Estate Board
of New York and the National Real Estate Association, and is the President of
the Trustee Committee of the Caedmon School.
SETH M. ZACHARY has served as a trustee and a member of the Audit Committee
and Compensation Committee of the Board of Trustees of the Company since
November 1993. Since 1987, he has been a partner in the law firm of Paul,
Hastings, Janofsky & Walker LLP, counsel to the Company.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During 1998, the Company extended loans to each of Richard J. Rouse, Vice
Chairman of the Board of Trustees, Co-Executive Chief Officer and a Trustee, and
T. Wilson Eglin, President, Chief Operating Officer and a Trustee, each in the
amount of $998,875.00, to fund the purchase by each of these individuals of
65,500 Common Shares. These loans bear interest at a rate of 7.6% per annum, are
secured by the Common Shares purchased by each of such individuals and are
scheduled to mature in 2003.
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FEDERAL INCOME TAX CONSIDERATIONS OF HOLDING SHARES IN A REIT
GENERAL
The following discussion summarizes the material federal income tax
considerations to a prospective holder of Common Shares. The following
discussion is for general information purposes only, is not exhaustive of all
possible tax considerations and is not intended to be and should not be
construed as tax advice. For example, this summary does not give a detailed
discussion of any state, local or foreign tax considerations. In addition, this
discussion is intended to address only those federal income tax considerations
that are generally applicable for all security holders in the Company. It does
not discuss all of the aspects of federal income taxation that may be relevant
to a prospective security holder in light of his or her particular circumstances
or to certain types of security holders who are subject to special treatment
under the federal income tax laws including, without limitation, insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States.
The information in this section is based on the Code (including the
provisions of the 1997 Act, several of which are described herein), current,
temporary and proposed Treasury Regulations, the legislative history of the
Code, current administrative interpretations and practices of the IRS (including
its practices and policies as endorsed in private letter rulings, which are not
binding on the IRS except with respect to the taxpayer that receives such a
ruling), and court decisions, all as of the date hereof. No assurance can be
given that future legislation, Treasury Regulations, administrative
interpretations and court decisions will not significantly change current law or
adversely affect existing interpretations of current law. Any such change could
apply retroactively to transactions preceding the date of the change. The
Company has not received any rulings from the IRS concerning the tax treatment
of the Company. Thus no assurance can be provided that the statements set forth
herein (which do not bind the IRS or the courts) will not be challenged by the
IRS or will be sustained by a court if so challenged.
EACH PROSPECTIVE PURCHASER OF THE SECURITIES IS ADVISED TO CONSULT WITH HIS
OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF
THE PURCHASE, OWNERSHIP AND SALE OF SECURITIES OF AN ENTITY ELECTING TO BE TAXED
AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL AND 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 elected to be taxed as a REIT under Sections 856
through 860 of the Code effective for its taxable year ended December 31, 1993.
The Company believes that it was organized, and has operated, in such a manner
so as to qualify for taxation as a REIT under the Code and intends to conduct
its operations so as to continue to qualify for taxation as a REIT. No
assurance, however, can be given that the Company has operated in a manner so as
to qualify or will be able to operate in such a manner so as to remain qualified
as a REIT. Qualification and taxation as a REIT depends upon the Company's
ability to meet on a continuing basis, through actual annual operating results,
the required distribution levels, diversity of share ownership and the various
qualification tests imposed under the Code discussed below, the results of which
will not be reviewed by Counsel. Given the highly complex nature of the rules
governing REITs, the ongoing importance of factual determinations, and the
possibility of future changes in circumstances of the Company, no assurance can
be given that the actual results of the Company's operations for any one taxable
year have satisfied or will continue to satisfy such requirements.
The following is a general summary of the Code provisions that govern the
federal income tax treatment of a REIT and its shareholders. These provisions of
the Code are highly technical and complex. This summary is qualified in its
entirety by the applicable Code provisions, Treasury Regulations and
administrative and judicial interpretations thereof, all of which are subject to
change prospectively or retroactively.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to shareholders. This treatment substantially
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eliminates the "double taxation" (at the corporate and shareholder levels) that
generally results from investment in a corporation. However, the Company will be
subject to federal income tax as follows: first, the Company will be taxed at
regular corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property acquired
on foreclosure or otherwise on default on a loan secured by such real property
or a lease of such property) which is held primarily for sale to customers in
the ordinary course of business or (ii) other nonqualifying income from
foreclosure property, it will be subject to tax at the highest corporate rate on
such income. Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business other than
foreclosure property), such income will be subject to a 100% tax. Fifth, if the
Company should fail to satisfy the 75% gross income test or the 95% gross income
test (as discussed below), but nonetheless has maintained its qualification as a
REIT because certain other requirements have been met, it will be subject to a
100% tax on an amount equal to (a) the gross income attributable to the greater
of the amount by which the Company fails the 75% or 95% test multiplied by (b) a
fraction intended to reflect the Company's profitability. Sixth, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
Company acquires any asset from a C corporation (i.e., 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, then, to
the extent of such property's "built-in gain" (the excess of the fair market
value of such property at the time of the acquisition by the Company over the
adjusted basis of such property at such time), such gain will be subject to tax
at the highest regular corporate rate applicable (as provided in Internal
Revenue Service regulations that have not yet been promulgated).
