THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IS
NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL A FINAL
PROSPECTUS SUPPLEMENT IS DELIVERED. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS ARE NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
Rule 424(b)5
Registration Statement No. 333-21293
SUBJECT TO COMPLETION, DATED JULY 15, 2003
PRELIMINARY PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 29, 1998)
1,500,000 SHARES
[AGREE REALTY CORPORATION LOGO]
AGREE REALTY CORPORATION
COMMON STOCK
---------------------
We are offering 1,500,000 shares of our common stock at a price per share
of $ . We will receive all of the net proceeds from this sale. Our
common stock is listed on the New York Stock Exchange under the symbol "ADC."
The last reported sales price of our common stock on July , 2003 was
$ per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. YOU SHOULD CAREFULLY CONSIDER
THE INFORMATION UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE S-9 OF THIS
PROSPECTUS SUPPLEMENT BEFORE BUYING OUR COMMON STOCK. NEITHER THE SECURITIES AND
EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<Table>
<Caption>
PER SHARE TOTAL
--------- -----------
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to us............................ $ $
</Table>
We have granted the underwriters an option for a period of thirty days to
purchase up to an additional shares of our common stock from us at the
public offering price, less the underwriting discounts and commissions, solely
to cover over-allotments, if any.
We expect the common stock to be available for delivery on or about July
, 2003.
FRIEDMAN BILLINGS RAMSEY BB&T CAPITAL MARKETS
July , 2003
You should rely only on the information contained in or incorporated by
reference into this prospectus supplement and the accompanying prospectus. The
information in this prospectus supplement replaces any inconsistent information
in the accompanying prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. The
information in this prospectus supplement and the accompanying prospectus is
current as of the date such information is presented. Our business, financial
condition, results of operations and prospects may have changed since those
dates.
TABLE OF CONTENTS
<Table>
PROSPECTUS SUPPLEMENT
</Table>
<Table>
<Caption>
PAGE
----
Cautionary Statement Concerning
Forward-Looking Statements.......... S-2
Our Company........................... S-3
Recent Developments................... S-4
The Offering.......................... S-5
Use of Proceeds....................... S-5
Price Range of Common Stock and
Dividends........................... S-6
Capitalization........................ S-7
Selected Financial Data............... S-8
Risk Factors.......................... S-9
Management............................ S-16
Our Properties and Tenants............ S-18
Description of Credit Facilities...... S-26
Federal Income Tax Consequences....... S-26
Underwriting.......................... S-32
Additional Description of Our
Shares.............................. S-33
Legal Matters......................... S-33
Experts............................... S-33
Where You Can Find More Information... S-34
</Table>
<Table>
<Caption>
PROSPECTUS
PAGE
----
Available Information................. 2
Incorporation of Certain Documents By
Reference........................... 2
The Company........................... 3
Use of Proceeds....................... 4
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends........................... 4
Description of Securities............. 5
Description of Common Stock........... 5
Description of Preferred Stock........ 6
Federal Income Tax Considerations..... 10
Employee Benefit Plans................ 22
ERISA Considerations.................. 22
Plan of Distribution.................. 23
Legal Matters......................... 24
Experts............................... 24
</Table>
S-1
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have made statements in this prospectus supplement and the accompanying
prospectus that are "forward-looking" in that they do not discuss historical
facts but instead note future expectations, projections, intentions or other
items relating to the future. These forward-looking statements include those
made in the documents incorporated by reference in this prospectus supplement
and the accompanying prospectus.
Forward-looking statements, which are generally prefaced by the words
"anticipate," "estimate," "should," "expect," "believe," "intend" and similar
terms, are subject to known and unknown risks, uncertainties and other facts
that may cause our actual results or performance to differ materially from those
contemplated by the forward-looking statements. Many of those factors are noted
in conjunction with the forward-looking statements in the text. Other important
factors that could cause our actual results to differ include:
- Our inability to effect the development or acquisition of properties on
favorable terms.
- The effect of economic conditions. If an economic downturn occurs, any
corresponding decrease in disposable income could result in consumers
being less willing to purchase goods from our tenants which could
adversely affect our financial condition and results of operations. Our
financial condition and results of operations could also be adversely
affected if our tenants are otherwise unable to make lease payments or
fail to renew their leases.
- Our inability to obtain long-term financing at interest rates that will
allow us to offer attractive rental rates to our tenants in order to
continue the development or acquisition of retail properties leased to
national tenants on a long-term basis.
- Actions of our competitors. We seek to remain competitive in the
development of real estate assets in the markets that we currently serve.
With regard to our acquisition of properties, we compete with insurance
companies, credit companies, pension funds, private individuals,
investment companies and other REITs, some of which have greater
resources than we do.
- Failure to qualify as a REIT. Although we believe that we were organized
and have been operating in conformity with the requirements for
qualification as a REIT under the Internal Revenue Code, we cannot assure
you that we will continue to qualify as a REIT. See "Federal Income Tax
Considerations -- Requirements for Qualification" beginning on page 12 of
the accompanying prospectus and "Federal Income Tax Consequences" in this
prospectus supplement.
- Changes in government regulations, tax rates and similar matters. For
example, changes in real estate and zoning laws, environmental
uncertainties and natural disasters could adversely affect our financial
condition and results of operations.
Other risks, uncertainties, and factors that could cause actual results to
differ materially from those projected are discussed in the "Risk Factors"
section of this prospectus supplement, as well as in reports filed by us from
time to time with the Securities and Exchange Commission, including Forms 10-K,
10-Q and 8-K.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by law. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in or incorporated by
reference into this prospectus supplement and the accompanying prospectus might
not occur.
S-2
The following information is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in,
or incorporated by reference into, this prospectus supplement and the
accompanying prospectus. We encourage you to read this prospectus supplement and
the accompanying prospectus, as well as the information which is incorporated by
reference into the accompanying prospectus, in their entireties. You should
carefully consider the factors set forth under "Risk Factors" in this prospectus
supplement before making an investment decision to purchase our common stock.
All references to "we," "us" or "our company" in this prospectus supplement and
the accompanying prospectus mean Agree Realty Corporation and its consolidated
subsidiaries, unless otherwise specified. Unless otherwise specified, the
information in this prospectus supplement assumes that the underwriters do not
exercise the over-allotment option described herein under "Underwriting."
OUR COMPANY
GENERAL
Agree Realty Corporation (Company) is a fully-integrated, self-administered
and self-managed real estate investment trust (REIT) that focuses primarily on
the development, acquisition and ownership of retail properties net leased to
national tenants. We were formed in December 1993 to continue and expand the
retail business founded in 1971 by our current President and Chairman, Richard
Agree. We specialize in building properties for national retailers who have
signed long-term net leases prior to commencement of construction. All of our
freestanding property tenants and most of our community shopping center tenants
have triple-net leases which typically require the tenant to be responsible for
property operating expenses including property taxes, insurance and maintenance.
We believe that this strategy provides us with a generally consistent source of
income and cash for distributions and also provides opportunities for
development of additional properties at attractive returns on investment,
without the risks associated with speculative development.
At March 31, 2003, our portfolio consisted of 49 properties, owned either
directly or through joint ventures, located in 13 states and contained an
aggregate of approximately 3.7 million square feet of gross leasable area. Our
portfolio includes 35 freestanding net leased properties and 14 community
shopping centers that as of March 31, 2003 were 97% leased with a weighted
average lease term of approximately 12.6 years. As of March 31, 2003,
approximately 66% of our annualized lease revenue is derived from our top three
tenants: Borders Group, Inc. (Borders) -- 30%, Kmart Corporation (Kmart) -- 19%
and Walgreen Co. (Walgreen) -- 17%. As of March 31, 2003, approximately 88% of
our annualized lease revenue is derived from national tenants.
We expect to continue to grow our asset base primarily through the
development of new retail properties that are pre-leased on a long-term basis to
national tenants. Since our initial public offering in 1994, we have developed
27 properties, all of which we continue to own. We developed 30 of our 35
freestanding properties and all 14 of our community shopping centers. Properties
we have developed (including our community shopping centers) account for 90.5%
of our contractual rent for 2003. We focus on development because we believe it
generally provides us a higher return on investment than the acquisition of
similarly located properties. We expect to continue to expand our tenant
relationships and diversify our tenant base to include other quality national
tenants.
GROWTH STRATEGY
Our growth strategy is to continue to develop retail properties pre-leased
on a long-term basis to national tenants. We believe that a development strategy
combined with substantial pre-leasing will produce superior risk adjusted
returns. To effect this strategy, we first identify a land parcel that we
believe is an attractive retail location for one of our tenant relationships.
The location must be in a concentrated retail corridor, have high traffic
counts, good visibility and demographics compatible with the needs of the
particular retail tenant. Then we propose to that tenant that we execute a
long-term net lease for the finished development on that site.
Once the lease is executed, we close on the land and pursue all the
necessary approvals to begin development. We direct all aspects of the
development, including construction, design, leasing and
S-3
management. Property management and the majority of the leasing activities are
handled directly by our personnel. We believe that this hands-on approach to
development and property management enhances our ability to maximize the
long-term value of our properties.
FINANCING STRATEGY
The majority of our indebtedness is fixed rate, non-recourse and long-term
in nature. Whenever possible, we use long-term financing for our properties to
match the underlying long-term leases. As of March 31, 2003, the average
weighted maturity of our long-term debt was 11.4 years. We intend to limit our
floating rate debt to borrowings under our credit facilities, which are
primarily used to finance new development and acquisitions. Once development of
a project is completed, we typically refinance this floating rate debt with
long-term, fixed rate, non-recourse debt. We intend to maintain a ratio of total
indebtedness (including construction and acquisition financing) to market
capitalization of 65% or less.
We may from time to time re-evaluate our borrowing policies in light of
then current economic conditions, relative costs of debt and equity capital,
market value of properties, growth and acquisition opportunities and other
factors. There is no contractual limit on our ratio of total indebtedness to
total market capitalization, and accordingly, we may modify our borrowing policy
and may increase or decrease our ratio of debt to market capitalization without
stockholder approval.
PROPERTY MANAGEMENT
We maintain an active leasing and capital improvement program that,
combined with the quality and locations of our properties, has made our
properties attractive to tenants. We intend to continue to hold our properties
for long-term investment and, accordingly, place a strong emphasis on quality
construction and an on-going program of regular maintenance. Our properties are
designed to require minimal capital improvements other than renovations or
expansions paid for by tenants. At our 14 community shopping center properties,
we sub-contract on-site functions such as maintenance, landscaping, snow
removal, sweeping, plumbing and electrical and, to the extent permitted by the
respective leases, our cost of these functions is reimbursed by our tenants.
Personnel from our corporate headquarters conduct regular inspections of each
property and maintain regular contact with major tenants.
We have a management information system designed to provide management with
the operating data necessary to make informed business decisions on a timely
basis. This computer system provides us immediate access to store availability,
lease data, tenants' sales history, cash flow budgets and forecasts, and enables
us to maximize cash flow from operations and closely monitor corporate expenses.
AGREE LIMITED PARTNERSHIP
Our assets are held by, and all of our operations are conducted through,
Agree Limited Partnership (Operating Partnership), of which we are the sole
general partner and held an 86.93% interest as of March 31, 2003. Under the
partnership agreement of the Operating Partnership, we, as the sole general
partner, have exclusive responsibility and discretion in the management and
control of the Operating Partnership.
RECENT DEVELOPMENTS
INCREASE IN ANNUAL DIVIDEND
On June 16, 2003, we announced that we declared our second quarter dividend
of $0.485 per share of common stock payable July 15, 2003 to shareholders of
record as of June 30, 2003. The dividend represents a $0.005 per share increase
over the dividend paid for the first quarter of 2003.
CREDIT FACILITIES
In the second quarter of 2003, we extended the term of our $5 million line
of credit with Standard Federal Bank to April 30, 2004. The line of credit is
used by us primarily for working capital and for project start-up
S-4
costs. As of June 30, 2003, the total outstanding principal balance under the
line of credit was $700,000 at an interest rate of 3.5%.
In addition to our line of credit, we have a $50 million credit facility
with Standard Federal Bank, as the agent, with a termination date in August
2003. The credit facility is used to fund property acquisitions and development
activities. As of June 30, 2003, the total outstanding principal balance under
the credit facility was approximately $37 million at an interest rate of 2.78%.
The credit facility has a draw termination date of August 7, 2003 and matures in
August 2006. During the three year period between termination and maturity, we
will have no further ability to borrow under this facility and we will be
required to repay a portion of the unpaid principal on a quarterly basis. We
have received a 90-day extension of the August 2003 termination date, during
which period we can continue to borrow under the credit facility. We are
currently in discussions with our lender regarding the further extension of the
termination date, the extension of the maturity date and other terms of the
credit facility. There can be no assurance that we will receive the requested
extensions or that the terms of the extensions will be acceptable to us.
THE OFFERING
<Table>
Shares of common stock offered by us........................ 1,500,000 shares(1)
Shares of common stock to be outstanding after the
offering.................................................. 5,979,345 shares(2)
New York Stock Exchange Symbol.............................. ADC
</Table>
- ---------------
(1) 1,725,000 shares of common stock if the underwriters exercise their
over-allotment in full.
(2) 6,204,345 shares of common stock if the underwriters exercise their
over-allotment in full. Based on the number of shares of common stock
outstanding on March 31, 2003 and does not include (a) 23,275 shares of
common stock that may be issued upon the exercise of currently outstanding
options granted under our 1994 Stock Incentive Plan (Stock Incentive Plan)
at an exercise price of $19.50 per share and (b) 673,547 shares of common
stock (subject to ownership limitations in our articles of incorporation)
that may be issued upon redemption of common partnership units owned by the
limited partners in our Operating Partnership. We may grant awards for an
additional 107,315 shares of common stock under our Stock Incentive Plan.
USE OF PROCEEDS
We expect to receive net proceeds of $ million from this offering, after
anticipated offering expense costs of approximately $ million (or net proceeds
of approximately $ million if the underwriters' over-allotment option is
exercised in full). We intend to use the net proceeds of this offering to repay
part of our outstanding indebtedness under our credit facility and line of
credit. The interest rate under our credit facility is a floating rate of LIBOR
plus 150 to 213 basis points, which was 2.78% at June 30, 2003. This facility
has a termination date in November 2003. The interest rate under our line of
credit is our lender's prime rate less 50 basis points, which was 3.5% at June
30, 2003. This line of credit matures in April 30, 2004. The borrowings under
our credit facilities were used to fund property acquisitions and development
activities. We may later re-borrow available funds under these credit facilities
prior to their termination so long as we are not in default and use those funds
for general corporate purposes, which may include, among other things, the
development or acquisition of new properties as suitable opportunities arise.
S-5
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The following table shows the high and low sales prices for shares of our
common stock for the periods indicated as reported by the New York Stock
Exchange and the dividends per share of common stock that we have declared or
paid in those periods.
<Table>
<Caption>
HIGH LOW DIVIDENDS
------- ------- ---------
2003
First Quarter........................................... $20.70 $16.80 $0.48
Second Quarter.......................................... $25.87 $19.24 $0.485
2002
First Quarter........................................... $18.97 $14.40 $0.46
Second Quarter.......................................... $20.00 $17.41 $0.46
Third Quarter........................................... $19.98 $15.75 $0.46
Fourth Quarter.......................................... $18.14 $16.20 $0.46
2001
First Quarter........................................... $17.50 $14.12 $0.46
Second Quarter.......................................... $20.05 $16.20 $0.46
Third Quarter........................................... $20.60 $17.15 $0.46
Fourth Quarter.......................................... $19.75 $17.85 $0.46
</Table>
On , 2003, the last reported sale price of our common stock was
$ per share.
We pay regular quarterly dividends on our common stock in amounts
determined in the discretion of our Board of Directors. In determining the
amount of the dividend, our Board of Directors considers the requirements under
the Internal Revenue Code that we pay dividends equal to at least 90% of our
taxable income before deductions of dividends paid and excluding net capital
gains in order to maintain our status as a REIT for federal income tax purposes,
our cash flow from operations, capital expenditures, our financial condition and
such other factors that our Board of Directors may deem relevant. Should we
issue preferred stock in the future, payments of dividends on our common stock
would be subject to any preferential rights which might be provided for under
the rights of such preferred stock. During the calendar year 2002, we paid
common dividends on our common stock of $1.84 per share, of which 100% was
taxable for federal income tax purposes.
On June 16, 2003, we announced that our Board of Directors had declared a
dividend on our common stock for the second quarter of 2003. The dividend was
$0.485 per share of common stock which equates to $1.94 per share of common
stock on an annualized basis as compared to the actual annual 2002 dividend of
$1.84 per share of common stock. These dividends are payable on July 15, 2003 to
stockholders of record as of June 30, 2003. Purchasers of our common stock in
this offering will not be entitled to receive the dividend payable on July 15,
2003.
We have not established a minimum dividend payment level. There can be no
assurance we will continue to pay dividends on our common stock in the future,
or that our future dividend rate will equal or exceed our historical dividend
rate. No assurances can be given regarding the portion of future common
dividends which may constitute return-of-capital for federal income tax
purposes.
S-6
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2003, and
our capitalization as adjusted to give effect to the issuance of 1,500,000
shares of our common stock in connection with this offering at a price of $
per share and the application of the net proceeds from the offering, after
deducting the estimated underwriting discount and offering expenses payable by
us. The information presented below should be read in conjunction with our
balance sheet, and the accompanying note disclosures thereto, which are
incorporated by reference to our Form 10-Q for the quarter ended March 31, 2003.
<Table>
<Caption>
MARCH 31, 2003
-----------------------------
ACTUAL AS ADJUSTED(1)
------------ --------------
Debt
Notes Payable(2)....................................... $ 37,658,232 $
Mortgage Loans......................................... 78,700,752 78,700,752
Construction Loans..................................... 5,598,863 5,598,863
------------ ------------
Total Debt.......................................... 121,957,847
------------ ------------
Minority Interest...................................... 5,801,089 5,801,089
------------ ------------
Stockholders' equity
Common stock, $.0001 par value, 20,000,000 authorized,
4,479,345 shares issued and outstanding; 5,979,345
shares outstanding as adjusted(3)................... 448 598
Additional paid in capital............................... 65,027,522
Deficit.................................................. (11,041,595) (11,041,595)
Unearned Compensation -- Restricted Stock................ (1,113,294) (1,113,294)
------------ ------------
Total Stockholder Equity............................ 52,873,081
------------ ------------
Total Capitalization................................ $180,632,017 $180,632,017
============ ============
</Table>
- ---------------
(1) Reflects the effects of this offering, after deducting estimated
underwriting discounts and commissions and estimated expenses, payable by
us, and assuming no exercise of the underwriters' over-allotment option to
purchase up to an additional 225,000 shares of our common stock.
(2) As adjusted, Notes Payable will be reduced by $ , representing the
application of the net proceeds of this offering to reduce our borrowings
under our credit facility and our line of credit with Standard Federal Bank.
(3) Shares of common stock issued and outstanding and as adjusted excludes
673,547 shares of common stock (subject to ownership limitations our
articles of incorporation) which may be issued upon redemption of common
partnership units owned by the limited partners of our Operating
Partnership, and 23,275 shares of common stock that may be issued upon
exercise of currently outstanding options as of March 31, 2003, granted
under our Stock Incentive Plan.
S-7
SELECTED FINANCIAL DATA
The following table presents certain selected financial data for each of
the years ended December 31, 2002, 2001, 2000, 1999 and 1998. The selected
financial data are derived from and should be read in conjunction with our
audited financial statements and notes thereto, which were audited by BDO
Seidman, LLP, our independent auditors, incorporated by reference into this
prospectus supplement and the accompanying prospectus. The selected financial
data for the quarters ended March 31, 2003 and 2002 are derived from our
unaudited financial statements and notes thereto incorporated by reference to
this prospectus supplement and the accompanying prospectus. The following
selected financial data should be read in conjunction with our financial
statements and the notes thereto and the information under "Management's
Discussion and Analysis of Financial condition and Results of Operations"
included in our Annual Report on Form 10-K for the year ended December 31, 2002
and our Form 10-Q for the quarter ended March 31, 2003, which are incorporated
by reference into this prospectus supplement and the accompanying prospectus.