Requirements for Qualification. A REIT is a corporation, trust or
association (i) which is managed by one or more trustees or directors, (ii) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (iii) which would be taxable
as a domestic corporation, but for Sections 856 through 859 of the Code, (iv)
which is neither a financial institution nor an insurance company subject to
certain provisions of the Code, (v) the beneficial ownership of which is held by
100 or more persons, (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities), and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) through (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
The Company expects to meet the ownership test immediately after the transaction
contemplated herein. The Company may redeem, at its option, a sufficient number
of shares or restrict the transfer thereof to bring or maintain the ownership of
the shares in conformity with the requirements of the Code. In addition, the
Company's Declaration of Trust includes restrictions regarding the transfer of
its stock that are intended to assist the Company in continuing to satisfy
requirements (v) and (vi). Moreover, for the Company's taxable years commencing
on or after January 1, 1998, if the Company complies with regulatory rules
pursuant to which it is required to send annual letters to holders of its
capital stock requesting information regarding the actual ownership of its
capital stock, and the Company does not know, or exercising reasonable diligence
would not have known, whether it failed to meet requirement (vi) above, the
Company will be treated as having met the requirement. See "Description of
Common Shares" and "Description of Preferred Shares."
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of each of the assets of the partnership and will be deemed to be entitled to
the income of the partnership attributable to such share. In addition, the
character of the assets and
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items of gross income of the partnership will 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 assets (as discussed below). Thus, the Company's
proportionate share of the assets, liabilities, and items of gross income of the
partnerships in which the Company owns an interest are treated as assets,
liabilities and items of the Company for purposes of applying the requirements
described herein.
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy certain gross income requirements. First, at least 75% of
the Company's 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
qualified temporary investments. Second, at least 95% of the Company's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from such real property investments, dividends, interest
and gain from the sale or disposition of stock or securities. For its tax years
ending on or before December 31, 1997, the Company was subject to a third gross
income test which required that short-term 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 have
represented less than 30% of the Company's gross income (including gross income
from prohibited transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT 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 receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or an owner of 10% or more of the REIT, actually 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, for rents received to qualify as
"rents from real property," the Company generally must not operate or manage the
property (subject to a de minimis exception applicable to the Company's tax
years commencing on and after January 1, 1998 as described below) or furnish or
render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no revenue. The REIT may,
however, directly perform certain services that are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant" of the property ("Permissible
Services").
For the Company's taxable years commencing on or after January 1, 1998,
rents received generally will qualify as rents from real property
notwithstanding the fact that the Company provides services that are not
Permissible Services so long as the amount received for such services meets a de
minimis standard. The amount received for "impermissible services" with respect
to a property (or, if services are available only to certain tenants, possibly
with respect to such tenants) cannot exceed one percent of all amounts received,
directly or indirectly, by the Company with respect to such property (or, if
services are available only to certain tenants, possibly with respect to such
tenants). The amount that the Company will be deemed to have received for
performing "impermissible services" will be the greater of the actual amounts so
received or 150% of the direct cost to the Company of providing those services.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if such failure was due to reasonable cause and not willful neglect, it
disclosed the nature and amounts of its items of gross income in a schedule
attached to its return, and any incorrect information on the schedule was not
due to fraud with intent to evade tax. A 100% penalty tax would be imposed on
the amount by which the Company failed the 75% or 95% test (whichever amount is
greater), less an amount which generally reflects expenses attributable to
earning the nonqualified income. No analogous relief is available for failure to
satisfy the 30% income test.
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Subject to certain safe harbor exceptions, any gain realized by the Company
on the sale of any property held as inventory or other property held primarily
for sale to customers in the ordinary course of business will be treated as
income from a prohibited transaction that is subject to a 100% penalty tax. Such
prohibited transaction income may also have an adverse effect upon the Company's
ability to satisfy the income tests for qualification as a REIT. 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 with respect to the particular transaction.
Asset Tests. The Company must also satisfy three tests relating to the
nature of its assets every quarter. 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" (as defined in
the Code) of the Company and (ii) stock or debt instruments held for not more
than one year purchased with the proceeds of an offering of equity securities or
a long-term (at least five years) debt offering of the Company, cash, cash items
and government securities). Second, not more than 25% of the Company's total
assets may be represented by securities other than those 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. The Company expects that substantially
all of its assets will consist of (i) real properties, (ii) stock or debt
investments that earn qualified temporary investment income, (iii) other
qualified real estate assets, and (iv) cash, cash items and government
securities. The Company may also invest in securities of other entities,
provided that such investments will not prevent the Company from satisfying the
asset and income tests for REIT qualification set forth above.
If the Company inadvertently fails one or more of the asset tests at the
end of a calendar quarter, such a failure would not cause it to lose its REIT
status, provided that (i) it satisfied all of the asset tests at the close of a
preceding calendar quarter, and (ii) the discrepancy between the values of the
Company's assets and the standards imposed by the asset test either did not
exist immediately after the acquisition of any particular acquisition or was not
wholly partly caused by such an acquisition. If the condition described in
clause (ii) of the preceding sentence were not satisfied, the Company could
still avoid disqualification by eliminating any discrepancy within 30 days after
the close of the calendar quarter in which it arose.
Annual Distribution Requirement. With respect to each taxable year, the
Company must distribute to its shareholders dividends (other than capital gain
dividends) in an amount at least equal to the sum of (a) 95% of its "REIT
Taxable income" (determined without regard to the deduction for dividends paid
and by excluding any net capital gain), and (b) 95% of any after-tax net income
from foreclosure property, minus the sum of certain items of "excess non-cash
income." REIT Taxable Income is generally computed in the same manner as taxable
income of ordinary corporations, with several adjustments, such as a deduction
allowed for dividends paid, but not for dividends received. "Excess non-cash
income" is the amount, if any, by which the sum of certain items of non-cash
income exceeds 5% of REIT Taxable Income for the taxable year (determined
without regard to the deduction for dividends paid and by excluding any net
capital gain). With respect to the Company's taxable years commencing prior to
January 1, 1998, these items of non-cash income for which relief from the
distribution requirement is provided are (i) the excess of amounts includible in
gross income due to the operation of Section 467 of the Code (relating to
deferred rental agreements) over the amounts that would have been includible
without regard to such provision, (ii) income from certain like-kind exchanges
not eligible for tax-free treatment, and (iii) the amounts includible on gross
income with respect to the amount that original issue discount on purchase money
debt obligations (but not other kinds of original issue discount or market
discount) exceed the amount of money and fair market value of other property
received during the taxable year under such instruments. With respect to the
Company's tax years commencing on and after January 1, 1998, "excess non-cash
income" described in clause (iii) above applies equally to REITs that use the
accrual method of accounting for United States federal income tax purposes.
The Company will be subject to tax on amounts not distributed at regular
United States federal corporate income tax rates. With respect to its taxable
years beginning on and after January 1, 1998, the Company may elect to retain
rather than distribute, net long-term capital gain, and be subject to regular
United States federal
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income tax thereon. For the consequences of such an election to the REIT's
shareholders, see "Taxation of Taxable Shareholders." In addition, a
nondeductible 4% excise tax is imposed on the excess of (i) 85% of the Company's
ordinary income for the year plus 95% of capital gain net income for the year
and the undistributed portion of the required distribution for the prior year
over (ii) the actual distribution to shareholders during the year (if any). Net
operating losses generated by the Company may be carried forward but not carried
back and used by the Company for 15 years (or 20 years in the case of net
operating losses generated in the Company's tax years commencing on or after
January 1, 1998) to reduce REIT Taxable Income and the amount that the Company
will be required to distribute in order to remain qualified as a REIT. Net
capital losses of the Company may be carried forward for five years (but not
carried back) and used to reduce capital gains.
In general, a distribution must be made during the taxable year to which it
relates to satisfy the distribution test and to be deducted in computing REIT
Taxable Income. However, the Company may elect to treat a dividend declared and
paid after the end of the year (a "subsequent declared dividend") as paid during
such year for purposes of complying with the distribution test and computing
REIT Taxable Income, if the dividend is (i) declared before the regular or
extended due date of the Company's tax return for such year and (ii) paid not
later than the date of the first regular dividend payment made after the
declaration (but in no case later than 12 months after the end of the year). For
purposes of computing the 4% excise tax, a subsequent declared dividend is
considered paid when actually distributed. Furthermore, any dividend that is
declared by the Company in October, November or December of a calendar year, and
payable to shareholders of record as of a specified date in such month of such
year will be deemed to have been paid by the Company (and received by
shareholders) on December 31 of such calendar year, but only if such dividend is
actually paid by the Company in January of the following calendar year. For
purposes of complying with the distribution test for a taxable year as a result
of an adjustment in certain of its items of income, gain or deduction by the
IRS, the Company may be permitted to remedy such failure by paying a "deficiency
dividend" in a later year together with interest and a penalty. Such deficiency
dividend may be included in the Company's deduction of dividends paid for the
earlier year for purposes of satisfying the distribution test. For purposes of
the 4% excise tax, the deficiency dividend is taken into account when paid, and
any income giving rise to the deficiency adjustment is treated as arising when
the deficiency dividend is paid.