SELECTED FINANCIAL DATA
<Table>
<Caption>
THREE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT NUMBER OF PROPERTIES, PERCENTAGE LEASED AND PER SHARE INFORMATION)
OPERATING DATA
Total Revenue............... $ 7,019 $ 6,169 $ 25,824 $ 24,629 $ 23,730 $ 21,931 $ 19,674
-------- -------- -------- -------- -------- -------- --------
Expenses
Property expense(1)....... 1,353 1,174 4,252 3,925 3,775 3,512 3,050
General and
administrative.......... 557 475 2,012 1,756 1,557 1,425 1,170
Interest.................. 1,584 1,478 6,196 6,720 7,045 5,771 5,231
Depreciation and
amortization............ 1,063 979 3,938 3,845 3,689 3,436 3,073
-------- -------- -------- -------- -------- -------- --------
Total Expenses.......... 4,557 4,106 16,398 16,246 16,066 14,144 12,524
-------- -------- -------- -------- -------- -------- --------
Other Income(2)............. 119 174 674 913 522 69 168
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary
item and minority
interest.................. 2,581 2,237 10,100 9,296 8,186 7,856 7,318
Extraordinary Item -- Early
Extinguishment of Debt.... -- -- -- -- -- -- (319)
-------- -------- -------- -------- -------- -------- --------
Income before Minority
Interest.................. 2,581 2,237 10,100 9,296 8,186 7,856 6,999
Minority Interest........... 337 295 1,328 1,230 1,088 1,050 912
-------- -------- -------- -------- -------- -------- --------
Net Income.................. $ 2,244 $ 1,942 $ 8,772 $ 8,066 $ 7,098 $ 6,806 $ 6,087
======== ======== ======== ======== ======== ======== ========
Number of Properties........ 49 48 48 47 45 42 39
======== ======== ======== ======== ======== ======== ========
Number of Square Feet....... 3,712 3,570 3,699 3,556 3,526 3,468 3,411
Percentage Leased........... 97% 99% 99% 99% 96% 97% 97%
PER SHARE DATA
Net income(3)............... $ 0.50 $ 0.44 $ 1.97 $ 1.83 $ 1.61 $ 1.56 $ 1.40
======== ======== ======== ======== ======== ======== ========
Cash dividends.............. $ 0.48 $ 0.46 $ 1.84 $ 1.84 $ 1.84 $ 1.84 $ 1.84
======== ======== ======== ======== ======== ======== ========
Weighted average of common
shares outstanding........ 4,479 4,446 4,447 4,417 4,396 4,365 4,346
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA
Real Estate (before
accumulated
depreciation)............. $219,596 $197,294 $210,986 $196,486 $191,048 $179,858 $166,921
Total Assets................ $184,285 $166,162 $178,162 $167,511 $166,052 $158,196 $149,648
Total debt, including
accrued interest.......... $122,204 $105,214 $115,534 $105,946 $104,407 $ 95,762 $ 85,650
</Table>
- ---------------
(1) Property expense includes real estate taxes, property maintenance,
insurance, utilities and land lease expense.
(2) Other income is composed of development fee income, gain on land sales, and
equity in net income of unconsolidated entities.
(3) Net income per share has been computed by dividing the net income by the
weighted average number of shares of Common Stock outstanding. The per share
amounts are presented in accordance with SFAS No. 128 "Earnings per share."
The Company's basic and diluted earnings per share are the same.
S-8
RISK FACTORS
GENERAL
We rely significantly on three major tenants. As of March 31, 2003, we
derived approximately 66% of our annualized base rent from three major tenants,
Borders, Kmart and Walgreen. In the event of a default by any of these tenants
under their leases, we may experience delays in enforcing our rights as lessor
and may incur substantial costs in protecting our investment. The bankruptcy or
insolvency of any of the major tenants would be likely to have a material
adverse effect on the properties affected and the income produced by those
properties and correspondingly our ability to pay dividends.
In the event that certain tenants cease to occupy a property, although
under most circumstances such a tenant would remain liable for its lease
payments, such an action may result in certain other tenants having the right to
terminate their leases at the affected property, which could adversely affect
the future income from that property. As of March 31, 2003, 14 of our properties
had tenants with those provisions in their leases. The aggregate base rental
income attributable to these tenants was approximately $1.9 million for 2002.
We could be adversely affected by a tenant's bankruptcy. If a tenant
becomes bankrupt or insolvent, that could diminish the income we expect from
that tenant's leases. We may not be able to evict a tenant solely because of its
bankruptcy. On the other hand, a bankruptcy court might authorize the tenant to
terminate its leases with us. If that happens, our claim against the bankrupt
tenant for unpaid future rent would be subject to statutory limitations that
might be substantially less than the remaining rent we are owed under the
leases. In addition, any claim we have for unpaid past rent would likely not be
paid in full. One of our major tenants, Kmart, recently emerged from bankruptcy.
As part of their plan of reorganization, Kmart terminated one of our leases and
modified two other leases. See "Properties -- Major Tenants." We cannot predict
what effect a future Kmart bankruptcy or the bankruptcy of any other major
tenant will have on us. A failure by Kmart to successfully implement its
reorganization plan or to continue as a going concern could result in Kmart's
inability to maintain its lease payments to us or to attempt to renegotiate or
terminate its leases.
Risks involved in single tenant leases. We focus our development
activities on net leased real estate or interests therein. Because our
properties are generally 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 our operating cash flow and might decrease the
value of the property leased to such tenant.
Risks associated with borrowing, including loss of properties in the event
of a foreclosure. At March 31, 2003, our ratio of total indebtedness to market
capitalization was approximately 54.8%. The use of leverage presents an
additional element of risk in the event that (1) the cash flow from lease
payments on our properties is insufficient to meet debt obligations, (2) we are
unable to refinance our debt obligations as necessary or on favorable terms or
(3) there is an increase in interest rates. If a property is mortgaged to secure
payment of indebtedness and we are unable to meet mortgage payments, the
property could be foreclosed upon with a consequent loss of income and asset
value to us. Under the "cross-default" provisions contained in mortgages
encumbering some of our properties, our default under a mortgage with a lender
would result in our default under mortgages held by the same lender on other
properties resulting in multiple foreclosures.
Risks associated with our development and acquisition activities. We
intend to continue development of new properties and to consider possible
acquisitions of existing properties. New project development is subject to a
number of risks, including risks of construction delays or cost overruns that
may increase project costs, risks that the properties will not achieve
anticipated occupancy levels or sustain anticipated rent levels, and new project
commencement risks such as receipt of zoning, occupancy and other required
governmental permits and authorizations and the incurrence of development costs
in connection with projects that are not pursued to completion. In addition, we
anticipate that our new development will be financed under lines of credit or
other forms of construction financing that will result in a risk that permanent
financing on newly developed projects might not be available or would be
available only on disadvantageous terms. In addition, the fact that we must
distribute 90% of our taxable income in order to maintain our qualification as a
REIT will limit our ability to rely upon income from operations or cash flow
from operations to finance new
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development or acquisitions. As a result, if permanent debt or equity financing
was not available on acceptable terms to refinance new development or
acquisitions undertaken without permanent financing, further development
activities or acquisitions might be curtailed or cash available for distribution
might be adversely affected. Acquisitions entail risks that investments will
fail to perform in accordance with expectations and that judgments with respect
to the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property will prove
inaccurate, as well as general investment risks associated with any new real
estate investment.
Our portfolio has limited geographic diversification. Our properties are
located primarily in the Midwestern United States and Florida. The concentration
of our properties in a limited number of geographic regions creates the risk
that, should these regions experience an economic downturn, our operations may
be adversely affected. For example, 24 of our properties are located in
Michigan. Should Michigan experience an economic downturn, our operations and
our rentals from our Michigan properties could be adversely affected.
Dependence on key personnel. We are dependent on the efforts of our
executive officers and directors. The loss of one or more of our executive
officers or directors would likely have a material adverse effect on our future
development or acquisition operations, which could adversely affect the market
price of our common stock. We do not presently have key-man life insurance for
any of our employees.
We are not limited by our organization documents as to the amount of debt
we may incur. We intend to maintain a ratio of total indebtedness (including
construction or acquisition financing) to market capitalization of 65% or less.
Nevertheless, we may operate with debt levels which are in excess of 65% of
market capitalization for extended periods of time. Our organization documents
contain no limitation on the amount or percentage of indebtedness which we may
incur. Therefore, our board of directors, without a vote of the stockholders,
could alter the general policy on borrowings at any time. If our debt
capitalization policy were changed, we could become more highly leveraged,
resulting in an increase in debt service that could adversely affect our
operating cash flow and our ability to pay dividends to our stockholders, and
could result in an increased risk of default on our obligations.
We can change our investment and financing policies without stockholder
approval. Our investment and financing policies, and our policies with respect
to certain other activities, including our growth, debt capitalization,
dividends, REIT status and investment and operating policies, are determined by
our Board of Directors. Although we have no present intention to do so, these
policies may be amended or revised from time to time at the discretion of our
Board of Directors without a vote of our stockholders.
Competition. We face competition in seeking properties for acquisition and
tenants who will lease space in these properties from insurance companies,
credit companies, pension funds, private individuals, investment companies and
other REITs, many of which have greater financial and other resources than we
do. There can be no assurance that we will be able to successfully compete with
such entities in our development, acquisition and leasing activities in the
future.
RISKS THAT MAY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
We cannot assure you we will continue paying dividends at historical
rates. Our ability to continue paying dividends on our common stock at
historical rates, or to increase our common stock dividend rate, will depend on
a number of factors, including our financial condition and results of future
operations, the performance of lease terms of tenants, provisions in our secured
loan covenants, and our ability to acquire, finance and lease additional
properties at attractive rates. If we do not maintain or increase the dividend
rate on our common stock, that could have an adverse effect on the market price
of our common stock. Additionally, payment of dividends on our common stock may
be subject to payment in full of the dividends on any preferred stock and
payment of interest on any debt securities we may have outstanding in the
future.
Market interest rates may have an effect on the value of our common
stock. One of the factors that investors may consider in deciding whether to
buy or sell our common stock is our dividend rate as a percentage of our stock
price, relative to market interest rates. If market interest rates increase,
prospective investors may desire a higher dividend rate on our common stock or
seek securities paying higher dividends.
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Changes in the tax laws could make investments in REITs less
attractive. The federal income tax laws governing REITs and the administrative
interpretations of those laws may be amended or changed at any time. Any of
those new laws or interpretations may take effect retroactively and could
adversely affect us or you as a stockholder. The recently enacted Jobs and
Growth Tax Relief Reconciliation Act of 2003 reduces the maximum tax rate on
both dividends and long-term capital gains for individuals to 15% until 2008.
This reduced tax rate generally does not apply to REIT dividends of ordinary
income. This legislation could cause shares in non-REIT corporations to be a
more attractive investment to individual investors than they have been, and
could have an adverse effect on the market price of shares of our common stock.
The market prices for our common stock may be affected by perceptions about
the financial health or share value of our tenants or the performance of REIT
stocks generally. To the extent any of our tenants or other comparable
retailers report losses or slower earnings growth or enter bankruptcy
proceedings, the market price for our common stock could be adversely affected.
The market price for our common stock could also be affected by any weakness in
retailer stocks or REIT stocks generally.
Uncertainties relating to lease renewals and re-letting of space. We are
subject to the risks that, upon expiration of leases for space located in our
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 we are unable to re-let promptly all or a substantial portion of our
retailers or if the rental rates upon such re-letting were significantly lower
than expected rates, our net income and ability to make expected distributions
to stockholders would be adversely affected. There can be no assurance that we
will be able to retain tenants in any of our properties upon the expiration of
their leases.
We must obtain new financing in order to grow. As a REIT, we are required
to distribute at least 90% of our net income to stockholders in the form of
dividends. This means we are limited in our ability to use internal capital to
acquire properties and must continually raise new capital in order to continue
to grow and diversify our real estate portfolio. Our ability to raise new
capital depends in part on factors beyond our control, including conditions in
equity and credit markets, conditions in the retail industry and the performance
of REITs generally. We continually consider and evaluate a variety of potential
transactions to raise additional capital, but we cannot assure that attractive
alternatives will always be available to us, nor that our common share price
will increase or remain at a level that will permit us to continue to raise
equity capital privately or publicly.
Right to Issue Preferred Stock. Although we do not currently have any
outstanding shares of preferred stock, our Board of Directors has the power to
issue shares of preferred stock with rights, preferences and designations as
determined by our Board of Directors. Our Board of Directors may issue classes
or series of preferred stock without the consent of our common stockholders
which may have senior rights with respect to dividends and upon liquidation to
the rights of our common stockholders.
RISKS ASSOCIATED WITH INVESTMENT IN REAL ESTATE
There are risks associated with owning and leasing real estate. Although
our lease terms obligate the tenants to bear substantially all of the costs of
operating our properties, investing in real estate involves a number of risks,
including:
- The risk that tenants will not perform under their leases, reducing our
income from the leases or requiring us to assume the cost of performing
obligations (such as taxes, insurance and maintenance) that are the
tenant's responsibility under the lease.
- The risk that changes in economic conditions or real estate markets may
adversely affect the value of our properties.
- The risk that local conditions (such as oversupply of similar properties)
could adversely affect the value of our properties.
- The risk that we may not always be able to lease properties at favorable
rental rates.
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- The risk that we may not always be able to sell a property when we desire
to do so at a favorable price.
- The risk of changes in tax, zoning or other laws could make properties
less attractive or less profitable.
If a tenant fails to perform its lease covenants, that would not excuse us from
meeting any mortgage debt obligation secured by the property and could require
us to fund reserves in favor of our mortgage lenders, thereby reducing funds
available for payment of dividends on our shares of common stock. We cannot be
assured that tenants will elect to renew their leases when the terms expire. If
a tenant does not renew its lease or if a tenant defaults on its lease
obligations, there is no assurance we could obtain a substitute tenant on
acceptable terms. If we cannot obtain another tenant with comparable structural
needs, we may be required to modify the property for a different use, which may
involve a significant capital expenditure and a delay in re-leasing the
property.
Some potential losses are not covered by insurance. Our leases require the
tenants to carry comprehensive liability, casualty, workers' compensation,
extended coverage and rental loss insurance on our properties. However, there
are some types of losses, such as terrorist acts or catastrophic acts of nature,
for which we or our tenants cannot obtain insurance at an acceptable cost. If
there is an uninsured loss or a loss in excess of insurance limits, we could
lose both the revenues generated by the affected property and the capital we
have invested in the property. We would, however, remain obligated to repay any
mortgage indebtedness or other obligations related to the property.
Failure to comply with the Americans with Disabilities Act and other laws
could result in substantial costs. Our properties must comply with the
Americans with Disabilities Act (ADA). The ADA requires that public
accommodations reasonably accommodate individuals with disabilities and that new
construction or alterations be made to commercial facilities to conform to
accessibility guidelines. Failure to comply with the ADA can result in
injunctions, fines, damage awards to private parties and additional capital
expenditures to remedy noncompliance. Our leases require the tenants to comply
with the ADA. However, if a tenant were to fail to comply with the ADA, as the
owner of the property, we could be subject to liability (including fines, damage
awards as well as capital expenditures to remedy noncompliance).
Our properties are also subject to various other federal, state and local
regulatory requirements. We do not know whether existing requirements will
change or whether compliance with future requirements will involve significant
unanticipated expenditures. Although these expenditures would be the
responsibility of our tenants, if tenants fail to perform these obligations, we
may be required to do so.
Potential liability for environmental contamination could result in
substantial costs. Under federal, state and local environmental laws, we may be
required to investigate and clean up any release of hazardous or toxic
substances or petroleum products at our properties, regardless of our knowledge
or actual responsibility, simply because of our current or past ownership of the
real estate. If unidentified environmental problems arise, we may have to make
substantial payments, which could adversely affect our cash flow and our ability
to make distributions to our stockholders. This potential liability results from
the fact that:
- As owner we may have to pay for property damage and for investigation and
clean-up costs incurred in connection with the contamination.
- The law may impose clean-up responsibility and liability regardless of
whether the owner or operator knew of or caused the contamination.
- Even if more than one person is responsible for the contamination, each
person who shares legal liability under environmental laws may be held
responsible for all of the clean-up costs.
- Governmental entities and third parties may sue the owner or operator of
a contaminated site for damages and costs.
These costs could be substantial and in extreme cases could exceed the value of
the contaminated property. The presence of hazardous substances or petroleum
products or the failure to properly remediate contamination may adversely affect
our ability to borrow against, sell or lease an affected property. In addition,
some
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environmental laws create liens on contaminated sites in favor of the government
for damages and costs it incurs in connection with a contamination.
Our leases require our tenants to operate the properties in compliance with
environmental laws and to indemnify us against environmental liability arising
from the operation of the properties. However, we could be subject to strict
liability under environmental laws because we own the properties. There is also
a risk that tenants may not satisfy their environmental compliance and
indemnification obligations under the leases. Any of these events could
substantially increase our cost of operations, require us to fund environmental
indemnities in favor of our secured lenders and reduce our ability to service
our secured debt and pay dividends to stockholders and any debt security
interest payments. Environmental problems at any properties could also put us in
default under loans secured by those properties, as well as loans secured by
unaffected properties.
Real estate investments are relatively illiquid. We may desire to sell a
property in the future because of changes in market conditions or poor tenant
performance or to avail ourselves of other opportunities. We may also be
required to sell a property in the future to meet secured debt obligations or to
avoid a secured debt loan default. Real estate projects cannot always be sold
quickly, and we cannot assure you that we could always obtain a favorable price.
We may be required to invest in the restoration or modification of a property
before we can sell it.
TAX RISKS
We will be subject to increased taxation if we fail to qualify as a REIT
for federal income tax purposes. A REIT generally is not taxed at the corporate
level on income it distributes to its stockholders, as long as it distributes
annually at least 90% of its taxable income to its stockholders. We have not
requested, and do not plan to request, a ruling from the Internal Revenue
Service that we qualify as a REIT. We have, however, received an opinion from
our tax counsel, Locke Liddell & Sapp LLP, that our ownership, operations and
assets permit us to qualify as a REIT.
You should be aware that opinions of counsel are not binding on the
Internal Revenue Service or on any court. Furthermore, the conclusions stated in
the opinion are conditioned on, and our continued qualification as a REIT will
depend on, our management meeting various requirements, which are discussed in
more detail under the heading "Federal Income Tax Considerations" in the
accompanying prospectus and "Federal Income Tax Consequences" in this prospectus
supplement.
If we fail to qualify as a REIT we will face tax consequences that will
substantially reduce the funds available for payment of dividends:
- We would not be allowed a deduction for dividends paid to shareholders in
computing our taxable income and would be subject to federal income tax
at regular corporate rates.
- We could be subject to the federal alternative minimum tax and possibly
increased state and local taxes.
- Unless we are entitled to relief under statutory provisions, we could not
elect to be treated as a REIT for four taxable years following the year
in which we were disqualified.
In addition, if we fail to qualify as a REIT, we will no longer be required to
pay dividends (other than any mandatory dividends on any preferred shares we may
offer). As a result of these factors, our failure to qualify as a REIT could
adversely effect the market price for our common stock.
Excessive non-real estate asset values may jeopardize our REIT status. In
order to qualify as a REIT, at least 75% of the value of our assets must consist
of investments in real estate, investments in other REITs, cash and cash
equivalents, and government securities. Therefore, the value of any property
that is not considered a real estate asset for federal income tax purposes must
represent in the aggregate less than 25% of our total assets. In addition, under
federal income tax law, we may not own securities in any one company (other than
a REIT, a qualified REIT subsidiary or a taxable REIT subsidiary) which
represent in excess of 10% of the voting securities or 10% of the value of all
securities of any one company, or which have, in the
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aggregate, a value in excess of 5% of our total assets, and we may not own
securities of one or more taxable REIT subsidiaries which have, in the
aggregate, a value in excess of 20% of our total assets. We may invest in
securities of another REIT, and our investment may represent in excess of 10% of
the voting securities or 10% of the value of the securities of the other REIT.
If the other REIT were to lose its REIT status during a taxable year in which
our investment represented in excess of 10% of the voting securities or 10% of
the value of the securities of the other REIT as of the close of a calendar
quarter, we will lose our REIT status.
The 25%, 20%, 10% and 5% tests are determined at the end of each calendar
quarter. If we fail to meet any such test at the end of any calendar quarter,
unless certain relief provisions apply, we will cease to qualify as a REIT.
We may have to borrow funds or sell assets to meet our distribution
requirements. Subject to some adjustments that are unique to REITs, a REIT
generally must distribute 90% of its taxable income. For the purpose of
determining taxable income, we may be required to accrue interest, rent and
other items treated as earned for tax purposes but that we have not yet
received. In addition, we may be required not to accrue as expenses for tax
purposes some items which actually have been paid, including, for example,
payments of principal on our debt, or some of our deductions might be disallowed
by the Internal Revenue Service. As a result, we could have taxable income in
excess of cash available for distribution. If this occurs, we may have to borrow
funds or liquidate some of our assets in order to meet the distribution
requirement applicable to a REIT.