The Company believes that it has distributed and intends to continue to
distribute to its shareholders an amount at least equal to 95% of the sum of (i)
its REIT Taxable Income (determined without regard to the deduction for
dividends paid and by excluding any net capital gains) and (ii) any after-tax
net income from foreclosure properties less any "excess non-cash income," as
those amounts are determined in good faith by the Company or its independent
accountants. However, it is possible that timing differences between the accrual
of income and its actual collection, and the need to make non-deductible
expenditures (such as capital improvements or principal payments on debt) may
cause the Company to recognize taxable income in excess of its net cash
receipts, thus increasing the difficulty of compliance with the distribution
requirement. In order to meet the 95% requirement, the Company might find it
necessary to arrange for short-term, or possibly long-term, borrowings.
Failure to Qualify. If the Company fails to qualify as a REIT for any
taxable year, and if certain relief provisions of the Code do not apply, it
would be subject to federal income tax (including applicable alternative minimum
tax) on its taxable income at regular corporate rates. Distributions to
shareholders in any year in which the Company fails to qualify will not be
deductible by the Company nor will they be required to be made. As a result, the
Company's failure to qualify as a REIT would reduce the cash available for
distribution by the Company to its shareholders. In addition, if the Company
fails to qualify as a REIT, all distributions to shareholders will be taxable as
ordinary income, to the extent of the Company's current and accumulated earnings
and profits. Subject to certain limitations of the Code, corporate distributees
may be eligible for the dividends-received deduction.
If the Company's failure to qualify as a REIT is not due to reasonable
cause but results from willful neglect, the Company would not be permitted to
elect REIT status for the four taxable years after the taxable year for which
such disqualification is effective. In the event the Company were to fail to
qualify as a REIT in one year and subsequently requalify in a later year, the
Company might be required to recognize taxable
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income based on the net appreciation in value of its assets as a condition to
requalification. In the alternative, the Company may be taxed on the net
appreciation in value of its assets if it sells properties within ten years of
the date the Company requalifies as a REIT under federal income tax laws.
TAXATION OF TAXABLE SHAREHOLDERS
As used herein, the term "U.S. shareholder" means a holder of Common or
Preferred Shares who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity treated as a corporation or partnership for federal income tax
purposes created or organized in or under the laws of the United States or of
any political subdivision thereof, (iii) is an estate the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust.
As long as the Company qualifies as a REIT, distributions made to the
Company's U.S. shareholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken into account by
them as ordinary income and corporate shareholders will not be eligible for the
dividends-received deductions as to such amounts. For purposes of computing the
Company's earnings and profits, depreciation for depreciable real estate will be
computed on a straight-line basis over a 40-year period. For purposes of
determining whether distributions on the Common Shares are out of current or
accumulated earnings and profits, the earnings and profits of the Company will
be allocated first to the Preferred Shares and second to the Common Shares.
There can be no assurance that the Company will have sufficient earnings and
profits to cover distributions on any Preferred Shares.
Distributions that are properly designated as capital gain dividends will
be taxed as gains from the sale or exchange of a capital asset held for more
than one year (to the extent they do not exceed the Company's actual net capital
gain for the taxable year) without regard to the period for which the
shareholder has held its shares. However, corporate shareholders may be required
to treat up to 20% of certain capital gain dividends as ordinary income pursuant
to Section 291 of the Code. As described below, the Taxpayer Relief Act of 1997
(the "1997 Act") changed significantly the taxation of capital gains by
taxpayers who are individuals, estates, or a trust. With respect to amounts
designated as capital gain distributions, the IRS has released Notice 97-64
describing temporary regulations that will be issued to permit REITs to further
designate such capital gain dividends as (i) a 20% rate gain distribution, (ii)
an unrecaptured Section 1250 gain distribution (taxed at a rate of 25%), or
(iii) a 28% rate gain distribution. Capital gain distributions that are not
specifically designated will be characterized as a 28% rate gain distribution.