Ownership limits may discourage a change in control. For the purpose of
protecting our REIT status, our articles of incorporation generally limit the
ownership by any single stockholder of any class of our capital stock, including
common stock, to 9.8% of the outstanding shares of that class. Our articles of
incorporation also prohibit anyone from buying shares if the purchase would
result in our losing our REIT status. For example, we would lose our REIT status
if we had fewer than 100 different stockholders or if five or fewer
stockholders, applying certain broad attribution rules of the Internal Revenue
Code, owned 50% or more of the common stock. These restrictions may discourage a
change in control, deter any attractive tender offers for our common stock or
limit the opportunity for you or other stockholders to receive a premium for
your common stock in the event a stockholder is making purchases of shares of
common stock in order to acquire a block of shares.
We have adopted certain anti-takeover measures. Our articles of
incorporation and bylaws contain provisions that could make it more difficult
for a party to make a tender offer for our common stock or complete a takeover
of us which is not approved by our Board of Directors. These provisions include:
- A staggered Board of Directors so that it would take three successive
annual meetings to replace all of our directors;
- Authority of the Board of Directors to issue, without stockholder
approval, our preferred stock on the terms as our Board of Directors may
determine;
- Limitations on the ability of stockholders to remove directors; and
- Limitations on the beneficial ownership of common stock.
Maryland law also contains provisions that restrict business combinations
and control share acquisitions not approved by our Board of Directors. We have
also adopted a shareholders rights plan, which is discussed below in "Additional
Description of Our Shares." These provisions could discourage a third party from
making an acquisition proposal for us and prevent a change in our control.
We may be subject to other tax liabilities. Even if we qualify as a REIT,
we may be subject to some federal, state and local taxes on our income and
property that could reduce operating cash flow.
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Changes in tax laws may prevent us from qualifying as a REIT. As we have
previously described, we intend to qualify as a REIT for federal income tax
purposes. However, this intended qualification is based on the tax laws that are
currently in effect. We are unable to predict any future changes in the tax laws
that would adversely affect our status as a REIT. If there is a change in the
tax laws that prevents us from qualifying as a REIT or that requires REITs
generally to pay corporate level income taxes, we may not be able to make the
same level of distributions to our stockholders.
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MANAGEMENT
Our executive officers and directors are as follows:
<Table>
<Caption>
NAME POSITION WITH THE COMPANY
- ---- -------------------------
Richard Agree........................ President and Chairman of the Board of Directors**
Kenneth R. Howe...................... Vice President, Finance and Secretary
Bruce J. Schaefer.................... Vice President, Leasing
David J. Prueter..................... Vice President
Nicholas Coburn...................... Vice President
Gene Silverman....................... Director***
Farris G. Kalil...................... Director***
Ellis G. Wachs....................... Director*
Michael Rotchford.................... Director**
</Table>
- ---------------
* Term as director expires 2004
** Term as director expires 2005
*** Term as director expires 2006
Richard Agree, 59, has been our President and Chairman of the Board of
Directors since December 1993. Prior thereto, he worked as managing partner of
the general partnerships which held our properties prior to the formation of the
Company and the initial public offering and was President of the predecessor
company since 1971. Mr. Agree has managed and overseen the development of over
5,000,000 square feet of anchored shopping center space during the past 31
years. He is a graduate of the Detroit College of Law and a member of the State
Bar of Michigan and the International Council of Shopping Centers.
Kenneth R. Howe, 54, has been our Vice President, Finance since June 1994
and our Secretary since November 1993. Prior to being appointed as Vice
President, Finance, Mr. Howe served as our Chief Financial Officer since
November 1993. From 1989 to April 1994 he was Controller of Agree Development
Company, a predecessor of the Company. From 1984 to 1989, he was a partner in
Straka, Jarackas and Company, a public accounting firm with which he was
employed since 1974. He is a graduate of Western Michigan University and a
certified public accountant.
Bruce J. Schaefer, 59, has been our Vice President, Leasing since January
1, 1998. Prior to being appointed to this position, Mr. Schaefer had directed
our leasing activities since April 1994. From 1988 to April 1994 he coordinated
all leasing activities for Agree Development Company.
David J. Prueter, 47, has been our Vice President since January 10, 2000.
From 1997 until joining us, Mr. Prueter was Director of U.S. Real Estate for
Borders. Prior to joining Borders Mr. Prueter served as the Senior Manager of
Real Estate Operations for the Kroger Co. Mr. Prueter is a state committee
member of the Michigan chapter of the International Council of Shopping Centers,
holds a MCR from NACORE and is a graduate of Western Michigan University.
Nicholas Coburn, 31, has been our Vice President since January 17, 2001.
Prior to being appointed to this position, Mr. Coburn had directed our
development activities since December 1997. From 1996 until joining us Mr.
Coburn was employed at Lewiston-Smith Realty Company. Mr. Coburn is a member of
the State Bar of Michigan and the American Society of Civil Engineers. He holds
a J.D. from the University of Detroit School of Law and a B.S. in Civil
Engineering from the University of Colorado.
Gene Silverman, 69, has been a director of the Company since April 1994.
Mr. Silverman has been a consultant to the entertainment industry since 1996.
From July 1993 until his retirement in December 1995, Mr. Silverman served as
the President and Chief Executive Officer of Polygram Video, USA, a division of
Polygram N.V., a New York Stock Exchange listed company. Prior to that, he was
Senior Vice President of sales at Orion Home Video from 1987 through 1992. In
1979 Mr. Silverman founded the Detroit-based
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distribution company named Video Trend, Inc. In addition he owned and operated
Music Trend, Inc. and Merit Music Distribution, Inc. in Detroit.
Farris G. Kalil, 64, has been a director of the Company since December
1993. Mr. Kalil has been a financial consultant since June 1999. From November
1996 until his retirement in May 1999 Mr. Kalil served as Director of Business
Development for the Commercial Lending Division of Michigan National Bank, a
national banking institution. From May 1994 to November 1996, Mr. Kalil served
as a Senior Vice President for Commercial Lending at First of America
Bank -- Southeast Michigan, N.A. Prior to that, Mr. Kalil served as a Senior
Vice President of Michigan National Bank where he headed the Commercial Real
Estate Division, Corporate Special Loans, Real Estate Asset Management/Real
Estate Owned Group, and the Government Insured Multi-Family Department. He had
been with Michigan National Corporation since 1960. Mr. Kalil received his B.S.
from Wayne State University and continued his education at the Northwestern
University School of Mortgage Banking.
Ellis G. Wachs, 73, has been a director of the Company since 1993. Mr.
Wachs is one of the four founders of Charming Shoppes, Inc. where, for a forty
year period ending in 1991, he held various positions, including Executive Vice
President, with various responsibilities including merchandise acquisition, real
estate leasing and site location. Since 1991 he has served as a consultant to
Charming Shoppes, Inc. and he currently is a real estate investor. He is a
graduate of the University of Illinois and a board member of the Philadelphia
Free Library.
Michael Rotchford, 44, has been a director of the Company since December
1993. He is a Senior Managing Director for Cushman & Wakefield, Inc., a company
specializing in real estate services. Prior to joining Cushman & Wakefield in
2000 he served as Managing Director of The Saratoga Group, an investment banking
organization specializing in tax and asset-based financing. Mr. Rotchford had
been with The Saratoga Group since 1991. Prior to 1991, Mr. Rotchford was a
Director in the investment banking division of Merrill Lynch & Co. where he
managed the commercial mortgage placement group. Mr. Rotchford holds a
bachelor's degree, with high honors, from the State University of New York at
Albany. He is also a licensed real estate broker.
EMPLOYMENT AGREEMENTS
Our current employment agreements with Mr. Agree and Mr. Howe became
effective on July 1, 1999. Mr. Prueter's employment agreement became effective
on January 10, 2000. Mr. Schaefer and Mr. Coburn do not have employment
contracts with us. Mr. Agree's employment agreement, pursuant to which he serves
as our Chairman of the Board of Directors and President, has a five-year term.
Under his employment agreement, Mr. Agree receives an annual base salary of
$189,000, subject to annual increases at the discretion of the Executive
Compensation Committee of the Board of Directors (Executive Compensation
Committee), and is entitled to participate in the Stock Incentive Plan and all
other benefit programs generally available to our executive officers.
If we terminate Mr. Agree's employment without cause (as defined below), he
is entitled to receive a payment equal to his annual salary (at the then
applicable rate) and has the right to continue to participate in all benefit
plans made generally available by us to our executives during the agreement's
initial term.
If a change-in-control (as defined in the employment agreement) occurs
prior to the expiration of Mr. Agree's employment agreement and within three
years after the change-in-control of the Company Mr. Agree is terminated by us,
Mr. Agree is entitled to be paid the greater of three times his then
compensation, or his compensation to be paid over the remaining life of the
employment agreement.
We may terminate Mr. Agree's agreement for "cause" which is defined to
include (1) willful failure or refusal to perform specific reasonable written
directives of the Board of Directors; (2) conviction of a felony; (3) dishonesty
involving the Company which results in an unjust gain or enrichment at our
expense; (4) moral turpitude which adversely affects our business; or (5) a
material breach of the non-competition section of the employment agreement. In
the event of Mr. Agree's termination for cause he will forfeit his right to any
and all benefits entitled to be received pursuant to his employment agreement
(other than any previously vested
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benefits) following the date of termination. Mr. Agree's agreement may also be
terminated if Mr. Agree dies or becomes disabled (as defined in the agreement).
In the event of termination of the agreement because of Mr. Agree's death or
disability, Mr. Agree (or his estate) shall receive for the longer of (1) the
remainder of the calendar year; or (2) six months, Mr. Agree's salary in effect
at the date of his death or disability.
The employment agreement with Mr. Howe, pursuant to which he serves as our
Chief Financial Officer and Secretary, is identical to Mr. Agree's employment
agreement, except that Mr. Howe's agreement provides for an annual base salary
of $126,000.
The employment agreement with Mr. Prueter, pursuant to which he serves as a
Vice President, is also identical to Mr. Agree's employment agreement, except
that Mr. Prueter's agreement provides for an annual base salary of $168,000. The
agreement also entitles Mr. Prueter to receive as an additional bonus of 2,500
shares of restricted stock each year.
STOCK INCENTIVE PLAN
The Executive Compensation Committee is responsible for administering the
Stock Incentive Plan, which includes determining the individuals to be granted
stock option awards or restricted stock grants and defining the terms of such
awards, including the number of shares, exercise price, vesting schedule and
expiration date.
The purpose of the Stock Incentive Plan is to provide compensation to
persons whose services are considered essential to the Company. By linking this
compensation to the market performance of the common stock and the growth in
funds from operations we intend to provide an additional incentive for officers
and key employees to enhance the value and success of the Company and align the
long-term interests of the officers and key employees with our interests.
The Executive Compensation Committee uses a subjective evaluation process
to determine whether an officer or key employee should receive a stock option
grant or receive a restricted stock award and the number of shares to be granted
or awarded to such officer or key employee. It has not set specific objective
goals or standards that an officer or key employee must meet to receive a stock
option or restricted stock award. The factors considered by the Executive
Compensation Committee include our general performance, the position, level and
scope of responsibility of the respective officer or key employee and the
officer's or key employee's anticipated performance and contributions to the
achievement of our long-term goals.
In January 2001, the Executive Compensation Committee awarded Messrs.
Agree, Howe, Schaefer, Prueter and Coburn 7,200, 4,000, 2,500, 2,500 and 3,000
shares of restricted stock, respectively. In January 2002, the Executive
Compensation Committee awarded Messrs. Agree, Howe, Schaefer, Prueter and Coburn
8,000, 4,500, 2,500, 2,500 and 3,500 shares of restricted stock, respectively.
The Executive Compensation Committee did not grant any options to purchase
shares of common stock in either 2002 or 2001. In January 2003, the Executive
Compensation Committee awarded Messrs. Agree, Howe, Schaefer, Prueter and Coburn
10,000, 5,000, 2,500, 2,500 and 3,500 shares, respectively. The restricted stock
awards vest over five years, with 20% vesting on each anniversary of the date of
grant.
OUR PROPERTIES AND TENANTS
Our properties consist of 35 freestanding net leased properties and 14
community shopping centers, that as of March 31, 2003 were 97% leased, with a
weighted average lease term of 12.6 years. Approximately 88% of our base rental
income was attributable to national retailers. Among these retailers are
Borders, Kmart and Walgreen which, at March 31, 2003, collectively represented
approximately 66% of current base rental income. A majority of our properties
were built for or are leased to national tenants who require a high quality
location with strong retail characteristics. We developed 30 of our 35
freestanding properties and all 14 of our community shopping centers. Five of
our freestanding properties, although not built by us, were acquired as part of
our relationship with Borders. Properties we have developed (including our
community shopping centers) account for 90.5% of our contractual rent for 2003.
Our 35 freestanding properties are comprised of 34 retail locations and Borders'
corporate headquarters.
S-18
A substantial portion of our income consists of rent received under net
leases. Most of the leases provide for the payment of fixed base rentals monthly
in advance and for the payment by tenants of a pro rata share of the real estate
taxes, insurance, utilities and common area maintenance of the shopping center
as well as payment to us of a percentage of the tenant's sales. We received
percentage rents of $41,409 for the first quarter of 2003 and $247,994 and
$413,058 for the fiscal years 2002 and 2001, respectively, and these amounts
represented 0.6%, 1.0% and 1.7%, respectively, of our total revenue for these
periods. Included in those amounts were percentage rents from Kmart of $162,419
and $235,894 for the fiscal years 2002 and 2001, respectively. Leases with
Borders do not contain percentage rent provisions. Leases with Walgreen do
contain percentage rent provisions; however, no percentage rent was received
from Walgreen during these periods. Some of our leases require us to make roof
and structural repairs, as needed.
MAJOR TENANTS
The following table sets forth certain information with respect to our
major tenants:
<Table>
<Caption>
ANNUALIZED BASE PERCENT OF TOTAL
NUMBER RENT AS OF ANNUALIZED BASE RENT AS
OF LEASES MARCH 31, 2003 OF MARCH 31, 2003
--------- --------------- -----------------------
Borders.................................. 18 $ 7,600,588(1) 30%
Kmart.................................... 15 4,713,035 19
Walgreen................................. 12 4,455,806 17
-- ----------- --
Total............................... 45 $16,769,429 66%
== =========== ==
</Table>
- ---------------
(1) Includes our percentage of base rent for each of the joint venture
properties.
Borders Group, Inc., (Borders), is a FORTUNE 500 company that trades on the
New York Stock Exchange under the symbol "BGP." Borders is a leading global
retailer of books, music, movies and other information and entertainment items.
Headquartered in Ann Arbor, Michigan Borders, operates over 400 Borders Books
and Music stores in the United States, as well as 29 international Borders
stores, approximately 800 Waldenbooks locations and 37 United Kingdom based
Books etc. stores. Borders employs more than 32,000 people worldwide. We derived
approximately 28% of our base rental income for the year ended December 31, 2002
from, and approximately 34% of our future minimum rentals are attributable to,
Borders. Borders has reported that its annual revenues for its 2002 fiscal year
ended January 26, 2003 were $3,513,000,000 and its annual net income for 2002
was $111,700,000 and that it had total stockholders' equity of $1,030,600,000.
Fifteen of our properties are anchored by Kmart, a retailer that operates
over 1,500 stores following its emergence from bankruptcy proceedings in May
2003. Kmart's principal business is general merchandise retailing through a
chain of department stores. We derived approximately 20% of our base rental
income for the year ended December 31, 2002 from, and approximately 18% of our
future minimum rentals are attributable to, Kmart. In connection with its
emergence from bankruptcy proceedings, Kmart was relieved of $7,969,000,000 of
liabilities. As of April 30, 2003, Kmart had total liabilities of $4,947,000,000
and shareholders' equity of $1,712,000,000. All of our Kmart properties are in
the "Big K" format and these Kmart properties average 85,000 square feet per
property. All of our leases with Kmart other than the lease relating to our
Lakeland, Florida property were reaffirmed by Kmart.
Walgreen is a leader of the U.S. chain drugstore industry and trades on the
New York Stock Exchange under the symbol "WAG." It operates over 3,950 stores in
43 states and Puerto Rico and total assets of approximately $9.8 billion as of
August 31, 2002. As of July 9, 2003, Walgreen had a Standard and Poor's rating
of A+ and a Moody's rating of Aa3. We derived approximately 17% of our base
rental income for the year ended December 31, 2002 from, and approximately 25%
of our future minimum rentals are attributable to, Walgreen. For its fiscal year
ended August 31, 2002, Walgreen reported that its annual net sales were
$26,681,100,000 and its annual net income was $1,019,200,000 and that it had
shareholders' equity of $6,230,200,000.
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In May 2003, Kmart emerged from the bankruptcy proceeding which it had
initiated in January, 2002. Pursuant to the confirmed plan of reorganization,
Kmart closed a number of its stores, including one of which that was located on
our property in Lakeland, Florida. Kmart vacated the premises in Lakeland,
Florida in April of 2003 and we are actively marketing the space formerly
occupied by Kmart. Our annual rent from this property was approximately $480,000
and Kmart's annual contribution under the lease for real estate taxes, insurance
and common area maintenance was approximately $110,000. Certain tenants in the
Lakeland, Florida community shopping center have co-tenancy clauses in their
leases which provide either for modification of their rent to be based on gross
sales or an option to terminate their lease when the Kmart store closes, if we
are unable to obtain a replacement anchor tenant. As of the date of this
prospectus supplement, none of these tenants have indicated that they will
exercise their option to terminate their leases with us. We believe it will take
between six to 12 months to re-let the Kmart location. In connection with the
re-letting the Kmart location, we may have to agree to make capital expenditures
with respect to the property. In addition, we have agreed to rent reductions
aggregating $300,000 per year under two other Kmart leases, for the stores in
Perrysburg, Ohio and Winter Garden, Florida. In both cases, the rent reductions
are for a 5-year periods.
The financial information set forth above with respect to Borders, Walgreen
and Kmart was derived from the annual reports on Form 10-K filed by Borders and
Walgreen with the SEC with respect to their 2002 fiscal years and the quarterly
report on Form 10-Q filed by Kmart with the SEC with respect to the first
quarter of 2003. Additional information regarding Borders, Walgreen or Kmart may
be found in their respective public filings. These filings can be accessed on
the SEC's website at www.sec.gov.
LOCATION OF PROPERTIES IN THE PORTFOLIO
<Table>
<Caption>
TOTAL GROSS PERCENT OF
NUMBER OF LEASABLE AREA GLA LEASED ON
STATE PROPERTIES (SQ. FEET) MARCH 31, 2003
- ----- ---------- ------------- --------------
California.............................................. 1 38,015 100%
Florida................................................. 5(1) 492,305 82(2)
Indiana................................................. 1 15,844 100
Illinois................................................ 1 20,000 100
Kansas.................................................. 2 45,000 100
Kentucky................................................ 1 135,009 100
Maryland................................................ 2 53,000 100
Michigan................................................ 24(1) 2,090,426 99
Nebraska................................................ 2 55,000 100
Ohio.................................................... 2 108,543 100
Oklahoma................................................ 4(1) 99,282 100
Pennsylvania............................................ 1 37,004 100
Wisconsin............................................... 3 523,036 99
-- --------- ---
Total/Average...................................... 49 3,712,464 97%
== ========= ===
</Table>
- ---------------
(1) Includes joint venture properties in which we own interests ranging from 11%
to 15%
(2) This figure includes the space in our Lakeland, Florida property vacated by
Kmart.
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LEASE EXPIRATIONS
The following table shows lease expirations for the next 10 years for our
community shopping centers and wholly-owned freestanding properties, assuming
that none of the tenants exercise renewal options.
<Table>
<Caption>
MARCH 31, 2003
---------------------------------------------
GROSS LEASABLE AREA ANNUALIZED BASE RENT
NUMBER -------------------- ----------------------
EXPIRATION OF LEASES SQUARE PERCENT PERCENT
YEAR EXPIRING FOOTAGE OF TOTAL AMOUNT OF TOTAL
---------- --------- --------- -------- ----------- --------
2003..................................... 8 23,436 0.6% $ 152,584 0.6%
2004..................................... 15(1) 65,623 1.8% 521,242 2.1%
2005..................................... 24 175,267 4.7% 1,012,674 4.0%
2006..................................... 32 160,524 4.3% 1,311,081 5.2%
2007..................................... 11 54,330 1.5% 392,809 1.5%
2008..................................... 21 386,838 10.4% 1,486,808 5.8%
2009..................................... 2 142,790 3.9% 542,414 2.1%
2010..................................... 5 206,735 5.6% 1,176,729 4.6%
2011..................................... 7 182,903 4.9% 1,201,938 4.7%
2012..................................... 1 50,000 1.3% 56,250 0.2%
2013..................................... 2 138,344 3.7% 777,194 3.1%
Thereafter............................... 44 2,125,674 57.3% 16,841,221 66.1%
--- --------- ------ ----------- ------
Total.................................... 172 3,712,464 100.0% $25,472,944 100.0%
=== ========= ====== =========== ======
</Table>
- ---------------
(1) For purposes of this table we have assumed that Borders will enter into a 15
to 20 year lease upon the expiration of each of its leases on our three
joint venture properties.
We have made preliminary contact with the tenants whose leases expire in
2003. Five (5) tenants, at their option, have the right to extend their lease
term; two (2) tenants' leases expire in 2003 and we expect to negotiate lease
extensions; and one (1) tenant has a month to month lease arrangement. Of the 16
leases that expired in 2002, 11 tenants extended their lease term; four tenants
elected not to extend their lease (two of which properties were subsequently
re-let to new tenants and two are currently for lease); and one tenant elected a
month to month option.
Leases on the three joint venture properties are for an initial term
through June 20, 2004. At the time of a refinancing of any of these properties
is consummated, Borders is required to enter into a net lease at a fixed lease
rate for a term of 15 to 20 years.
ANNUALIZED BASE RENT OF OUR PROPERTIES
The following is a breakdown of base rents in place at March 31, 2003 for
each type of retail tenant:
<Table>
<Caption>
PERCENT OF
ANNUALIZED ANNUALIZED
TYPE OF TENANT BASE RENT(1) BASE RENT
- -------------- ------------ ----------
National(2)................................................. $22,333,249 88%
Regional(3)................................................. 2,032,617 8
Local....................................................... 1,107,078 4
----------- ---
Total..................................................... $25,472,944 100%
=========== ===
</Table>
- ---------------
(1) Includes our share of annualized base rent for each of the joint venture
properties.
(2) Includes the following national tenants: Kmart, Borders, Walgreen, Wal-Mart,
Fashion Bug, Winn Dixie, Rite Aid, JC Penney, Avco Financial, GNC Group,
Radio Shack, Sam Goody, Super Value, Maurices,
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Payless Shoes, Kash N Karry, Blockbuster Video, Family Dollar, H&R Block,
Sally Beauty, Jo Ann Fabrics, Staples, Best Buy, Dollar Tree, TGI Friday's,
Circuit City and Pier 1 Imports.
(3) Includes the following regional tenants: Roundy's Foods, Dunham's Sports,
Christopher Banks, Beal's Outlet Stores and Hollywood Video.
FREESTANDING PROPERTIES
Thirty-five (35) of our properties are freestanding properties which at
March 31, 2003 were net leased to Borders (18), Circuit City Stores (1), Kmart
(3), Walgreen (12) and Wal-Mart (1). Our freestanding properties provided
$14,209,117, or approximately 55.8% of our total annualized base rent as of
March 31, 2003, at an average base rent per square foot of $10.00. These
properties contain, in the aggregate, 1,421,147 square feet of gross leasable
area or approximately 38% of our total gross leasable area. Our freestanding
properties tend to have high traffic counts, are generally located in densely
populated areas and are leased to a single tenant on a long term basis. Thirty
(30) of our 35 freestanding properties were developed by us. Five (5) of our 35
freestanding properties, although not developed by us, were acquired as part of
our relationship with Borders. Our freestanding properties have a weighted
average lease term of 16 years.
Our freestanding properties range in size from 13,686 to 458,729 square
feet of gross leasable area and are located in the following states: California
(1), Florida (3), Indiana (1), Kansas (2), Maryland (2), Michigan (17), Nebraska
(2), Ohio (2), Oklahoma (4) and Pennsylvania (1). Included in our freestanding
properties are three joint venture properties in which we own interests ranging
from 11% to 15%. The location
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and general occupancy information with respect to our freestanding properties
are set forth in the following table:
FREESTANDING PROPERTIES(1)
<Table>
<Caption>
YEAR LEASE EXPIRATION(3)
TENANT/LOCATION COMPLETED/EXPANDED TOTAL GLA (OPTION EXPIRATION)
- --------------- ------------------ --------- --------------------
Borders,(2) Aventura, FL................. 1996 30,000 Jan 31, 2016 (2036)
Borders, Columbus, OH.................... 1996 21,000 Jan 23, 2016 (2036)
Borders, Monroeville, PA................. 1996 37,004 Nov 8, 2016 (2036)
Borders, Norman, OK...................... 1996 24,641 Sep 20, 2016 (2036)
Borders, Omaha, NE....................... 1995 30,000 Nov 3, 2015 (2035)
Borders, Santa Barbara, CA............... 1995 38,015 Nov 17, 2015 (2035)
Borders, Wichita, KS..................... 1995 25,000 Nov 10, 2015 (2035)
Borders,(2) Lawrence, KS................. 1997 20,000 Oct 16, 2022 (2042)
Borders, Tulsa, OK....................... 1998 25,000 June 20, 2004 (2024)
Borders, Oklahoma City, OK............... 2002 24,641 Nov 17, 2017 (2037)
Borders, Omaha, NE....................... 2002 25,000 Nov 17, 2017 (2037)
Borders, Indianapolis, IN................ 2002 15,844 Nov 17, 2017 (2037)
Borders, Columbia, MD.................... 1999 28,000 Oct 16, 2022 (2042)
Borders, Germantown, MD.................. 2000 25,000 Oct 16, 2022 (2042)
Borders Headquarters, Ann Arbor, MI...... 1996/1998 458,729 Jan 29, 2023 (2043)
Circuit City Stores, Boynton Beach, FL... 1996 32,459 Dec 15, 2016 (2036)
Kmart, Grayling, MI...................... 1984 52,320 Sep 30, 2009 (2059)
Kmart, Oscoda, MI........................ 1984/1990 90,470 Sep 30, 2009 (2059)
Kmart, Perrysburg, OH.................... 1983/1997 87,543 Oct 31, 2008 (2058)
Sam's Club, Roseville, MI................ 2002 (4) Aug 4, 2022 (2082)
Walgreen, Waterford, MI.................. 1997 13,905 Feb 28, 2018 (2058)
Walgreen, Chesterfield, MI............... 1998 13,686 July 31, 2018 (2058)
Walgreen, Pontiac, MI.................... 1998 13,905 Oct 31, 2018 (2058)
Walgreen, Grand Blanc, MI................ 1998 13,905 Feb 28, 2019 (2059)
Walgreen, Rochester, MI.................. 1998 13,905 June 30, 2019 (2059)
Walgreen, Ypsilanti, MI.................. 1999 15,120 Dec 31, 2019 (2059)
Walgreen,(2) Petoskey, MI................ 2000 13,905 Apr 30, 2020 (2060)
Walgreen, Flint, MI...................... 2000 14,490 Dec 31, 2020 (2060)
Walgreen, Flint, MI...................... 2001 15,120 Feb 28, 2021 (2061)
Walgreen, N Baltimore, MI................ 2001 14,490 Aug 31, 2021 (2061)
Walgreen, Flint, MI...................... 2002 14,490 Apr 30, 2027 (2077)
Walgreen, Big Rapids, MI................. 2003 13,560 Apr 30, 2028 (2078)
-------- ---------
Total.................................. 1,261,147
---------
</Table>
- ---------------
(1) Does not include the three joint venture properties.
(2) These properties are subject to long-term ground leases where a third party
owns the underlying land and has leased the land to us to construct or
operate freestanding properties. We pay rent for the use of the land and we
are generally responsible for all costs and expenses associated with the
building and improvements. At the end of the lease terms, as extended
(Aventura, FL 2036, Lawrence, KS 2027 and Petoskey, MI 2049), the land
together with all improvements revert to the land owner. We have an option
S-23
to purchase the Lawrence property during the period October 1, 2006 to
September 30, 2016 and to purchase the Petoskey property after August 7,
2019.
(3) At the expiration of tenant's initial lease term, each tenant has an option,
subject to certain requirements, to extend its lease for an additional
period of time.
(4) This 12.68 acre property is leased from us by Wal-Mart pursuant to a ground
lease.
JOINT VENTURE PROPERTIES
During 1996, seven freestanding properties that we leased to Borders,
including Borders' current corporate headquarters, its former headquarters
building and properties operated as Borders Books and Music were developed or
acquired directly by seven limited liability companies which we identify as
joint ventures, but which are accounted for by us as partnerships. We have
acquired the entire interest of our joint venture partner in four of the joint
venture properties and have entered into a long-term lease with Borders for each
property. The acquired properties are located in Oklahoma City, Oklahoma, Omaha,
Nebraska, Indianapolis, Indiana and Ann Arbor, Michigan. The remaining three
properties are owned by separate limited liability companies that are each owned
jointly by us and an affiliate of Borders. Our economic interest in the joint
ventures ranges from 11% to 15%. The financing for the development of the joint
venture properties was provided through a financing facility established by
Borders and its affiliates (Borders Financing Facility).
The leases on the three properties between Borders and each of the joint
ventures has a term expiring June 20, 2004, unless the Borders Financing
Facility is extended or earlier terminated. At any time during the term of the
lease, Borders has the right to cause the refinancing of the properties,
provided that, prior to any refinancing, we may elect to provide alternative
financing for the properties. If we elect to provide alternative financing and
are subsequently unable to obtain the requisite financing, Borders may purchase
the properties. Upon a refinancing by Borders or our providing alternative
financing, we will acquire the interest of the Borders' affiliate in the joint
ventures, and Borders will enter into a new lease with us providing for a term
of 15 or 20 years, with four five-year extension options.
Our investment in the three joint venture properties currently yields
approximately $450,000 annualized base rent. Under certain circumstances
relating to refinancing of such assets, the rents paid pursuant to such leases
are subject to adjustment. The following table provides additional information
on the joint venture properties.
JOINT VENTURE PROPERTIES
<Table>
<Caption>
OUR
TENANT/LOCATION INTEREST TOTAL GLA LEASE EXPIRATIONS(1)
- --------------- -------- --------- --------------------
Borders, Inc., Ann Arbor, MI............................ 11% 110,000 June 20, 2004
Borders, Inc., Boynton Beach, FL........................ 12% 25,000 June 20, 2004
Borders, Inc., Tulsa, OK................................ 15% 25,000 June 20, 2004
-------
Total................................................. 160,000
-------
</Table>
- ---------------
(1) At the time a refinancing of these properties is consummated, Borders is
required to enter into a net lease at a fixed lease rate for a term of 15 to
20 years.
COMMUNITY SHOPPING CENTERS
Fourteen (14) of our properties are community shopping centers ranging in
size from 20,000 to 241,458 square feet of gross leaseable area. The community
shopping centers are located in five states as follows: Florida (2), Illinois
(1), Kentucky (1), Michigan (7) and Wisconsin (3). Our community shopping
centers tend to be located in high traffic, market dominant centers in which
customers of our tenants purchase day-to-day necessities. Our community shopping
centers are anchored by national tenants.
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The location, general character and primary occupancy information with
respect to the community shopping centers as of March 31, 2003 are set forth
below:
SUMMARY OF COMMUNITY SHOPPING CENTERS AT MARCH 31, 2003
<Table>
<Caption>
GROSS AVERAGE PERCENT PERCENT
YEAR LEASABLE BASE OCCUPIED AT LEASED AT ANCHOR TENANTS (LEASE
COMPLETED/ AREA ANNUALIZED RENT PER MARCH 31, MARCH 31, EXPIRATION/OPTION PERIOD
PROPERTY LOCATION EXPANDED SQ. FT.) BASE RENT(2) SQ. FT.(3) 2003 2003(4) EXPIRATION)(5)
- ----------------- ---------- ---------- ------------ ---------- ----------- --------- ---------------------------
Capital Plaza,(1)...... 1978/1991 135,009 $ 369,568 $2.74 75% 100% Kmart (2008/2053)
Frankfort, KY Winn Dixie (2010/2035)
Fashion Bug (2005/2025)
Charlevoix Commons..... 1991 137,375 658,495 4.97 70% 96% Kmart (2015/2065)
Charlevoix, MI Roundy's (2011-2031)
Chippewa Commons....... 1991 168,311 879,783 5.40 97% 97% Kmart (2014/2064)
Chippewa Falls, WI Roundy's (2011/2031)
Fashion Bug (2006/2021)
Iron Mountain Plaza.... 1991 176,352 856,193 4.99 97% 97% Kmart (2015/2065)
Iron Mountain, MI Roundy's (2011/2031)
Fashion Bug (2007/2022)
Ironwood Commons....... 1991 185,535 907,327 5.00 97% 97% Kmart (2015/2065)
Ironwood, MI Super Value (2011/2036)
Fashion Bug (2004/2022)
Marshall Plaza......... 1990 119,279 650,331 5.45 100% 100% Kmart (2015/2065)
Marshall, MI
Mt. Pleasant Shopping 1973/1997 241,458 1,088,504 4.51 100% 100% Kmart (2008/2048)
Center................. J.C. Penney Co. (2005/2020)
Mt. Pleasant, MI Staples, Inc. (2005/2025)
Fashion Bug (2006/2026)
North Lakeland Plaza... 1987 171,334 804,827 9.22 51% 51% Best Buy (2013/2028)
Lakeland, FL
Petoskey Town Center... 1990 174,870 1,052,342 6.15 98% 98% Kmart (2015/2065)
Petoskey, MI Roundy's (2010/2030)
Fashion Bug (2007/2022)
Plymouth Commons....... 1990 162,031 974,599 6.01 100% 100% Kmart (2015/2065)
Plymouth, WI Roundy's (2010/2030)
Fashion Bug (2006/2021)
Rapids Associates...... 1990 173,557 945,139 5.57 72% 98% Kmart (2015/2065)
Big Rapids, MI Roundy's (2010/2030)
Fashion Bug (2004/2021)
Shawano Plaza.......... 1990 192,694 1,013,792 5.26 100% 100% Kmart (2014/2064)
Shawano, WI Roundy's (2010/2030)
J.C. Penney Co. (2005/2025)
Fashion Bug (2004/2021)
West Frankfort Plaza... 1982 20,000 131,000 6.55 100% 100% Fashion Bug (2007)
West Frankfort, IL
Winter Garden Plaza.... 1988/2000 233,512 931,927 4.06 98% 98% Kmart (2013/2063)
Winter Garden, FL Kash N Karry (2020/2040)
---------- ----------- ----- ---- ----
TOTAL/AVERAGE...... $2,291,317 $11,263,827 $5.18 90% 95% 95%
========== =========== ===== ==== ====
</Table>
- ---------------
(1) All community shopping centers except Capital Plaza (which is subject to a
long-term ground lease expiring in 2053 from a third party) are wholly-owned
by us.
(2) Total annualized base rents of the Company as of March 31, 2003.
(3) Calculated as total annualized base rents, divided by gross leaseable area
actually leased as of March 31, 2003.
(4) Roundy's has sub-leased the space it leases at Iron Mountain Plaza (35,285
square feet, rented at a rate of $5.87 per square foot) and leases but does
not currently occupy, the 35,896 square feet it leases at
S-25
Charlevoix Commons at a rate of $5.97 per square foot and the 44,478 square
feet it leases at Rapids Associates at a rate of $6.00 per square foot. The
Iron Mountain and Charlevoix leases expire in 2011 and the Rapids Associates
lease expires in 2010 (assuming they are not extended by Roundy's).
(5) The option to extend the lease beyond its initial term is only at the option
of the tenant.
DESCRIPTION OF CREDIT FACILITIES
We have, through our Operating Partnership, a $50 million credit facility
with Standard Federal Bank, as the agent. Advances to this credit facility bear
interest, at our option, either within a range of 1-month to 6-month LIBOR, plus
150 basis points to 213 basis points or the lender's prime rate, based on
certain factors such as debt to property value and debt service coverage. The
credit facility has a draw termination date of August 7, 2003 and matures in
August 2006. During the three year period between termination and maturity, we
will have no further ability to borrow under this credit facility and we will be
required to repay a portion of the unpaid principal on a quarterly basis. We
have received a 90-day extension of the August 2003 termination date, during
which period we can continue to borrow under the credit facility. We are
currently in discussions with the lender regarding the further extension of the
termination date, the extension of the maturity date and other terms of the
credit facility. There can be no assurance that we will receive the requested
extensions or that the terms of the extensions will be acceptable to us. The
credit facility is used to fund property acquisitions and development activities
and is secured by 15 of our properties. At June 30, 2003, approximately $37
million was outstanding under this credit facility, bearing interest a weighted
average annual rate of 2.78%.
In addition, we have, through our Operating Partnership, a $5 million line
of credit with Standard Federal Bank, as the lender. The line of credit bears
interest, at our option, at either the lender's prime rate less 50 basis points
or 175 basis points over the 1-month LIBOR rate. Borrowings under the line of
credit are used to provide working capital and to fund land options and start-up
costs associated with new projects. The line of credit matures on April 30,
2004. At June 30, 2003, $700,000 was outstanding under the line of credit,
bearing interest at an annual rate of 3.5%.
FEDERAL INCOME TAX CONSEQUENCES
IN GENERAL
The following summary of material federal income tax consequences relating
to the acquisition, ownership and disposition of common stock is based on
current law, is for general information only and is not tax advice. This summary
is based upon the Internal Revenue Code, existing, temporary and proposed
regulations of the Treasury Department, or Treasury Regulations, and existing
judicial decisions and administrative rulings and practices of the IRS, all of
which are subject to change. Any such change could apply retroactively and could
significantly alter the tax consequences described below. No advance tax ruling
has been sought or obtained from the IRS regarding the tax consequences
described below. Because the following discussion represents only a summary, it
is qualified in its entirety by the applicable provisions of the Internal
Revenue Code, the rules and regulations promulgated thereunder and
administrative and judicial interpretation thereof, all of which are subject to
change and all of which may be applied retroactively.
The following discussion is limited to holders of common stock who are
United States persons. For purposes of this discussion, United States persons
are:
- individuals who are citizens of the United States or who are residents in
the United States for United States federal income tax purposes;
- corporations (including any entities treated as corporations for United
States federal income tax purposes) that are organized under the laws of
the United States or any state thereof;
- estates the income of which is subject to United States federal income
taxation regardless of its source; or
- trusts that are subject to the supervision of a court within the United
States and are subject to the control of one or more United States
persons that have the authority to control all substantial decisions
S-26
of the trust or that have a valid election in effect under applicable
Treasury Regulations to be treated as a United States person.
This summary does not discuss all United States federal tax considerations,
such as estate and gift tax consequences, that may be relevant to a holder in
light of the holder's particular circumstances. This summary does not address
the federal income tax consequences that may be relevant to holders that may be
subject to special treatment (including, without limitation, holders subject to
the alternative minimum tax, banks, insurance companies, tax-exempt
organizations, financial institutions, small business investment companies,
partnerships or other pass-through entities, dealers in securities or
currencies, broker-dealers, persons who hold shares as part of a straddle,
hedging, constructive sale, or conversion transaction, and holders whose
functional currency is not the United States dollar). Furthermore, this summary
does not address any aspects of state, local or other taxation. This summary is
limited to those holders who hold the common stock as "capital assets" within
the meaning of Section 1221 of the Internal Revenue Code.
If a partnership (including for this purpose any entity treated as a
partnership for United States federal income tax purposes) is a beneficial owner
of common stock, the treatment of a partner in the partnership will generally
depend upon the status of the partner and upon the activities of the
partnership. A holder of common stock that is a partnership and the partners in
such partnership should consult their tax advisors about the United States
federal income tax consequences of holding and disposing of common stock.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR
HOLDER. PROSPECTIVE HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING
THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF ACQUIRING, HOLDING AND
DISPOSING OF COMMON STOCK, AND ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE
LAWS OF ANY FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTION.
TAXABLE DISTRIBUTIONS
As long as we qualify as a REIT, distributions made by us to the holders of
common stock out of our current or accumulated earnings and profits as
calculated for United States federal income tax purposes (that are not
designated as capital gain dividends) will be taxable to these holders as
ordinary income and will not be eligible for the dividends received deduction
generally available to holders that are corporations. Distributions not
designated as capital gain dividends made to a holder of common stock which
exceed our earnings and profits will be deemed to be a return of capital to the
holder to the extent of the adjusted tax basis of the holder's common stock. Any
such distribution in excess of adjusted tax basis will be taxable to the holder
as gain from the sale of common stock to the extent the distribution exceeds the
holder's adjusted tax basis in the common stock. A holder of common stock who
has received a distribution in excess of our accumulated earnings and profits
may, upon sale of the common stock, realize a higher taxable gain or a smaller
loss because the adjusted basis of the common stock as reduced will be used for
purposes of computing the amount of the gain or loss. For purposes of
determining whether distributions to holders of common stock are out of current
or accumulated earnings and profits, our earnings and profits will be allocated
first to our outstanding preferred stock, if any, and then to the common stock.