Notice 97-64 provides that a REIT must determine the maximum amounts that it may
designate as 20% and 25% rate capital gain dividends by performing the
computation required by the Code as if the REIT were an individual whose
ordinary income were subject to a marginal tax rate of at least 28%. The Notice
further provides that designations made by the REIT will be effective only to
the extent that they comply with Revenue Ruling 89-81, which requires that
distributions made to different classes of shares not be composed
disproportionately of dividends of a particular type.
Distributions in excess of current and accumulated earnings and profits
will constitute a non-taxable return of capital to a shareholder to the extent
that such distributions do not exceed the adjusted basis of the shareholder's
shares, and will result in a corresponding reduction in the shareholder's basis
in the shares. Any reduction in a shareholder's tax basis for its shares will
increase the amount of taxable gain or decrease the deductible loss that will be
realized upon the eventual disposition of the shares. The Company will notify
shareholders at the end of each year as to the portions of the distributions
which constitute ordinary income, capital gain or a return of capital. Any
portion of such distributions that exceed the adjusted basis of a U.S.
shareholder's shares will be taxed as capital gain from the disposition of
shares, provided that the shares are held as capital assets in the hands of the
U.S. shareholder.
Aside from the different income tax rates applicable to ordinary income and
capital gain dividends, regular and capital gain dividends from the Company will
be treated as dividend income for most other federal income tax purposes. In
particular, such dividends will be treated as "portfolio" income for purposes of
the passive activity loss limitation (including all individuals) and generally
will not be able to offset any "passive
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losses" against such dividends. Dividends will be treated as investment income
for purposes of the investment interest limitation contained in Section 63(d) of
the Code, which limits the deductibility of interest expense incurred by
noncorporate taxpayers with respect to indebtedness attributable to certain
investment assets.
In general, dividends paid by the Company will be taxable to shareholders
in the year in which they are received, except in the case of dividends declared
at the end of the year, but paid in the following January, as discussed above.
In general, a domestic shareholder will realize capital gain or loss on the
disposition of shares equal to the difference between (i) the amount of cash and
the fair market value of any property received on such disposition and (ii) the
shareholder's adjusted basis of such shares. With respect to dispositions
occurring after July 28, 1997, in the case of a domestic shareholder who is an
individual or an estate or trust, such gain or loss will be long-term capital
gain or loss if such shares have been held for more than one year but not more
than 18 months and long-term capital gain or loss subject to a 20% tax rate if
such shares have been held for more than 18 months. In the case of a taxable
U.S. shareholder that is a corporation, such gain or loss will be long-term
capital gain or loss if such shares have been held for more than one year. Loss
upon the sale or exchange of shares by a shareholder who has held such shares
for six months or less (after applying certain holding period rules) will be
treated as long-term capital loss to the extent of distribution from the Company
required to be treated by such shareholder as long-term capital gain.
Pursuant to the 1997 Act, for the Company's taxable years commencing on or
after January 1, 1998, the Company may elect to require the holders of shares to
include the Company's undistributed net long-term capital gains in their income.
If the Company makes such an election, the holders of shares will (i) include in
their income as long-term capital gains their proportionate share of such
undistributed capital gains and (ii) be deemed to have paid their proportionate
share of the tax paid by the Company on such undistributed capital gains and
thereby receive a credit or refund for such amount. A holder of shares will
increase the basis in its shares by the difference between the amount of capital
gain included in its income and the amount of tax it is deemed to have paid. The
earnings and profits of the Company will be adjusted appropriately. As described
below in "-- 1997 Act," with respect to such long-term capital gain of a taxable
domestic shareholder that is an individual or an estate or a trust, the IRS has
authority to issue regulations that could apply the special tax rate applicable
to sales of depreciable real property by an individual or an estate or trust to
the portion of the long-term capital gains of an individual or an estate or
trust attributable to deductions for depreciation taken with respect to
depreciable real property.
BACKUP WITHHOLDING
The Company will report to its domestic shareholders and the IRS the amount
of dividends paid during each calendar year, and the amount of tax withheld, if
any, with respect thereto. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 31% with respect to dividends
paid unless such holder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number and certifies as to no loss of exemption from
backup withholding. Amounts withheld as backup withholding will be creditable
against the shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions made to any
shareholders who fail to certify their non-foreign status to the Company. See
"-- Taxation of Non-U.S. Shareholders" below. Additional issues may arise
pertaining to information reporting and backup withholding with respect to
Non-U.S. Shareholders (persons other than (i) citizens or residents of the
United States, (ii) corporations, partnerships or other entities created or
organized under the laws of the United States or any political subdivision
thereof, and (iii) estates or trusts the income of which is subject to United
States federal income taxation regardless of its source) and Non-U.S.