Dividends we declare in October, November or December of any year and payable to
a holder of the record of common stock on a specified date in any of these
months shall be treated as both paid by us and received by the holder on
December 31 of that year, provided we actually pay the dividend on or before
January 31 of the following calendar year. A holder of common stock may not
include in his or her own income tax return any of our net operating losses or
capital losses.
Dividends that are properly designated by us as capital gain dividends will
be taxable as capital gains (to the extent that they do not exceed our actual
net capital gain for the taxable year). Depending on the period of time, the tax
characteristics of the assets which produced these gains, and on certain
designations, if any, which we make, these gains may be taxable to non-corporate
U.S. shareholders as long term capital gains or at a 25% rate. However,
corporate holders of common stock may be required to treat up to 20% of certain
capital gain dividends as ordinary income. We may elect to retain, rather than
distribute as a capital gain dividend,
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our net long-term capital gains. If we make this election, we would pay tax on
our retained net long-term capital gains. In addition, to the extent we
designate, a holder of common stock would:
- include its proportionate share of our undistributed long-term capital
gains in computing its long-term capital gains in its return for its
taxable year in which the last day of our taxable year falls;
- be deemed to have paid the capital gains tax imposed on us on the
designated amounts included in the holder's long-term capital gains;
- receive a credit or refund for the amount of tax deemed paid by it;
- increase the adjusted basis of its common stock by the difference between
the amount of includable gains and the tax deemed to have been paid by
it; and
- in the case of a holder that is a corporation, appropriately adjust its
earnings and profits for the retained capital gains in accordance with
Treasury Regulations to be prescribed by the IRS.
Distributions we make and gain arising from the sale or exchange by a
holder of our common stock will not be treated as income from a passive
activity, within the meaning of Section 469 of the Internal Revenue Code, since
income from a passive activity generally does not include dividends and gain
attributable to the disposition of property that produces dividends. As a
result, holders of common stock subject to the passive activity rules will
generally be unable to apply any "passive losses" against this income or gain.
Distributions we make, to the extent they do not constitute a return of capital,
generally will be treated as investment income for purposes of computing the
investment interest limitation. Gain arising from the sale or other disposition
of our common stock, however, will be treated as investment income if a holder
so elects, in which case the capital gain is taxed at ordinary income rates.
In any year in which we fail to qualify as a REIT, holders of common stock
generally will continue to be treated in the same fashion described above,
except that none of our dividends will be eligible for treatment as capital
gains dividends and corporate stockholders may qualify for the dividends
received deduction.
SALE OR OTHER TAXABLE DISPOSITION OF COMMON STOCK FOR CASH
Upon a sale or other taxable disposition of shares of common stock, the
holder of the stock generally will recognize capital gain or loss for United
States federal income tax purposes in an amount equal to the difference between:
- the amount of cash and the fair market value of any property received
(less any portion attributable to accumulated and declared, but unpaid,
dividends which will be taxable as a dividend to the extent of our
current and accumulated earnings and profits); and
- the holder's adjusted tax basis in the common stock.
Generally, gain or loss realized by a holder upon the sale of common stock
will be reportable as capital gains or loss. If a holder receives a long-term
capital gain dividend from us and has held the common stock for six months or
less, any loss incurred on the sale or exchange of the common stock is treated
as a long-term capital loss to the extent of the corresponding long-term capital
gain dividend received.
BACKUP WITHHOLDING
We will report to both our holders who are United States persons 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
holder may be subject to backup withholding with respect to dividends paid at a
rate of 30% for 2003, 29% for 2004 and 2005, and 28% thereafter until December
31, 2010, if the holder fails to furnish its taxpayer identification number to
us in the required manner or to establish an exemption from the requirement or
if the Secretary of the Treasury notifies us that the taxpayer identification
number furnished by the holder is incorrect. Accordingly, a holder may avoid
backup withholding by furnishing its correct taxpayer identification number to
us. Any holder who does not provide its taxpayer identification number to us
should consult its tax advisor concerning the applicability of the backup
withholding provisions to its distributions
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from us. Any amount paid as backup withholding will be creditable against the
holder's federal income tax liability.
UPDATE OF FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain changes in the federal income tax
laws that affect REITs and stockholders of REITs. This discussion supplements,
and should be read in conjunction with, the disclosure under the caption
"Federal Income Tax Considerations" in the accompanying prospectus. The
following tax discussion replaces the discussion in the section entitled
"Federal Income Tax Considerations" to the extent the two are inconsistent. The
following discussion, which is not exhaustive of all possible tax consequences,
does not include a discussion of any state, local or foreign tax consequences.
We have elected to be treated as a REIT under Sections 856 through 860 of
the Internal Revenue Code for federal income tax purposes commencing with our
taxable year ended December 31, 1994. We believe that we have been organized and
have operated in a manner that qualifies for taxation as a REIT under the
Internal Revenue Code. We also believe that we will continue to operate in a
manner that will preserve our status as a REIT. We cannot assure you, however,
that such requirements will be met in the future. We have received an opinion
from Locke Liddell & Sapp LLP, our legal counsel, to the effect that we
qualified as a REIT under the Internal Revenue Code for our taxable year ended
December 31, 2002, we have been organized and our manner of operation has been
in conformity with the requirements for qualification and taxation as a REIT as
of the date of this prospectus supplement and that our proposed manner of
operation and diversity of equity ownership should enable us to continue to
satisfy the requirements for qualification as a REIT in the calendar year 2003
if we operate in accordance with the methods of operations described herein and
our representations concerning our intended method of operation. However, you
should be aware that opinions of counsel are not binding on the IRS or on the
courts, and, if the IRS were to challenge these conclusions, no assurance can be
given that these conclusions would be sustained in court. The opinion of Locke
Liddell & Sapp LLP is based on various assumptions as well as on certain
representations made by us as to factual matters, including a factual
representation certificate provided by us. The rules governing REITs are highly
technical and require ongoing compliance with a variety of tests that depend,
among other things, on future operating results, asset diversification,
distribution levels and diversity of stock ownership. Locke Liddell & Sapp LLP
will not monitor our compliance with these requirements. While we expect to
satisfy these tests, and will use our best efforts to do so, no assurance can be
given that we will qualify as a REIT for any particular year, or that the
applicable law will not change and adversely affect us and the holders of common
stock. The following is a summary update of the material federal income tax
considerations affecting us as a REIT and the holders of our common stock.
Ticket to Work and Work Incentives Improvement Act of 1999. The rules
dealing with federal income taxation are constantly under review by Congress,
the IRS and the Treasury Department. For example, on December 17, 1999, the
Ticket to Work and Work Incentives Improvement Act of 1999, was signed into law.
The act contains changes in federal income tax laws that, beginning after
December 31, 2000, affect REITs. Under this legislation, REITs may own stock in
"taxable REIT subsidiaries," corporations that may provide services to tenants
of the REIT and others, without disqualifying the rents that the REIT receives
from its tenants. A taxable REIT subsidiary is a corporation in which a REIT
owns stock, directly or indirectly, and with respect to which the corporation
and the REIT have made a joint election to treat the corporation as a taxable
REIT subsidiary. Although a REIT may own up to 100% of the stock of a taxable
REIT subsidiary, (1) the value of all securities in taxable REIT subsidiaries
held by the REIT may not exceed 20% of the value of the total assets of the
REIT; and (2) any dividends received by the REIT from its taxable REIT
subsidiaries will not constitute qualifying income under the 75% income test. In
addition, this legislation limits the deduction of interest paid by a taxable
REIT subsidiary to the REIT and limits the amount of rental payments that may be
made by a taxable REIT subsidiary to the REIT.
A REIT is subject to a penalty tax equal to 100% of redetermined rents,
redetermined deductions and excess interest. Redetermined rents are generally
rents from real property which would otherwise be reduced on distribution,
apportionment or allocation to clearly reflect income as a result of services
furnished or
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rendered by a taxable REIT subsidiary to tenants of the REIT. There are a number
of exceptions with regard to redetermined rents, which are summarized below.
- Redetermined rents do not include amounts received directly or indirectly
by a REIT for customary services.
- Redetermined rents do not include de minimis payments received by the
REIT with respect to non-customary services rendered to the tenants of a
property owned by the REIT that do not exceed 1% of all amounts received
by the REIT with respect to the property.
- The redetermined rent provisions do not apply with respect to any
services rendered by a taxable REIT subsidiary to the tenants of the
REIT, as long as the taxable REIT subsidiary renders a significant amount
of similar services to persons other than the REIT and to tenants who are
unrelated to the REIT or the taxable REIT subsidiary or the REIT tenants,
and the charge for these services is substantially comparable to the
charge for similar services rendered to such unrelated persons.
- The redetermined rent provisions do not apply to any services rendered by
a taxable REIT subsidiary to a tenant of a REIT if the rents paid by
tenants leasing at least 25% of the net leasable space in the REIT's
property who are not receiving such services are substantially comparable
to the rents paid by tenants leasing comparable space who are receiving
the services and the charge for the services is separately stated.
- The redetermined rent provisions do not apply to any services rendered by
a taxable REIT subsidiary to tenants of a REIT if the gross income of the
taxable REIT subsidiary from these services is at least 150% of the
taxable REIT subsidiary's direct cost of rendering the services.
- The Secretary of the Treasury has the power to waive the tax that would
otherwise be imposed on redetermined rents if the REIT establishes to the
satisfaction of the Secretary that rents charged to its tenants were
established on an arms' length basis even though a taxable REIT
subsidiary provided services to the tenants.
Redetermined deductions are deductions, other than redetermined rents, of a
taxable REIT subsidiary if the amount of these deductions would be decreased on
distribution, apportionment or allocation to clearly reflect income between the
taxable REIT subsidiary and the REIT. Excess interest means any deductions for
interest payments made by a taxable REIT subsidiary to the REIT to the extent
that the interest payments exceed a commercially reasonable rate of interest.
A REIT is prohibited from owning more than 10%, by vote or by value, of the
securities, other than specified debt securities, of a non-REIT issuer. This
prohibition does not, however, apply to taxable REIT subsidiaries, qualified
REIT subsidiaries and non-qualified corporate subsidiaries in which the REIT
does not own more than 10% of the voting securities, provided the non-qualified
subsidiary was established on or before July 12, 1999, does not engage in a new
line of business or acquire any substantial asset (other than pursuant to a
binding contract in effect as of July 12, 1999, a tax-free exchange, an
involuntary conversion or a reorganization with another non-qualified corporate
subsidiary) and the REIT does not acquire any new securities in such subsidiary
(other than pursuant to a binding contract in effect as of July 12, 1999 or a
reorganization with another non-qualified corporate subsidiary). A REIT may
convert existing non-qualified corporate subsidiaries into taxable REIT
subsidiaries in a tax-free reorganization at any time prior to January 1, 2004.
The 5% asset test described in the accompanying prospectus also does not apply
to securities held by the REIT in taxable REIT subsidiaries.
Under the legislation, the 95% distribution requirement discussed in the
accompanying prospectus has been reduced to 90% of REIT taxable income.
Under the legislation, the basis for determining whether more than 15% of
the rents received by a REIT from a property are attributable to personal
property is based upon a comparison of the fair market value of the personal
property leased by the tenant as compared to the fair market value of all of the
property leased by the tenant, rather than the adjusted basis of such personal
property compared to the adjusted basis of all such property as discussed in the
accompanying prospectus.
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The accompanying prospectus describes regulations that are to be
promulgated governing certain tax issues relating to built-in gain assets we
acquire in specific tax-free transactions. Temporary regulations have been
issued addressing these issues. The temporary regulations allow us to make an
election with respect to such built-in gain assets. If we make the election, we
will be taxed at the highest regular corporate tax rate to the extent the
built-in gain is recognized during the first ten years after we acquire the
built-in gain assets. If we do not make the election, a tax would be incurred
upon the acquisition of the built-in gain asset as if such asset had been sold
to an unrelated party for its fair market value at such time.
Jobs and Growth Tax Act. On May 28, 2003, the President of the United
States signed into law the Jobs and Growth Tax Relief Reconciliation Act of
2003, referred to herein as the Jobs and Growth Tax Act. The Jobs and Growth Tax
Act reduces the maximum individual tax rate for long-term capital gains
generally from 20% to 15% (for sales occurring after May 6, 2003 through
December 31, 2008). The Jobs and Growth Tax Act also taxes "qualified dividend
income" of individuals as net capital gain, thus reducing the maximum individual
tax rate for such dividends to 15% (for tax years from 2003 through 2008).
"Qualified dividend income" generally includes dividends received from regular
domestic corporations and from certain "qualified foreign corporations,"
provided certain required stock holding periods are met.
Under the Jobs and Growth Tax Act, REIT dividends (other than capital gain
dividends) generally are not qualifying dividend income and continue to be taxed
at ordinary rates. Dividends received from a REIT will be treated as qualified
dividend income, however, to the extent the REIT itself has qualifying dividend
income for the taxable year in which the dividend was paid, such as dividends
from taxable REIT subsidiaries, and designates such dividends as qualifying for
such capital gains rate tax treatment. Qualifying dividend income of a REIT for
this purpose also includes the sum of (i) the excess of the REIT's "real estate
investment trust taxable income" for the preceding year, which would typically
include any income that the REIT did not distribute to stockholders, over the
tax payable by the REIT on such income, and (ii) the excess of the income of the
REIT for the preceding year subject to the built-in gain tax on certain assets
acquired from C corporations, including as a result of the conversion of a C
corporation to a REIT, over the tax payable by the REIT on any such income in
the preceding year.
Assuming that we distribute all of our taxable income to our stockholders,
our distributions generally will not be eligible for the new 15% tax rate on
dividends for individual taxpayers except to the extent attributable to income
on which we have paid tax as discussed above or to dividends received by us from
non-REIT corporations such as taxable REIT subsidiaries. As a result, our
ordinary REIT distributions generally will be taxed at the higher tax rates
applicable to ordinary income.
Without future congressional action, the maximum individual tax rate on
long-term capital gains will return to 20% in 2009, and the maximum individual
tax rate on dividends will move to 35% in 2009 and 39.6% in 2011.
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UNDERWRITING
Friedman, Billings, Ramsey & Co., Inc. and BB&T Capital Markets, a division
of Scott & Stringfellow, Inc., are acting as representatives of the underwriters
of this offering. Subject to the terms and conditions contained in the
underwriting agreement, we have agreed to sell to each underwriter, and each
underwriter has agreed to purchase from us, the number of shares set forth
opposite its name below. The underwriting agreement provides that the obligation
of the underwriter to pay for and accept delivery of our common stock is subject
to approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to take and pay for all of the shares of our
common stock offered hereby, other than those covered by the over-allotment
option described below, if any such shares are taken.
<Table>
<Caption>
UNDERWRITER: NUMBER OF SHARES
- ------------ ----------------
Friedman, Billings, Ramsey & Co., Inc. .....................
BB&T Capital Markets, a division of Scott & Stringfellow,
Inc. .....................................................
</Table>
The following table shows the per share and total underwriting discount we
will pay to the underwriters. The amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase 225,000 additional
shares of common stock to cover over-allotments.
<Table>
<Caption>
NO EXERCISE FULL EXERCISE
----------- -------------
Per Share................................................... $ $
-------- --------
Total:................................................. $ $
======== ========
</Table>
Certain of our executive officers and directors have agreed with the
underwriters, for a period of 90 days after the date of this prospectus
supplement, subject to certain exceptions, not to sell any shares of common
stock, or any securities convertible into or exchangeable for shares of common
stock, owned by them, without the prior written consent of the underwriters.
However, the underwriters may, in their sole discretion and at any time without
notice, release all or any portion of the securities subject to these
agreements.
The underwriters propose to offer our common stock directly to the public
at $ per share and to certain dealers at this price less a concession not in
excess of $ per share. The underwriter's may allow and the dealers may
reallow, a concession not in excess of $ per share to certain dealers.
We expect to incur expenses of approximately $ in connection with
this offering.
We have granted the underwriters an option, exercisable for 30 days after
the date of this prospectus supplement, to purchase up to additional
shares of common stock to cover over-allotments, if any, at the public offering
price less the underwriting discount described on the cover page of this
prospectus supplement. If the underwriters exercise this option, the
underwriters will have a firm commitment, subject to certain conditions, to
purchase all of the shares covered by the option.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the underwriter may be required to make in respect
thereof.
In connection with the offering, the underwriters are permitted to engage
in certain transactions that stabilize, maintain or otherwise effect the market
price of our common stock. These transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of our common stock. The
underwriters may create a short position in our common stock in connection with
this offering by selling more than they are committed to purchase from us, and
in such case, the underwriters may reduce that short position by purchasing our
shares in the open market to cover all or a portion of such short position. The
underwriters may also cover all or a portion of such short position, up to
shares, by exercising the underwriters' over-allotment option referred
to above. In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be higher
than it might be in the absence of those purchases. Neither we nor the
underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of our
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common stock. In addition, neither we nor the underwriters make any
representation that the underwriters will engage in those transactions or that
those transactions, one commenced, will not be discontinued without notice.
The underwriters or their respective affiliates may provide us with
investment banking, financial advisory, or commercial banking services in the
future, for which they may receive customary compensation.
ADDITIONAL DESCRIPTION OF OUR SHARES
SHAREHOLDER RIGHTS PLAN
We have adopted a rights agreement, under which each holder of our common
stock receives one preferred share purchase right for each outstanding share of
common stock. Each right is attached to each share of common stock, is not
currently exercisable and trades only with the common shares. Each right will
separate from the share of common stock to which it is attached and will become
exercisable ten days after a public announcement that a person or group has
acquired common stock that would result in ownership of 15% or more of our
shares of common stock. Upon the occurrence of such an event, each right would
entitle the holder to purchase for an exercise price of $70.00 one one-hundredth
of a share of new Series A Junior Participating preferred Shares, which is
designed to have economic and voting rights generally equivalent to one common
share. If a person or group actually acquires 15% or more of our common shares,
each right held by the acquiring person or group (or their transferees) will
become void, and each right held by our other stockholders will entitle those
holders to purchase for the exercise price a number of shares of our common
shares having a market value of twice the exercise price. If we, at any time
after a person or group has become a 15% beneficial owner and acquired control
of our Board of Directors, are involved in a merger or similar transaction with
any person or group or sell assets to any person or group, each outstanding
right would then entitle its holder to purchase for the exercise price a number
of shares of such other company having a market value of twice the exercise
price. In addition, if any person or group acquires 15% or more of our shares of
common stock, we may, at our option and to the fullest extent permitted by law,
exchange one common share for each outstanding right. The rights are not
exercisable until the above events occur and will expire on December 22, 2008,
unless earlier exchanged or redeemed by us. We may redeem the rights for $.001
per right under certain circumstances.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe.
LEGAL MATTERS
Certain legal matters, including the legality of the common stock, will be
passed upon for us by Locke Liddell & Sapp LLP, Dallas, Texas, as our securities
and tax counsel, and for the underwriters by Winston & Strawn, Chicago,
Illinois. The opinion of counsel as described under "Federal Income Tax
Consequences" is being rendered by Locke Liddell & Sapp LLP, Dallas, Texas.
EXPERTS
The financial statements and schedule incorporated by reference in this
prospectus supplement and the accompanying prospectus have been audited by BDO
Seidman, LLP, independent certified public accountants, to the extent and for
the periods set forth in their report incorporated herein by reference, and are
incorporated herein in reliance upon such report given upon the authority of
said firm as experts in auditing and accounting.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference rooms. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms.
The SEC allows us to "incorporate by reference" the information we file
with them, which means we can disclose important information to you by referring
you to those documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
SEC will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
until we have sold all of the securities.
- Annual Report on Form 10-K for the fiscal year ended December 31, 2002
(File No. 1-12928);
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File
No. 1-12928);
- Definitive Proxy Statement on Schedule 14-A filed with the SEC on March
24, 2003 (File No. 1-12928); and
- Registration Statement on Form 8-A filed March 18, 1994, relating to our
common stock (File No. 1-12928).
The filings we make with the SEC may be obtained from us at no cost upon a
written or telephone request by contacting us at the following:
Agree Realty Corporation
31850 Northwestern Highway
Farmington Hills, Michigan 48334
Attention: Kenneth R. Howe
Telephone: (248) 737-4190, extension 226
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AGREE REALTY CORPORATION
$125,000,000
COMMON STOCK
PREFERRED STOCK
Agree Realty Corporation (the "Company") may from time to time offer and
sell (i) shares of its common stock, par value $.0001 per share (the "Common
Stock") and (ii) shares of its preferred stock, par value $.0001 per share (the
"Preferred Stock" and, together with the Common Stock, the "Offered
Securities"), with an aggregate public offering price not to exceed
$125,000,000. The Offered Securities may be offered separately or together, in
separate series, in amounts and at prices and terms to be set forth in a
supplement to this Prospectus (the "Prospectus Supplement").
The terms of the Preferred Stock, including the specific designation and
stated value per share, any dividend, liquidation, redemption, conversion,
voting and other rights, and all other specific terms of the Preferred Stock,
including the initial public offering price, will be set forth in the applicable
Prospectus Supplement. The specific number of shares of Common Stock and
issuance price per share thereof will be set forth in the applicable Prospectus
Supplement. In addition, the specific terms of the Prospectus Supplement may
include limitations on direct or beneficial ownership and restrictions on
transfer of the Offered Securities, in each case as may be appropriate to
preserve the status of the Company as a real estate investment trust ("REIT")
for Federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain Federal income tax considerations relating to, and any
listing on a securities exchange of, the Offered Securities covered by such
Prospectus Supplement.
The Offered Securities may be offered directly by the Company, through
agents designated from time to time by the Company or to or through underwriters
or dealers, or through a combination of the foregoing. If any agents or
underwriters are involved in the sale of any of the offered Securities, their
names, and any applicable purchase price, fee, commission or discount
arrangement between or among them, will be set forth, or will be calculable from
the information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Offered Securities may be sold without delivery of the
applicable Prospectus Supplement describing the method and terms of the offering
of such Offered Securities.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
THE "RISK FACTORS" SET FORTH IN THE APPLICABLE PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS IS APRIL 29, 1998.
1
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (of which this Prospectus is a part) on
Form S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. Statements contained in this Prospectus as to
the content of any contract or other document are not necessarily complete, and
in each instance reference is made to the copy of the contract or other document
filed as an exhibit to the Registration Statement, each statement being
qualified in all respects by that reference and the exhibits to the Registration
Statement. For further information regarding the Company and the securities
offered hereby, reference is hereby made to the Registration Statement and the
exhibits to the Registration Statement which may be obtained from the Commission
at its principal office in Washington, D.C., upon payment of fees prescribed by
the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Commission.
Reports, proxy statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at its
Regional offices located at Citicorp Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661; and Suite 1300, Seven World Trade Center, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a site on the World Wide
Web at http://www.sec.gov. that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The Common Stock is listed on the New York Stock Exchange,
Inc. (the "NYSE") and such reports, proxy statements and other information
concerning the Company can be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company pursuant
to the Exchange Act (File No. 1-12928) are hereby incorporated by reference in
this Prospectus.
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "Form 10-K").
(b) The Company's Registration Statement on Form S-11, dated May 15,
1997 (Registration Statement No. 333-25313).
(c) Description of the Offered Securities contained in the Company's
registration statement on Form 8-A filed March 18, 1994.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made hereby shall be deemed to be incorporated
by reference into this Prospectus.
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of the Registration Statement and this
Prospectus to the extent that a statement contained in the Registration
Statement, this Prospectus or any other subsequently filed document that is also
incorporated by reference herein modifies or supersedes that statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a Prospectus is delivered, upon written
or oral request of that person, a copy of any document incorporated herein by
reference (other than exhibits to those documents unless the exhibits are
specifically
2
incorporated by reference into the documents that this Prospectus incorporates
by reference). Requests should be directed to Kenneth Howe, Vice
President -- Finance, Agree Realty Corporation, 31850 Northwestern Highway,
Farmington Hills, Michigan 48334; telephone number (248) 737-4190.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER OR AGENT. THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT DO
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER OR
THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR
RESPECTIVE DATES.
THE COMPANY
The Company is a self-administered, self-managed real estate investment
trust ("REIT") which develops, acquires, owns and operates Properties (as
defined below) which are primarily leased to major national and regional retail
companies under net leases. As of December 31, 1997, the Company owned, either
directly or through interests in joint ventures, 34 Properties (the
"Properties," and sometimes collectively referred to as the "Portfolio") located
in 12 states and containing an aggregate of approximately 3.1 million square
feet of gross leasable area ("GLA"). The Properties consist of 13 neighborhood
and community shopping centers and 21 freestanding Properties. As of December
31, 1997, 98t of GLA in the Portfolio was leased and approximately 93% of the
Company's annualized base rent was attributable to national and regional
retailers. As of December 31, 1997, the Company derived approximately 73% of its
annualized base rent from five major tenants, Kmart Corporation ("Kmart"),
Borders, Inc., Roundy's Inc ("Roundy's), Walgreen Co. ("Walgreen") and Fashion
Bug (Charming Shoppes, Inc.). The Company was the developer of all 13 of the
shopping centers and 16 of the 21 freestanding properties. As of December 31,
1997, the average age of the Properties was approximately seven years.
Upon completion of its initial public offering (the "IPO") in April 1994,
the Company succeeded to the ownership of 17 Properties which contain an
aggregate of 2,376,000 square feet. Since the IPO, the Company has:
(i) Completed, either directly or through interests in joint ventures,
the development or acquisition of 15 Properties leased to Borders, Inc. and
other subsidiaries (collectively, "Borders") of Borders Group, Inc. ("BGI")
which contain in the aggregate over 675,000 square feet. These Properties
include Borders' corporate headquarters and central administrative
buildings in Ann Arbor, Michigan. Eight of these 15 Properties are owned
directly by the Company and the remaining seven (the "Joint Venture
Properties") are owned by entities wherein the Company's economic interest
ranges from 8%- to 20% (the "Joint Ventures").
(ii) Developed a Circuit City store in Boynton Beach, Florida,
consisting of approximately 32,500 square feet, pursuant to a 20 year net
lease.
(iii) Developed a free standing Walgreen Drug Store located in
Waterford, Michigan consisting of approximately 14,000 square feet,
pursuant to a 20 year net lease.
(iv) Continued to operate both its initial portfolio and its new
Properties at leased rates of over 95% and without any tenant defaults.
Kmart, the Company's largest tenant, reported to the Company that the
aggregate same-store sales at the stores leased from the Company increased
over 6% from 1996 to 1997. Since the IPO, the only anchor tenant to vacate
any of the Company's Properties was J. Byrons, which
3
vacated its 51,868 square-foot location in Lakeland, Florida in September
1996. This space was re-leased to Best Buy Company, Inc., at an increased
rental rate, for a term expiring in January 2013, with a 15 year renewal
option.
The Company is operated under the direction of Richard Agree, Chairman of
the Board and President, and Kenneth Howe, Vice President-Finance. Messrs. Agree
and Howe have a combined 35 years experience in the construction, management,
leasing and disposition of retail properties.
The Company's executive offices are located at 31850 Northwestern Highway,
Farmington Hills, Michigan 48334. The telephone number is (248) 737-4190. The
Company was incorporated in Maryland on December 15, 1993 and the duration of
its existence is perpetual. Unless the context otherwise requires, the term
"Company," as used herein, includes Agree Realty Corporation and Agree Limited
Partnership (the "Operating Partnership"), of which Agree Realty Corporation is
the sole general partner.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company expects to use all or a portion of the net proceeds from the sale of the
Offered Securities, first, to discharge all or a portion of the then outstanding
principal amount under the $50,000,000 Line of Credit Agreement, dated as of
November 14, 1995, and amended on August 7, 1997 and November 17, 1997, by and
among the Operating Partnership, the Company, Michigan National Bank, NBD Bank
and LaSalle National Bank (the "Credit Agreement"). As of March 31, 1998,
approximately $11,674,000 was outstanding under the Credit Agreement, which
borrowings were used for the acquisition, construction and development of
additional properties. Subject to certain exceptions, the then outstanding
principal balance of the borrowings under the Credit Agreement, together with
the accrued interest thereon, becomes payable on the maturity date, August 7,
2003. The borrowings under the Credit Agreement bear an adjustable interest
rate.
The Company intends, unless otherwise described in the applicable
Prospectus Supplement, to use the remaining net proceeds from the sale of the
Offered Securities for general corporate purposes, which may include acquiring
additional retail income-producing properties or interests in entities owning or
developing such properties as suitable opportunities arise, making improvements
to properties, repaying certain then-outstanding secured or unsecured
indebtedness and for working capital. Pending use for the foregoing purposes,
such proceeds may be invested in short-term, interest-bearing time or demand
deposits with financial institutions, cash items or qualified government
securities.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to combined fixed charges and preferred
stock dividends for the year ended December 31, 1997, the year ended December
31, 1996, the year ended December 31, 1995 and the year ended December 31, 1994
(which includes results of operations of the Company's predecessor entities for
the period of January 1, 1994 through April 21, 1994) was 2.1x, 1.7x, 1.9x and
1.4x, respectively, and for the years ending December 31, 1993 and 1992 (which
are based on the results of the Company's predecessor entities) was .99x and
..93x, respectively. For the years ending December 31, 1993 and 1992,
respectively, all of which were prior to the Company's initial public offering
in April of 1994, the Company's earnings were inadequate to cover fixed charges
by $22,654 and $635,882. The Company had no preferred dividend requirement in
any of the foregoing years. Therefore, the ratio of earnings to combined fixed
charges and preferred stock dividends are the same as the ratio of earnings to
fixed charges for such years. Earnings were calculated by adding certain fixed
charges (consisting of interest on indebtedness and amortization of finance
costs) to the Company's income before extraordinary items.
4
DESCRIPTION OF SECURITIES
The summary of the terms of the Offered Securities set forth below does not
purport to be complete and is subject to, and qualified in its entirety by,
references to the Company's articles of incorporation, as they may be amended
from time to time (the "Charter"), and bylaws, as they may be amended from time
to time (the "Bylaws").
Under the Company's Charter and Bylaws, the total number of shares of all
classes of capital stock that the Company has authority to issue is 20,000,000
shares, par value $.0001 per share, initially consisting of 5,000,000 shares of
Common Stock and 2,500,000 shares of excess stock (the "Excess Stock"). At March
31, 1998, 4,346,313 shares of Common Stock were issued and outstanding, all of
which are fully paid and nonassessable.
The Board of Directors is authorized to classify or reclassify any unissued
portion of the authorized shares of capital stock to provide for the issuance of
shares in other classes or series, including preferred stock in one or more
series.
DESCRIPTION OF COMMON STOCK
GENERAL
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Holders of Common
Stock do not have cumulative voting rights in the election of directors, which
means that holders of more than 50$ of the shares of Common Stock voting for the
election of directors can elect all of the directors if they choose to do so and
the holders of the remaining shares cannot elect any directors. Subject to
preferential rights with respect to any outstanding Preferred Stock, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company, holders of Common
Stock, together with the holders of Excess Stock (as described below), are
entitled to share ratably in net assets remaining after payment of liabilities
and satisfaction of preferential rights with respect to any outstanding shares
of Preferred Stock. The shares of Common Stock are not convertible into any
other class or series except into Excess Stock under limited circumstances. See
"-- Restrictions on Transfer." Holders of Common Stock do not have preemptive
rights, which means they have no right to acquire any additional shares of
Common Stock that may be issued by the Company at a subsequent date. The
outstanding shares of Common Stock are, and the Common Stock to be outstanding
upon completion of the offering will be, fully paid and nonassessable. The
Common Stock is listed on the NYSE under the symbol "ADC."
RESTRICTIONS ON TRANSFER
Among other requirements that must be met for the Company to qualify as a
REIT under the Internal Revenue Code of 1986, as amended (the "Code"), not more
than 50% of the value of its issued and outstanding Equity Stock (as defined
below) may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include, except in limited circumstances, certain
entities such as qualified private pension plans) during the last half of a
taxable year, and the Equity Stock must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of twelve months or during a
proportionate part of a shorter taxable year. In addition, certain percentages
of the Company's gross income must be from particular activities (see "Federal
Income Tax Considerations -- Taxation of the Company -- Income Tests"). The
Charter contains restrictions on the acquisition of shares of Equity Stock to
enable the Company to qualify as a REIT.
Subject to certain exceptions specified in the Charter, no holder may own,
or be deemed to own by virtue of the attribution provisions of the Code, more
than 9.8% (the "Ownership Limit") of the value of the Company's outstanding
Common Stock and Preferred Stock (collectively, the "Equity Stock" or the
"Stock") except that the Agree-Rosenberg Group (as defined in the Charter) may
own up to 24%. The Board of Directors may waive the ownership Limit if evidence
satisfactory to the Board of Directors and the
5
Company's tax counsel is presented that such ownership will not then or in the
future jeopardize the Company's status as a REIT. As a condition of such waiver,
the Board of Directors may require opinions of counsel satisfactory to it and/or
an undertaking from the applicant with respect to preserving the REIT status of
the Company. The foregoing restrictions on transferability and ownership will
not apply if the Board of Directors determines that it is no longer in the best
interests of the Company to continue to qualify as a REIT. If shares of Equity
Stock in excess of the Ownership Limit, or shares which would cause the REIT to
be beneficially owned by less than 100 persons, are issued or transferred to any
person, such issuance or transfer shall be null and void to the intended
transferee, and the intended transferee would acquire no rights to the stock.
Shares transferred in excess of the Ownership Limit will be automatically
converted into shares of Excess Stock that will be deemed transferred by
operation of 1x to the Company as trustee for the exclusive benefit of the
person or persons to whom the shares are ultimately transferred, until the
intended transferee retransfers the shares. While these shares are held in
trust, they will not be entitled to vote or to share in any dividends or other
distributions. The shares may be retransferred by the intended transferee to any
person. who may hold such shares at a price not to exceed the price paid by the
intended transferee, at which point the shares will automatically be converted
into ordinary Equity Stock. In addition, such shares of Excess Stock held in
trust are purchasable by the Company for a 90-day period at a price equal to the
lesser of the price paid for the stock by the intended transferee and the market
price for the stock on the date the Company determines to purchase the stock.
This period commences on the date of the violative transfer if the intended
transferee gives notice to the Company of the transfer, or the date the Board of
Directors determines that a violative transfer has occurred if no notice has
been provided.
All certificates representing shares of the offered Securities will bear a
legend referring to the restrictions described above.
In order for the Company to comply with its record keeping requirements,
the Charter requires that each beneficial or constructive owner of Equity Stock
and each person (including stockholders of record) who holds stock for a
beneficial or constructive owner, shall provide to the Company such information
as the Company may request in order to determine the Company's status as a REIT
and to ensure compliance with limitations on the ownership of Equity Stock. The
Charter also requires each beneficial or constructive owner of a specified
percentage of Equity Stock to provide, no later than January 31 of each year,
written notice to the Company stating the name and address of such owner, the
number of shares of Equity Stock beneficially or constructively owned, and a
description of xx% such shares are held. In addition, each such stockholder must
provide such additional information as the Company may request in order to
determine the effect of such stockholder's ownership of Equity Stock on the
Company's status as a REIT and to ensure compliance with the limitations on the
ownership of Equity Stock.
This ownership limitation may have the effect of precluding acquisition of
control of the Company by a third party unless the Board of Directors determines
that maintenance of REIT status is no longer in the best interests of the
Company. No restrictions on transfer will preclude the settlement of
transactions entered into through the facilities of the NYSE, provided that
certain transactions may be settled by the delivery of Excess Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
DESCRIPTION OF PREFERRED STOCK
GENERAL
Subject to limitations prescribed by Maryland 1x and the Company's Charter,
the Board of Directors is authorized to issue, from the authorized but unissued
shares of capital stock of the Company, Preferred Stock in such classes or
series as the Board of Directors may determine and to establish from time to
time the number of shares of Preferred Stock to be included in any such class or
series and to fix the designation and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
6
qualifications and terms and conditions of redemption of the shares of any such
class or series, and such other subjects or matters as may be fixed by
resolution of the Board of Directors. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company.
As of the date hereof, none of the shares of capital stock has been
designated as Preferred Stock. The Preferred Stock will, when issued for lawful
consideration therefor, be fully paid and nonassessable and, unless otherwise
provided in the applicable Prospectus Supplement, will have no preemptive
rights.
TERMS
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below unless otherwise provided in the applicable
Prospectus Supplement. The statements below describing the Preferred Stock are
in all respects subject to and qualified in their entirety by reference to the
applicable provisions of the Charter and the By-Laws and any articles
supplementary to the Charter designating terms of a series of Preferred Stock
(the "Articles Supplementary").
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including: (i) the title and stated
value of such Preferred Stock and the number of shares offered; (ii) the
liquidation preference per share; (iii) the initial public offering price at
which such Preferred Stock will be issued; (iv) the dividend rate, periods and
payment dates or methods of calculation thereof applicable to such Preferred
Stock and the date from which dividends on such Preferred Stock shall commence
to accumulate, if applicable; (v) the provision for a sinking fund, if any, for
such Preferred Stock; (vi) the provision for redemption, if applicable, of such
Preferred Stock; (vii) any listing of such Preferred Stock on any securities
exchange; (viii) the terms and conditions, if applicable, upon which such
Preferred Stock will be convertible into Common Stock, including the conversion
price or rate (or manner of calculation thereof); (ix) any other specific terms,
preferences, rights, limitations or restrictions of such Preferred Stock; (x) a
discussion of Federal income tax considerations applicable to such Preferred
Stock; (xi) the relative ranking and preference of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of the
affairs of the Company; (xii) any limitations on issuance of any series of
Preferred Stock ranking senior to or on a parity with such series of Preferred
Stock as to dividend rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company; (xiii) any limitations on direct or beneficial
ownership and restrictions on transfer, in each case as may be appropriate to
preserve the status of the Company as a REIT; and (xiv) the voting rights, if
any, of such Preferred Stock.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to all
classes or series of Common Stock and Excess Stock of the Company and to all
equity securities issued by the Company, the terms of which specifically provide
that such equity securities rank junior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company; (ii) on a parity with all equity securities issued by the Company, the
terms of which specifically provide that such equity securities rank on a parity
with the Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; and (iii) junior to all
equity securities issued by the Company, the terms of which specifically provide
that such equity securities rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company.
DIVIDENDS
Holders of each series of Preferred Stock will be entitled to receive,
when, as and if declared by the Board of Directors, out of assets of the Company
legally available for payment, cash dividends at such rates and on such dates as
will be set forth in the applicable Prospectus Supplement. Such rate may be
fixed or variable or both. Each such dividend shall be payable to holders of
record as they appear on the share transfer books of
7
the Company on such record date as shall be fixed by the Board of Directors, as
specified in the Prospectus Supplement relating to such series of Preferred
Stock.
Dividends on any series of Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors fails to declare a
dividend payable on a dividend payment date on any series of the Preferred Stock
for which dividends are noncumulative, then the holders of such series of the
Preferred Stock will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Company will have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
So long as any series of Preferred Stock shall be outstanding, unless (i)
full dividends (including, if such dividends are cumulative, dividends for prior
dividend periods) shall have been paid or declared and set apart for payment on
all outstanding shares of Preferred Stock of such series and all other classes
and series of Preferred Stock (other than Junior Stock, as hereinafter defined)
and (ii) the mandatory repurchase or other mandatory retirement of, or with
respect to any sinking or other analogous fund for, any shares of Preferred
Stock of such series or any other Preferred Stock of any class or series (other
than Junior Stock) shall have occurred or been provided for and sufficient funds
shall have been deposited in trust to effect such repurchase or retirement, the
Company may not declare any dividends on any Common Stock or any other equity
securities of the Company ranking junior as to dividends or distributions of
assets to such series of Preferred Stock (the Common Stock and any such other
equity securities being herein referred to as "Junior Stock"), or make any
payment on account of, or set apart money for, the purchase, redemption or other
retirement of, or for a sinking or other analogous fund, for, any Junior Stock
or make any distribution in respect thereof, whether in cash or property or in
obligations or equity securities of the Company, other than shares of Junior
Stock which are neither convertible into, nor exchangeable or exercisable for,
any securities of the Company other than shares of Junior Stock.