Shareholders should consult their tax advisors with respect to any such
information and backup withholding requirements.
The Treasury Department has recently finalized regulations regarding the
withholding and information reporting rules discussed above. In general, these
regulations do not alter the substantive withholding and information reporting
requirements but unify current certification procedures and forms and clarify
and modify
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reliance standards. These regulations generally are effective for payments made
after December 31, 1999, subject to certain transition rules.
TAXATION OF NON-U.S. SHAREHOLDERS
The following discussion is only a summary of the rules governing United
States federal income taxation of nonresident alien individuals, foreign
corporations, foreign partnerships or other foreign estates or trusts
(collectively, "Non-U.S. Shareholders"). 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 shares,
including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company 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 the Company. Such distributions ordinarily will 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. Certain tax treaties limit
the extent to which dividends paid by a REIT can qualify for a reduction of the
withholding tax on dividends. Distributions in excess of current and accumulated
earnings and profits of the Company will not be taxable to a Non-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 such distributions exceed the adjusted basis of a Non-U.S.
Shareholder's shares, they 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 his shares in the Company, as described below.
For withholding tax purposes, the Company currently is required to treat
all distributions as if made out of its current or accumulated earnings and
profits and thus intends to withhold at the rate of 30% (or a reduced treaty
rate if applicable) on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a Non-U.S. Shareholder. Under the
final regulations (discussed above), generally effective for distributions on or
after January 1, 2000, the Company would be required to withhold at the 30% rate
on distributions it reasonably estimates to be in excess of the Company's
current and accumulated earnings and profits. If it cannot be determined at the
time a distribution is made whether such distribution will be in excess of
current and accumulated earnings and profits, the distribution will be subject
to withholding at the rate applicable to ordinary dividends. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that the Company will be required to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution (or a lower applicable treaty rate), to the
extent that the Company does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or lower applicable treaty rate) will
be subject to withholding at a rate of 10%. However, the Non-U.S. Shareholder
may seek from the IRS a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Company, and the amount
withheld exceeded the Non-U.S. Shareholder's United States tax liability, if
any.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of 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, a Non-U.S. Shareholder is taxed as if such gain were
effectively connected with a United States business. Non-U.S. Shareholders would
thus be taxed at the normal capital gain rates applicable to U.S. shareholders
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of non-resident alien individuals). Also, distributions subject
to FIRPTA may be subject to a 30% branch profits tax in the hands of a corporate
Non-U.S. Shareholder not entitled to treaty relief. The Company is required by
applicable regulations to withhold 35% of any distribution that could be
designated by the Company as a capital gains dividend regardless of the amount
actually designated as a capital gain dividend. This amount is creditable
against the Non-U.S. Shareholder's FIRPTA tax liability.
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Although the law is not entirely clear on the matter, it appears that
amounts designated by the Company pursuant to the 1997 Act as undistributed
capital gains in respect of shares would be treated with respect to Non-U.S.
Shareholders in the manner outlined in the preceding paragraph for actual
distributions by the Company of capital gain dividends. See "Taxation of
Shareholders -- Taxation of Taxable Shareholders." Under that approach, Non-U.S.
Shareholders would be able to offset as a credit against their United States
federal income tax liability resulting therefrom their proportionate share of
the tax paid by the Company on such undistributed capital gains (and to receive
from the IRS a refund to the extent their proportionate share of such tax paid
by the Company were to exceed their actual United States federal income tax
liability).
Gain recognized by a Non-U.S. Shareholder upon a sale of shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during specified
testing period less than 50% in value of the share was held directly or
indirectly by foreign persons. It is anticipated that the Company will be a
"domestically controlled REIT." Therefore, the sale of shares will not be
subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if (i) 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 (ii) 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 and such gain is attributable to an office or
fixed place of business in the United States or such nonresident alien
individual has a "tax home" in the United States and such gain is not
attributable to an office or fixed place of business located outside the United
States or, if such gain is attributable to an office or fixed place of business
located outside the United States, it is not subject to foreign income tax equal
to at least 10% of such gain. If the gain on the sale of shares were to be
subject to taxation under FIRPTA, the Non-U.S. Shareholder will be subject to
the same treatment as U.S. Shareholders with respect to such gain (subject to
applicable alternative minimum tax, special alternative minimum tax in the case
of nonresident alien individuals and possible application of the 30% branch
profits tax in the case of foreign corporations) and the purchaser would be
required to withhold and remit to the Internal Revenue Service 10% of the
purchase price.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While investments
in real estate may generate UBTI, the Service has issued a published ruling to
the effect that dividend distributions by a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling and on the intention of the Company to invest its
assets in a manner that will avoid the recognition of UBTI by the Company,
amounts distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition of
shares in the Company with debt, a portion of its income from the Company, if
any, will constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of
Code Section 501(c) are subject to different UBTI rules, which generally will
require them to characterize distributions from the Company as UBTI.