Any dividend payment made on a series of Preferred Stock shall first be
credited against the earliest accrued but unpaid dividend due with respect to
shares of such series which remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, a series of
Preferred Stock may be redeemable, in whole or from time to time in part, at the
option of the Company, and may be subject to mandatory redemption pursuant to a
sinking fund or otherwise, in each case upon the terms, at the times and at the
redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of unpaid dividends for prior dividend periods) to
the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of shares of equity securities of the Company, the
terms of such series of Preferred Stock may provide that, if no such shares of
capital stock shall have been issued or to the extent the net proceeds from any
issuance are insufficient to pay in full the aggregate redemption price then
due, such Preferred Stock shall automatically and mandatorily be converted into
the applicable shares of capital stock of the Company pursuant to conversion
provisions specified in the applicable Prospectus Supplement.
So long as any dividends on shares of any series of Preferred Stock or any
other series of Preferred Stock of the Company ranking on a parity as to
dividends and distribution of assets with such series of Preferred Stock are in
arrears, no shares of any such series of Preferred Stock or such other series of
Preferred Stock of the Company will be redeemed (whether by mandatory or
optional redemption) unless all such shares are
8
simultaneously redeemed, and the Company will not purchase or otherwise acquire
any such shares; provided, however, that the foregoing will not prevent the
purchase or acquisition of such shares pursuant to a purchase or exchange offer
made on the same terms to holders of all such shares outstanding.
In the event that fewer than all of the outstanding shares of a series of
Preferred Stock are to be redeemed, the number of shares to be redeemed will be
determined by lot or pro rata (subject to rounding to avoid fractional shares)
as may be determined by the Company or by any other method as may be determined
by the Company in its sole discretion to be equitable. From and after the
redemption dates (unless default shall be made by the Company in providing for
the payment of the redemption price plus accumulated and unpaid dividends, if
any), dividends shall cease to accumulate on the shares of Preferred Stock
called for redemption and all rights of the holders thereof (except the right to
receive the redemption price plus accumulated and unpaid dividends, if any)
shall cease.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Stock, Excess Stock or any other class or
series of capital stock of the Company ranking junior to the Preferred Stock in
the distribution of assets upon any liquidation, dissolution or winding up of
the Company, the holders of each series of Preferred Stock shall be entitled to
receive out of assets of the Company legally available for distribution to
stockholders liquidating distributions in the amount of the liquidation
preference per share, if any, set forth in the applicable Prospectus Supplement,
plus an amount equal to all dividends accrued and unpaid thereon (which shall
not include any accumulation in respect of unpaid noncumulative dividends for
prior dividend periods). After payment of the full amount of the liquidating
distributions to which they are entitled, the holder of Preferred Stock will
have no right or claim to any of the remaining assets of the Company. In the
event that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of the Company are insufficient to pay the
amount of the liquidating distributions on all outstanding shares of Preferred
Stock and the corresponding amounts payable on all shares of other classes or
series of capital stock of the Company ranking on a parity with the Preferred
Stock in the distribution of assets, then the holders of the Preferred Stock and
all other such classes or series of capital stock ranking on parity with the
Preferred Stock shall share ratably in any such distribution of assets in
proportion to the full liquidating distributions to which they would otherwise
be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of capital stock ranking junior to
the Preferred Stock upon liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
the Company with or into any other corporation, trust or entity, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock of a series remain outstanding, the Company will not,
without the affirmative vote or consent of the holders of at least a majority of
the shares of such series of Preferred Stock outstanding at the time, given in
person or by proxy, either in writing or at a meeting (such series voting
separately as a class), (i) authorize or create, or increase the authorized or
issued amount of, any class or series of capital stock ranking prior to such
series of Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, or
reclassify any authorized capital stock of the Company into such shares, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares, or (ii) amend, alter or repeal
the provisions of the Charter or the Articles Supplementary for such series of
9
Preferred Stock, whether by merger, consolidation or otherwise (an "Event"), so
as to materially and adversely affect any right, preference, privilege or voting
power of such series of Preferred Stock or the holders thereof, provided,
however, with respect to the occurrence of any Event set forth in (ii) above, so
long as the Preferred Stock remains outstanding with the terms thereof
materially unchanged, taking into account that upon the occurrence of an Event
the Company may not be the surviving entity, the occurrence of any such Event
shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of Preferred Stock, and provided further
that (a) any increase in the amount of the authorized Preferred Stock or the
creation or issuance of any other series of Preferred Stock or (b) any increase
in the amount of authorized shares of such series or any other series of
Preferred Stock, in each case ranking on a parity with or junior to the
Preferred Stock of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall have
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the shares of Preferred Stock are
convertible, the conversion price or rate (or manner of calculation thereof),
the conversion period, provisions as to whether conversion will be at the option
of the holders of the Preferred Stock or the Company, the events requiring an
adjustment of the conversion price and the provisions affecting conversion in
the event of the redemption of such series of Preferred Stock.
RESTRICTIONS ON TRANSFER AND OWNERSHIP
See "Description of Common Stock -- Restrictions on Transfer" for a
discussion of the restrictions on transfer of shares of capital stock necessary
for the Company to qualify as a REIT under the Code.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material Federal income tax considerations
regarding an investment in the Offered Securities is based on current law, is
for general information only and is not tax advice. For purposes of this
discussion, the "Company" refers only to Agree Realty Corporation. Kramer,
Levin, Naftalis & Frankel ("Kramer Levin"), counsel to the Company, has reviewed
the following discussion and is of the opinion that it fairly summarizes all
Federal income tax considerations that are likely to be material to Company
stockholders. However, this discussion does not purport to deal with all aspects
of taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
subject to special treatment under the Federal income tax laws (including
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, foreign corporations and individuals who are not citizens or
residents of the United States). The discussion in this section is based on
existing provisions of the Code, existing and proposed Treasury Regulations,
existing court decisions and existing rulings and other administrative
interpretations. There can be no assurance that future Code provisions or other
legal authorities will not alter significantly the tax consequences described
below. No rulings have been obtained from the Internal Revenue Service (the
"IRS") concerning any of the matters discussed in this section. Because the
following represents only a summary, it is qualified in its entirety by the
applicable Code
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provisions, rules and regulations promulgated thereunder and administrative and
judicial interpretations thereof, all of which are subject to change and all of
which may be applied retroactively.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT ITS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE PURCHASE, OWNERSHIP AND
SALE OF THE OFFERED SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A
REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The Company has elected to be taxed as a REIT commencing with the
taxable year ending December 31, 1994. The Company believes that, commencing
with such taxable year, it has been organized and has operated in such a manner
as to qualify for taxation as a REIT under the Code and the Company intends to
continue to operate in such a manner, but no assurance can be given that it will
qualify as a REIT in any particular year.
The REIT requirements and the Federal income tax treatment of REITs and
their stockholders are highly technical and complex. The following discussion
sets forth only the material aspects of the Code sections that govern the
Federal income tax treatment of a REIT and its stockholders.
Opinion of Counsel. Kramer Levin is of the opinion that the Company is
organized in conformity with the requirements for qualification and taxation as
a REIT, and its proposed method of operation and the proposed method of
operation of the Operating Partnership will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code. It must be
emphasized that the opinion is based on various assumptions and is conditioned
upon certain representations made by the Company as to factual matters. Certain
of such factual assumptions and representations are set forth below in this
discussion of "Federal Income Tax Considerations." In addition, the opinion is
based upon the factual representations of the Company concerning its business
and properties, and the business and properties held by or through the Operating
Partnership, as set forth in this Prospectus. The opinion is expressed as of its
date, and Kramer Levin has no obligation to advise stockholders of the Company
of any subsequent change in the matters stated, represented or assumed, or any
subsequent change in applicable law. Moreover, the Company's qualification and
taxation as a REIT depends upon its ability to meet, through actual annual
operating results, distribution levels and diversity of stock ownership, the
various qualification tests imposed under the Code as discussed below, the
results of which will not be reviewed by Kramer Levin. Accordingly, no assurance
can be given that the actual results of the Company's operation for any one
taxable year will satisfy such requirements. See "-- Failure to Qualify." An
opinion of counsel is not binding on the IRS, and no assurance can be given that
the IRS will not challenge the Company's qualification as a REIT or that such
challenge would not be upheld by a court.
Taxation of the Company. If the Company qualifies for taxation as a REIT,
it generally will not be subject to Federal corporate income tax on its net
income that is currently distributed to stockholders because the REIT provisions
of the Code generally allow a REIT to deduct dividends paid to stockholders.
This deduction for dividends paid to stockholders substantially eliminates the
Federal "double taxation" (once at the corporate level and once again at the
stockholder level) that generally results from investment in a corporation.
However, the 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" (generally,
property acquired by reason of a default in a lease or an indebtedness held by a
REIT) which is held primarily for sale to customers in the ordinary course of
business or (ii) other nonqualifying net 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,
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certain sales or other dispositions of property (other than foreclosure
property) held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if the Company
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), and has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% test, multiplied by a fraction intended to reflect
the Company's profitability. Sixth, if the Company should fail to distribute
during any 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 four percent excise tax on the excess of such required distribution
over the amounts actually distributed. Seventh, if the Company acquires any
asset from a C corporation (i.e., a corporation generally subject to full
corporate-level tax) in a transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other property) in the hands of the C corporation, and the Company recognizes
gain on the disposition of such asset during the 10-year period beginning on the
date on which such asset was acquired by the Company (the "Recognition Period"),
then pursuant to guidelines issued by the IRS in IRS Notice 88-19 (the "Built-in
Gain Rules"), such gain, to the extent of the excess of (a) the fair market
value of such asset as of the beginning of such Recognition Period over (b) the
Company's adjusted basis in such asset as of the beginning of such Recognition
Period (the "Built-in Gain"), will be subject to tax at the highest regular
corporate rate. The results described above with respect to the recognition of
Built-in Gain assume that the Company will make an election pursuant to the
Built-in Gain Rules or applicable future administrative rules or Treasury
Regulations. The Company has not acquired, and does not expect to acquire, an
interest in any asset subject to the Built-in Gain Rules.
Requirements for Qualification. To qualify as a REIT, the Company must
elect to be so treated and must meet the requirements, certain of which are
discussed below, relating to the Company's organization, sources of income,
nature of assets and distributions of income to stockholders. The Company has
made the necessary election to be a REIT.
The Code defines a REIT as a corporation, trust or association (1) which is
managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (3) which would be taxable as a domestic corporation, but
for sections 856 through 859 the Code; (4) which is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more persons; (6) which
is not closely held, i.e. not more than 50% in value of its outstanding stock
is, at any time during the last half of the taxable year, owned, directly or
indirectly through the application of certain attribution rules, by or for five
or fewer individuals (as defined in the Code to include certain entities); and
(7) which meets certain other tests, described below, regarding the nature of
its income and assets. The Code provides that conditions (1) to (4), inclusive,
must be met during the entire taxable year and that condition (5) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (5) and
(6) do not apply to the first taxable year for which an election is made to be
taxed as a REIT. The Company has satisfied and anticipates that it will continue
to satisfy the requirements set forth in (1) through (7) above. In addition, the
Charter currently includes certain restrictions regarding transfer of the Equity
Stock that are intended to assist the Company in continuing to satisfy the share
ownership requirements described in (5) and (6) above. See "Description of
Common Stock -- Restrictions on Transfer."
To monitor the Company's compliance with the share ownership requirements,
the Company is required to maintain records regarding the actual ownership of
its shares. To do so, the Company must demand written statements each year from
the record holders of certain percentages of its stock in which the record
holders are to disclose the actual owners of the shares (i.e., the persons
required to include in gross income the REIT dividends). A list of those persons
failing or refusing to comply with this demand must be maintained as part of the
Company's records. A stockholder who fails or refuses to comply with the demand
must submit a statement with its tax return disclosing the actual ownership of
the shares and certain other information. Beginning in 1998, the Company will
not be treated as closely held during a taxable year if it demands the
12
required information statements from its record holders with respect to such
year, provided that the Company did not know, or have reason to know, that it
was closely held.
In addition, a corporation may not elect to be taxed as a REIT unless its
taxable year is the calendar year. The Company has a calendar year taxable year.
Treasury Regulations provide that a REIT which is a partner in a
partnership will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership shall retain the same character in the hands of the
REIT for purposes of section 856 of the Code, including satisfying the gross
income, tests and the asset tests described below. Thus, the Company's
proportionate share of the assets, liabilities and items of income of the
Operating Partnership (and any other partnership in which the Company invests)
will be treated as assets, liabilities and items of income of the Company for
purposes of applying the requirements described herein, provided that the
Operating Partnership (and any such other partnership) is treated as a
partnership for Federal income tax purposes. See "-- Tax Aspects of the
Operating Partnership -- Classification as a Partnership."
Income Tests. In order for the Company to maintain its qualification as a
REIT, it must satisfy certain gross income requirements annually. 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
"qualified temporary investment income" (described below). 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, and from dividends, interest and gain from the sale or other
disposition of stock or securities or from any combination of the foregoing.
Third, prior to 1998, gain from the sale or other disposition of stock or
securities held for less than one year, gain from prohibited transactions and
gain from the sale or other disposition of real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property)
must represent less than 30% of the Company's gross income (including gross
income from prohibited transactions) for each taxable year. This 30% gross
income test will cease to apply in taxable years beginning in 1998.
For purposes of the 75% and 95% gross income tests described above, "rents
from real property" generally include rents from interests in real property,
charges for services customarily furnished or rendered in connection with the
rental of real property, and rent attributable to personal property which is
leased under, or in connection with, a lease of real property, but only if the
rent attributable to such personal property for the taxable year does not exceed
15% of the total rent for the taxable year under such lease. However, "rents
from real property" do not include any amount received or accrued with respect
to any real or personal property if the determination of such amount depends in
whole or in part on the income or profits derived by any person from such
property. 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. In addition, the Code
provides that rents received or accrued 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, directly or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). Finally, "rents from real property" do
not include any amount received or accrued with respect to any real or personal
property if the REIT operates or manages the property or furnishes or renders
services to the tenants of such property, other than through an independent
contractor who is adequately compensated and from whom the REIT does not derive
any income; provided, however, that the Company may directly perform certain
customary services in connection with the rental of property (e.g., furnishing
water, heat, light and air conditioning, and cleaning windows, public entrances
and lobbies) other than services which are considered rendered to the occupant
of the property (e.g., renting parking spaces on a reserved basis to tenants).
For taxable years beginning after August 5, 1997, if the amount a REIT receives
or accrues for furnishing or rendering such impermissible services to the
tenants of a property or for the management or operation of property does not
exceed 1% of all amounts received or accrued by the REIT with respect to such
property during the year, only the amount received or accrued for such services,
management or operation (rather than all amounts received or accrued with
respect to such property) will be excluded from "rents from real property." The
amount treated as
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received for such impermissible services, management or operation will be at
least equal to 150% of the REIT's direct cost in furnishing such services or
providing the management or operation. The Company does not and will not charge
rent for any property that is based in whole or in part on the income or profits
of any person (except by reason of being based on a percentage or percentages of
receipts or sales, as described above) and the Company does not and will not
rent any property to a Related Party Tenant. The Company, directly and through
independent contractors, performs services under certain of its leases, all of
which the Company believes are customary services. The Company will hire
independent contractors from whom it derives no revenue to perform any
non-customary services.
The Company expects that substantially all of its gross income will
continue to qualify as "rents from real property." The Company provides
management and/or development services to certain properties for which it
receives a fee and may also realize gains from the sale of parcels of land
adjacent to the Properties; however, such fees and gains have constituted, and
the Company anticipates that they will continue to constitute, less than 5% of
the Company's gross income.
For purposes of the gross income tests described above, the term "interest"
generally does not include any amount received or accrued (directly or
indirectly) if the determination of such amount depends in whole or in part on
the income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "interest" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. The
Company does not, and does not intend to, charge interest that will depend, in
whole or in part, on the income or profits of any person.
To the extent the operating Partnership does not immediately use the
proceeds from the sale of the Offered Securities, these funds will be invested
in interest-bearing accounts and short-term, interest-bearing securities. The
interest income earned on these funds is expected to be includible under the 75%
test as "qualified temporary investment income" (which includes income
attributable to stock or debt instruments and attributable to the temporary
investment of new capital received in a stock offering, not including amounts
received under a dividend reinvestment plan). Qualified temporary investment
income treatment only applies to income received or accrued during the one-year
period beginning on the date the Company receives the new capital.
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 it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the nature and amount of its gross income to its return
and any incorrect information on the schedule was not due to fraud with intent
to evade tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of these relief provisions. As
discussed above in "-- Taxation of the Company," even if these relief provisions
apply, a tax would be imposed with respect to the excess net income. No similar
mitigation provision applies to provide relief if the 30% income test (for
taxable years prior to 1998) is not satisfied and, in such case, the Company
would cease to qualify as a REIT. See "-- Failure to Qualify."
Asset Tests. The Company, at the close of each quarter of its taxable
year, must also satisfy two tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must be represented by
real estate assets (including (i) its allocable share of real estate assets held
by partnerships in which the Company owns an interest or held by "qualified REIT
subsidiaries" of the Company and (ii) stock or debt instruments attributable to
the temporary investment of new capital received in exchange for Company stock
(other than amounts received pursuant to a dividend reinvestment plan) or in a
public offering of Company debt obligations which have maturities of at least
five years, but only during the one-year period beginning on the date the
Company receives such new capital), cash, cash items and government securities.
Second, with respect to investments in securities other than those includible in
the 75% 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 nor more
than 10% of the outstanding voting securities of such issuer (excluding
securities of a qualified REIT subsidiary or another REIT).
14
The Company believes it has complied and anticipates that it will continue
to comply with these asset tests. The Company is deemed to hold directly its
proportionate share of all real estate and other assets of the Operating
Partnership (and other partnerships in which the Company holds an interest). As
a result, the Company believes that at least 75% of its assets are and will
continue to be real estate assets. In addition, the Company does not, and does
not plan to, hold any securities representing more than 10% of any one issuer's
voting securities (other than securities of a qualified REIT subsidiary or
another REIT), or securities of any one issuer exceeding 5% of the value of the
Company's gross assets (determined in accordance with generally accepted
accounting principles). As previously discussed, the Company is deemed to own
its proportionate share of the assets of a partnership in which it is a partner
so that the Company's partnership interest in the operating Partnership itself
(or in other partnerships in which the Company holds an interest) is not a
security for purposes of the asset tests.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests, and to take such other
action within 30 days after the close of any quarter as may be required to cure
any noncompliance. However, there can be no assurance that such other action
will always be successful.
Annual Distribution Requirements. The Company, in order to be treated as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders during each taxable year in an amount at least equal to (A) the
sum of (i) 95% of the Company's "REIT taxable income" for the taxable year
(computed without regard to the dividends paid deduction and the Company's net
capital gain) and (ii) 95% of the net income, if any, from foreclosure property
in excess of the special tax on income from foreclosure property, minus (B) the
sum of certain items of noncash income. In addition, during the Company's
Recognition Period, if the Company disposes of any asset subject to the Built-in
Gain Rules, the Company will be required, pursuant to guidelines issued by the
IRS, to distribute at least 95% of the after-tax Built-in Gain realized during
the Recognition Period. Such distributions must be made in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment after such declaration. To the extent that the
Company does not distribute all of its net capital gain or distributes at least
95% (but less than 100%) of its "REIT taxable income," as adjusted, it will be
subject to tax on the undistributed portion at regular corporate ordinary and
capital gains tax rates. Furthermore, if the Company should fail to distribute
during any 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 four percent excise tax on the excess of such required distribution
over the amounts actually distributed. The Company believes that it has made,
and intends to make, timely distributions sufficient to satisfy these annual
distribution requirements.
The Company's REIT taxable income has been, and is expected to continue for
five to seven years to be, less than its cash flow, due to the allowance of
depreciation and other noncash charges in computing taxable income. Accordingly,
the company anticipates that during this period it will generally have
sufficient cash or liquid assets to enable it to satisfy the 95% distribution
requirement. It is possible that the Company, from time to time, may not have
sufficient cash or other liquid assets to meet the 95t distribution requirement,
possibly as a result of timing differences between the actual receipt of income
and actual payment of deductible expenses and the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company, or as a
result of nondeductible expenses such as principal amortization or capital
expenditures exceeding the amount of noncash deductions. In the event that such
situation occurs, in order to meet the 95% distribution requirement, the Company
may find it necessary to arrange for short-term, or possibly long-term,
borrowing or to pay dividends in the form of taxable stock dividends. If the
amount of nondeductible expenses exceeds noncash deductions, the Company may
refinance its indebtedness to reduce principal payments and borrow funds for
capital expenditures.
15
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year, and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary dividend income and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company will also be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification is lost. It is not possible
to state whether in all circumstances the Company would be entitled to the
statutory relief discussed above.