In addition, a pension trust that owns more than 10% of the Company is
required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage") in certain circumstances. The UBTI Percentage is the gross
income derived from an unrelated trade or business (determined as if the Company
were a pension trust) divided by the gross income of the Company for the year in
which the dividends are paid. The UBTI rule applies only if (i) the UBTI
Percentage is at least 5%, (ii) the Company qualifies as a REIT by reason of the
modification of the 5/50 Rule that allows the beneficiaries of the pension trust
to be treated as holding shares of the Company in proportion to their actuarial
interests in the pension trust, and (iii) either (A) one pension trust owns more
than 25% of the value of the Company's shares or (B) a group of
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pension trusts individually holding more than 10% of the value of the Company's
capital shares collectively own more than 50% of the value of the Company's
capital shares.
While an investment in the Company by an Exempt Organization generally is
not expected to result in UBTI except in the circumstances described in the
preceding paragraph, any gross UBTI that does arise from such an investment will
be combined with all other gross UBTI of the Exempt Organization for a taxable
year and reduced by all deductions attributable to the UBTI plus $1,000. Any
amount then remaining will constitute UBTI on which the Exempt Organization will
be subject to tax. If the gross income taken into account in computing UBTI
exceeds $1,000, the Exempt Organization is obligated to file a tax return for
such year on IRS Form 990-T. None of the Company, the Board of Trustees, or any
of their Affiliates expects to undertake the preparation or filing of IRS Form
990-T for any Exempt Organization in connection with an investment by such
Exempt Organization in the Common Shares. Generally, IRS Form 990-T must be
filed with the Service by April 15 of the year following the year to which it
relates.
1997 ACT
As described above, the 1997 Act contains certain changes to the REIT
qualification requirements and to the taxation of REITs. The 1997 Act also
contains certain changes to the taxation of capital gains of individuals, trusts
and estates.
Capital Gain Rates. Subject to certain exceptions, for individuals, trusts
and estates, the maximum rate of tax on the net capital gain from a sale or
exchange occurring after July 28, 1997 of a capital asset held for more than 18
months has been reduced from 28% to 20%. The maximum rate has been reduced to
18% for capital assets acquired after December 31, 2000 and held for more than
five years. The maximum rate for capital assets held for more than one year but
not more than 18 months remains at 28%. The maximum rate for net capital gains
attributable to the sale of depreciable real property held for more than 18
months is 25% to the extent of the prior deductions for "unrecaptured Section
1250 gain" (i.e., depreciation deductions not otherwise recaptured as ordinary
income under the existing depreciation recapture rules). Capital gain from the
sale of depreciable real property held for more than 18 months allocated by the
Company to a non-corporate shareholder will be subject to the 25% rate to the
extent that the capital gain on the real property sold by the Company does not
exceed prior depreciation deductions with respect to such property. The 1997 Act
provides the IRS with authority to issue regulations that could, among other
things, apply these rates on a look-through basis in the case of "pass-through"
entities such as the Company. The taxation of capital gains of corporations was
not changed by the 1997 Act.
REIT Provisions. In addition to the provisions discussed above, the 1997
Act contains a number of technical provisions that either (i) reduce the risk
that the Company will inadvertently cease to qualify as a REIT, or (ii) provide
additional flexibility with which the Company can meet the REIT qualification
requirements. These provisions are effective for the Company's taxable years
commencing on or after January 1, 1998.
TAXATION OF REINVESTED DIVIDENDS
Those holders of Common Shares who elect to participate in the Dividend
Reinvestment Plan will be deemed to have received the gross amount of dividends
distributed on their behalf by the Plan Agent as agent for the participants in
such plan. Such deemed dividends will be treated as actual dividends to such
shareholders by the Company and will retain their character and have the tax
effects as described above. Participants that are subject to federal income tax
will thus be taxed as if they received such dividends despite the fact that
their distributions have been reinvested and, as a result, they will not receive
any cash with which to pay the resulting tax liability.
OTHER TAX CONSIDERATIONS
Entity Classification. A significant number of the Company's investments
are held through partnerships. If any such partnerships were treated as an
association, the entity would be taxable as a corporation and therefore would be
subject to an entity level tax on its income. In such a situation, the character
of the
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Company's assets and items of gross income would change and might preclude the
Company from qualifying as a REIT.
Prior to January 1, 1997, an organization formed as a partnership or a
limited liability company 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 in effect at that
time used to distinguish a partnership from a corporation for tax purposes.
These four characteristics were (i) continuity of life, (ii) centralization of
management, (iii) limited liability, and (iv) free transferability of interests.
Under final Treasury Regulations which became effective January 1, 1997, the
four factor test has been eliminated and an entity formed as a partnership or as
a limited liability company will be taxed as a partnership for federal income
tax purposes, unless it specifically elects otherwise. The Regulations provide
that the IRS will not challenge the classification of an existing partnership or
limited liability company for tax periods prior to January 1, 1997 so long as
(1) the entity had a reasonable basis for its claimed classification, (2) the
entity and all its members recognized the federal income tax consequences of any
changes in the entity's classification within the 60 months prior to January 1,
1997, and (3) neither the entity nor any member of the entity had been notified
in writing on or before May 8, 1996, that the classification of the entity was
under examination by the IRS.
The Company believes that each partnership in which it holds an interest
(either directly or indirectly) is properly treated as a partnership for tax
purposes (and not as an association taxable as a corporation).
Tax Allocations with Respect to the Properties. When property is
contributed to a partnership in exchange for an interest in the partnership, the
partnership generally takes a carryover basis in that property for tax purposes
equal to the adjusted basis of the contributing partner in the property, rather
than a basis equal to the fair market value of the property at the time of
contribution (this difference is referred to as "Book-Tax Difference"). Special
rules under 704(c) of the Code and the regulations thereunder tend to eliminate
the Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed
properties in the hands of the partnership could cause the Company (i) to be
allocated lower amounts of depreciation and other deductions for tax purposes
than would be allocated to the Company if all properties were to have a tax
basis equal to their fair market value at the time the properties were
contributed to the partnership, and (ii) possibly to be allocated taxable gain
in the event of a sale of such contributed properties in excess of the economic
or book income allocated to the Company as a result of such sale.
PLAN OF DISTRIBUTION
This Prospectus relates to the possible issuance by the Company of the
Redemption Shares if, and to the extent that, holders of Units tender such Units
for redemption. The Company has registered the Redemption Shares for sale to
provide the holders thereof with freely tradable securities, but registration of
such shares does not necessarily mean that any of such shares will be offered or
sold by the holders thereof.
The Company will not receive any proceeds from the issuance of the
Redemption Shares to holders of Units upon receiving a notice of redemption (but
it will acquire from such holders the Units tendered for redemption). The Unit
holders and any agents or dealers that participate in the distribution of
Redemption Shares may be deemed to be "underwriters" within the meaning of the
Securities Act and any profit on the sale of Redemption Shares by them and any
commissions received by any such dealers or agents might be deemed to be
underwriting commissions under the Securities Act.
The Company may from time to time issue up to 1,829,300 Redemption Shares
upon the acquisition of the Units tendered for redemption. The Company will
acquire from each exchanging Limited Partner a Unit in exchange for each
Redemption Share that the Company issues in connection with these acquisitions.
Consequently, with each redemption, the Company's interest in the Operating
Partnership will increase.
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EXPERTS
The consolidated financial statements of the Company incorporated into this
Prospectus by reference to the Annual Report on Form 10-K for the year ended
December 31, 1997, have been so incorporated in reliance on the report of KPMG
Peat Marwick LLP, independent certified public accountants (incorporated by
reference) and upon the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters, including the validity of the securities described
herein and certain tax matters, will be passed upon for the Company by Paul,
Hastings, Janofsky & Walker LLP, 399 Park Avenue, New York, New York 10022. Seth
M. Zachary, a partner of Paul, Hastings, Janofsky & Walker LLP, is presently
serving as a member of the Board of Trustees of the Company.
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE REDEMPTION SHARES OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
REDEMPTION SHARES OFFERED BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
----
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Information Regarding Forward-Looking
Statements.......................... 3
Prospectus Summary.................... 4
Risk Factors.......................... 6
Description of Capital Shares......... 9
Description of Units.................. 10
Registration Rights................... 14
Redemption of Units................... 15
Use of Proceeds....................... 24
Distributions On OP Units............. 24
The Company........................... 25
Management............................ 28
Certain Relationships and Related
Transactions........................ 29
Federal Income Tax Considerations of
Holding Shares in a REIT............ 30
Plan of Distribution.................. 40
Experts............................... 41
Legal Matters......................... 41
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1,829,300 SHARES
LEXINGTON CORPORATE
PROPERTIES TRUST
COMMON SHARES
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PROSPECTUS
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JUNE 23, 1998
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