Taxation of Taxable Domestic Stockholders. As used herein, the term
"Domestic Stockholder" means a holder of shares of Stock that (for United States
Federal income tax purposes) is (i) a citizen or resident of the United States,
(ii) a corporation, a partnership, or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof or
(iii) an estate or trust the income of which is subject to United States Federal
income taxation regardless of its source. A trust will generally be treated as a
Domestic Stockholder for its taxable years beginning after December 31, 1996, if
a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. For any taxable
year for which the Company qualifies for taxation as a REIT, amounts distributed
to taxable Domestic Stockholders will be taxed as follows.
Distributions Generally. Distributions to Domestic Stockholders, other
than capital gain dividends discussed below, will be taxable as ordinary income
to such holders up to the amount of the Company's current or accumulated
earnings and profits. Such distributions are not eligible for the dividends
received deduction for corporations. To the extent that the Company makes
distributions in excess of its current or accumulated earnings and profits, such
distributions will first be treated as a tax-free return of capital, reducing
the tax basis in a Domestic Stockholder's shares of Stock, and the amount in
excess of such Stockholder's tax basis in its shares of Stock will be taxable as
gain realized from the sale of such shares. Such gain will constitute capital
gain if such shares were held as a capital asset, and will constitute long-term
capital gain if held for more than one year. Long term capital gain recognized
by an individual Stockholder will be taxed at the lowest rate applicable to
capital gains if the Stockholder has held the shares for more than 18 months.
See "-- Dispositions of Shares of Stock." Dividends declared by the Company in
October, November, or December of any year payable to a stockholder of record on
a specified date in any such month will be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the Company during January of the following
calendar year. Stockholders may not include on their own income tax returns any
tax losses of the Company. Future regulations may require stockholders to take
into account, for purposes of computing their individual alternative minimum tax
liability, certain tax preference items of the Company.
As a result of certain rules relating to the determination of the Company's
earnings and profits, stockholders may be required to treat certain
distributions that would otherwise result in a tax-free return of capital as
taxable dividends. Moreover, any "deficiency dividend" will be treated as a
"dividend" (an ordinary dividend or a capital gain dividend, as the case may
be), regardless of the Company's earnings and profits.
Capital Gain Dividends. Dividends to Domestic Stockholders that are
properly designated by the Company as capital gain dividends will be treated (to
the extent they do not exceed the Company's actual net capital gain) as gain
from the sale or exchange of a capital asset held for more than one year, or to
the extent designated by the Company, for more than 18 months without regard to
the period for which the stockholder
16
has held its stock. Corporate stockholders, however, may be required to treat up
to 20% of certain capital gain dividends as ordinary income. Capital gain
dividends are not eligible for the dividends received deduction for
corporations. For taxable years beginning after 1997, Domestic Stockholders may
be treated as receiving a capital gain dividend with respect to undistributed
net capital gains of the Company, to the extent designated by the Company in a
written notice to the shareholders. In that event, Domestic Stockholders will
receive a credit or refund in the amount of tax paid by the Company with respect
to such deemed dividends and will increase the basis in their shares by the
amount of such deemed dividends.
Passive Activity Losses; Investment Interest Limitations. Distributions
from the Company and gain from the disposition of the shares of Stock will not
ordinarily be treated as passive activity income, and, therefore, Domestic
Stockholders generally will not be able to apply any "passive activity losses"
against such income. Dividends from the Company (to the extent they do not
constitute a return of capital) and gain from the disposition of shares of Stock
generally will be treated as investment income for purposes of the investment
interest limitation.
Dispositions of Shares of Stock. A Domestic Stockholder will recognize
gain or loss on the sale or exchange of shares of Stock to the extent of the
difference between the amount realized on such sale or exchange and the holder's
tax basis in such shares. Such gain or loss generally will constitute capital
gain or loss if the holder has held such shares as a capital asset and will
generally constitute long-term capital gain if held for more than one year and
taxable at the lowest applicable rates for capital gains if held for more than
18 months. Losses incurred on the sale or exchange of shares of Stock held for
six months or less (after applying certain holding period rules), however, will
generally be deemed long-term capital loss to the extent of any capital gain
dividends received by the Domestic Stockholder with respect to such shares and
treated as long-term capital gain.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
In general, a tax-exempt entity that is a stockholder of the Company will
not be subject to tax on distributions from the Company or gain realized on the
sale of Stock. The IRS has ruled that amounts distributed by a REIT to a
tax-exempt employees' pension trust do not constitute unrelated business taxable
income ("UBTI"). Although rulings are merely interpretations of law by the IRS
and may be revoked or modified, based on this analysis, indebtedness incurred by
the Company in connection with the acquisition of an investment should not cause
any income derived from the investment to be treated as UBTI to a tax-exempt
entity, provided that the tax-exempt entity has not financed the acquisition of
its shares with "acquisition indebtedness" within the meaning of the Code and
the shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity. A tax-exempt entity that incurs indebtedness to finance its
purchase of shares, however, will be subject to UBTI by virtue of the
acquisition indebtedness rules.
In certain circumstances, qualified trusts that hold more than 10% (by
value) of the interests in a REIT meeting certain requirements are required to
treat a percentage of REIT dividends as UBTI. The rule applies only if (i) the
qualification of the REIT depends upon the application of a "look-through"
exception to the restriction on REIT stockholdings by five or fewer individuals,
including qualified trusts (see "Description of Common Stock -- Restrictions on
Transfer"), and (ii) the REIT is "predominantly held" by qualified trusts. A
REIT is predominantly held by qualified trusts if one qualified trust owns more
than 25% of the value of the REIT or a group of qualified trusts each owning
more than 10% of the value of the REIT collectively own more than 50% of the
value of the REIT. The qualification of the Company as a REIT has not depended
and it is not anticipated that it will depend on the application of the
"look-through" exception. The Company has not been and does not expect to be
"predominantly held" by qualified trusts.
SPECIAL TAX CONSIDERATIONS FOR FOREIGN STOCKHOLDERS
The rules governing United States Federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and foreign trusts
and estates (collectively, "Non-U.S. Stockholders") are complex, and the
following discussion is intended only as a summary of such rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of Federal, state and local
17
income tax laws on an investment in the Company, including any reporting
requirements, as well as the tax treatment of such an investment under their
home country laws.
In general, Non-U.S. Stockholders will be subject to regular United States
Federal income tax with respect to their investment in the Company if such
investment is "effectively connected" with the Non-U.S. Stockholder's conduct of
a trade or business in the United States. A corporate Non-U.S. Stockholder that
receives income that is (or is treated as) effectively connected with a United
States trade or business may also be subject to a branch profits tax at a 30%
rate, unless reduced or eliminated by an applicable income tax treaty, which is
payable in addition to regular United States corporate income tax. The following
discussion will apply to Non-U.S. Stockholders whose investment in the Company
is not so effectively connected. The Company expects to withhold United States
income tax, as described below, on the gross amount of any distributions paid to
a Non-U.S. Stockholder unless the Non-U.S. Stockholder files the appropriate IRS
form, claiming that a lower treaty income tax rate applies or that the
distribution is effectively connected income.
A distribution by the Company that is not attributable to gain from the
sale or exchange by the Company of a United States real property interest and
that is not designated by the Company as a capital gain dividend will be treated
as an ordinary income dividend to the extent made out of current or accumulated
earnings and profits, and subject to withholding as discussed below. A
distribution of cash in excess of the Company's earnings and profits will be
treated first as a return of capital that will reduce a Non-U.S. Stockholder's
basis in its shares of Stock (but not below zero) and then as gain from the
disposition of such shares, the tax treatment of which is described under the
rules discussed below with respect to dispositions of shares.
Distributions by the Company that are attributable to gain from the sale or
exchange of a United States real property interest will be taxed to a Non-U.S.
Stockholder under provisions of the Code enacted by the Foreign Investment in
Real Property Tax Act of 1980 ("FIRPTA"). Under the FIRPTA provisions, such
distributions are taxed to a Non-U.S. Stockholder as if such distributions were
gains effectively connected with a United States trade or business. Accordingly,
a Non-U.S. Stockholder will be taxed at the normal capital gain rates applicable
to a Domestic Stockholder (subject to any applicable alternative minimum tax and
a special alternative minimum tax in the case of non-resident alien
individuals). Distributions subject to the FIRPTA provisions may also be subject
to a 30% branch profits tax in the hands of a corporate Non-U.S. Stockholder
that is not entitled to treaty exemption.
The Company will be required to withhold and remit to the IRS 35% of
designated capital gain dividends payable to Non-U.S. Stockholders (or, if
greater, 35% of the amount of any distributions that could be designated as
capital gain dividends). In addition, if the Company designates prior
distributions as capital gain dividends, subsequent distributions, up to the
amount of such prior distributions, will be treated as capital gain dividends
for purposes of withholding. The Company will also be required to withhold and
remit to the IRS 30% of the gross amount of distributions not attributable to
gain from the sale or exchange of a United States real property interest and not
designated as a capital gain dividend. If recently issued proposed Treasury
Regulations are promulgated in their current form, the Company would have the
option, effective for distributions made after December 31, 1997, either to
treat the entire distribution as a dividend subject to withholding (as under
current law) or to treat only a portion of the distribution as a dividend if it
makes a reasonable estimate of the portion of the distribution that is not a
dividend based on expected earnings and profits. Tax treaties may reduce the
Company's withholding obligations. If the amount withheld by the Company with
respect to a distribution to a Non-U.S. Stockholder exceeds the stockholder's
United States tax liability with respect to such distribution (as determined
under the rules described in the two preceding paragraphs), the Non-U.S.
Stockholder may file for a refund of such excess from the IRS. It should be
noted that the 35% withholding tax rate on capital gain dividends currently
corresponds to the maximum income tax rate applicable to corporations, but is
higher than the 20% maximum rate on capital gains of individuals.
Unless the shares of Stock constitute a "United States real property
interest" within the meaning of the FIRPTA provisions, a sale of such shares by
a Non-U.S. Stockholder generally will not be subject to United States taxation.
The shares of the Company will not constitute a United States real property
interest if the Company is a "domestically controlled REIT." A domestically
controlled REIT is a REIT less than 50% in value of the shares of which are held
directly or indirectly by Non-U.S Stockholders at all times during a
18
specified testing period. The Company believes that it is, and expects to
continue to be, a domestically controlled REIT, and therefore that the sale of
shares in the Company by Non-U.S. Stockholders will not be subject to U.S.
income taxation. However, because the shares of Stock will be publicly traded,
no assurance can be given that the Company will continue to be a domestically
controlled REIT. Notwithstanding the foregoing, capital gain not subject to the
FIRPTA provisions will be taxable to a Non-U.S. Stockholder if the Non-U.S.
Stockholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and certain other conditions
apply, in which case the nonresident alien individual will be subject to a 30%
tax on such individual's capital gains. If the Company was not a domestically
controlled REIT, whether a Non-U.S. Stockholder's sale of shares of Stock would
be subject to tax under the FIRPTA provisions as a sale of a United States real
property interest would depend on whether the shares were "regularly traded" (as
defined by applicable Treasury Regulations) on an established securities market
(e.g., the NYSE on which the shares of Stock are listed) and whether such
Non-U.S. Stockholder holds more than 5% of such shares during a specified
testing period. If the gain on the sale of the Company's shares were subject to
the taxation under the FIRPTA provisions, the Non-U.S. Stockholder would be
subject to the same treatment as a Domestic Stockholder with respect to such
gain (subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresidential alien individuals). In any event, a
purchaser of shares of Stock from a Non-U.S. Stockholder will not be required
under the FIRPTA provisions to withhold on the purchase price if the purchased
shares of Stock are "regularly traded" on an established securities market or if
the Company is a domestically controlled REIT. Otherwise, under the FIRPTA
provisions the purchaser of shares of stock may be required to withhold log of
the purchase price and remit such amount to the IRS.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain Federal income tax
considerations applicable solely to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
Federal tax laws other than income tax laws.
Classification as a Partnership. The Company will be entitled to include
in its income its distributive share of the Operating Partnership's income and
to deduct its distributive share of the Operating Partnership's losses only if
the Operating Partnership is classified, for Federal income tax purposes, (i) as
a partnership rather than as an association taxable as a corporation and (ii)
not as a "publicly traded partnership." Under recently finalized Treasury
Regulations, an entity such as the Operating Partnership that has more than one
owner and was in existence and claimed partnership classification prior to
January 1, 1997 (the "Effective Date"), will be classified as a partnership
rather than as an association taxable as a corporation for periods beginning on
the Effective Date, provided it does not elect to change its classification. In
general, the entity's claimed partnership classification will be respected for
all periods prior to the Effective Date if it had a reasonable basis for its
claimed classification.
The Operating Partnership has not requested, and does not intend to
request, a ruling from the IRS that it will be treated as a partnership for
Federal income tax purposes. In the opinion of Kramer Levin, based on the
provisions of the Partnership Agreement of the Operating Partnership (the
"Partnership Agreement"), certain factual assumptions and certain
representations described in the opinion, the Operating Partnership will, for
all taxable years since its inception, be treated as a partnership and not as a
corporation or an association taxable as a corporation for Federal income tax
purposes and not as a "publicly traded partnership." Unlike a tax ruling, an
opinion of counsel is not binding on the IRS or the courts.
If for any reason the Operating Partnership were taxable as a corporation
rather than as a partnership for Federal income tax purposes, the Company would
not be able to satisfy the income and asset requirements for status as a REIT.
See "-- Taxation of the Company -- Income Tests," and "-- Taxation of the
Company -- Asset Tests," above. In addition, any change in the Operating
Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur a tax liability without any related cash
distribution. See "-- Taxation of the Company -- Annual Distribution
Requirements," above. Further, items of income and deduction of the Operating
Partnership would not pass through to its partners, and its partners would be
treated as stockholders for tax purposes. The Operating Partnership would be
required to pay Federal
19
income tax at regular corporate tax rates on its net income, and distributions
to partners would constitute dividends (to the extent of the Operating
Partnership's current and accumulated earnings and profits) that would not be
deductible in computing the Operating Partnership's taxable income.
Partners, Not the Operating Partnership, Subject to Tax. A partnership is
not a taxable entity for Federal income tax purposes. Rather, the Company is
required to take into account its allocable share of the operating Partnership's
income, gains, losses, deductions and credits for the taxable year of the
Operating Partnership ending within or with the taxable year of the Company
without regard to whether the Company has received or will receive any cash
distributions from the Operating Partnership.
Operating Partnership Allocations. The allocation of income, gains,
losses, deductions and credits among partners will generally be determined in
accordance with the provisions of the Partnership Agreement. However, the
allocations provided in the Partnership Agreement will be disregarded for
Federal income tax purposes if they do not comply with the provisions of section
704(b) of the Code and the Treasury Regulations promulgated thereunder.
If an allocation is not recognized for Federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The Operating Partnership's
allocations of income, gains, losses, deductions and credits are intended to
comply with the requirements of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
Tax Allocations With Respect to Pre-Contribution Gain. Pursuant to section
704(c) of the Code, items of income, gain, loss, deduction and credit
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership must be allocated for
Federal income tax purposes in a manner such that the contributor is charged
with, or benefits from, the unrealized gain or unrealized loss associated with
the property at the time of the contribution. The amount of such unrealized gain
or unrealized loss is generally equal to the difference between the fair market
value and the adjusted tax basis of the contributed property at the time of
contribution (the "Book-Tax Difference"). In general, the fair market value of
the Properties contributed to the Operating Partnership was in excess of their
adjusted tax bases. The Partnership Agreement requires allocations of income,
gains, losses, deductions and credits attributable to each item of contributed
property be made in a manner that is consistent with section 704(c) of the Code.
As a result, the tax depreciation available with respect to such property will
be allocated first to the partners other than the partner that contributed the
property, to the extent of, and in proportion to, such other partners' share of
book depreciation, and then, if any tax depreciation remains, to the partner
that contributed the property. Accordingly, the depreciation deductions
allocable to the parties for tax purposes will not correspond to the percentage
interests of the partners. While the Company will generally be allocated tax
depreciation deductions with respect to the Properties in excess of its
percentage interest in the Operating Partnership, its share of tax depreciation
may be less than the depreciation deductions that would have been allocated to
the Company had the basis of the Properties been equal to their fair market
value. Upon the disposition of any item of contributed property, all or a
portion of gain attributable to the excess, if any, at such time of basis for
book purposes over basis for tax purposes may be allocated for tax purposes to
the contributing partner.
Basis in Partnership Interests. The Company's adjusted tax basis in its
partnership interest in the Operating Partnership generally will be (i) equal to
the amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company; (ii) increased by (a) its allocable share
of the Operating Partnership's income and (b) its allocable share of
indebtedness of the Operating Partnership; and (iii) reduced, but not below
zero, by (a) the Company's allocable share of the Operating Partnership's loss
and (b) the amount of cash distributed to the Company, the basis of property
distributed to the Company and by constructive distributions resulting from a
reduction in the Company's share of the indebtedness of the Operating
Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the
20
recognition of such loss will be deferred until such time as the recognition of
such loss would not reduce the Company's adjusted tax basis below zero. To the
extent that the Operating Partnership's distributions or any decrease in the
Company's share of the indebtedness of the Operating Partnership (each such
decrease being considered a constructive cash distribution to the partners)
would reduce the Company's adjusted tax basis in the operating Partnership below
zero, such distributions (including such constructive distributions) would
constitute taxable income to the Company. Such distributions and constructive
distributions normally will be characterized as a capital gain, and if the
Company's partnership interest in the Operating Partnership has been held for
longer than the long-term capital gain holding period (currently one year), such
distributions and constructive distributions will constitute long-term capital
gain.
Depreciation Deductions Available to the Partnerships. The Operating
Partnership's assets other than cash consist largely of appreciated property
contributed by its partners. Assets contributed to a partnership in a tax-free
transaction carry over their depreciation schedules. Accordingly, the Operating
Partnership's depreciation deductions for its real property are based largely on
the historic depreciation schedules for the Properties. The real property is
being depreciated over a range of 15 to 39 years using various methods of
depreciation which were determined at the time that each item of depreciable
property was placed in service. Any real property purchased or developed by the
Operating Partnership will be depreciated over at least 39 years.
Sale of Partnership Property. Generally, any gain realized by the
Operating Partnership on the sale of property held by it, if the property is
held for more than one year, will be long-term capital gain, except for any
portion of such gain that is treated as depreciation or cost recovery recapture.
However, under the REIT requirements, the Company's share as a partner of any
gain realized by the Operating Partnership on the sale of any property held by
the Operating Partnership as inventory or other property held primarily for sale
to customers in the ordinary course of the Operating Partnership's trade or
business will be treated as income from a prohibited transaction that is subject
to a 100% penalty tax. See "-- Taxation of the Company," above. Such prohibited
transaction income will also have an adverse effect upon the Company's ability
to satisfy the income tests for status as a REIT. Under existing law, whether
property is held as inventory or primarily for sale to customers in the ordinary
course of the Operating Partnership's trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction. A safe harbor is provided for certain sales of real estate assets
held for at least four years, which sales might otherwise be considered
prohibited transactions. The safe harbor applies to a sale only if, among other
things, the expenditures made during the four-year period preceding the date of
the sale which are includible in the basis of the property sold do not exceed
30% of the property's net sales price and in the taxable year of the sale either
the REIT has made no more than seven sales of property or the aggregate adjusted
bases of all the properties sold does not exceed 10% of the adjusted bases of
all of the REIT's properties as of the beginning of the year. The Operating
Partnership has held and intends to continue to hold the Properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning and operating and leasing the Properties and to
make such occasional sales of the Properties, including peripheral land, as are
consistent with the Company's and the Operating Partnership's investment
objectives. No assurance can be given, however, that every property sale by the
Operating Partnership will constitute a sale of property held for investment.
Conversion Rights. In the event that the Company acquires limited
partnership units in the Operating Partnership ("OP Units") from the holders
thereof by reason of the exercise of conversion rights, the Company will have a
basis in the OP Units so acquired equal to the fair market value of the stock it
issues, or the amount of cash it pays, in exchange for such OP Units. If the
Operating Partnership makes an election under section 754, the portion of the
Operating Partnership's basis in its assets with respect to the Company will be
adjusted to reflect the price paid for the OP Units. If the Company acquires all
the OP Units, the Operating Partnership will terminate and the Company will, as
a result, directly own all the Properties directly held by the Operating
Partnership, and the basis of those Properties in the hands of the Company would
be determined by reference to the Company's basis in its partnership interest in
the Operating Partnership.
21
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its Domestic Stockholders and the IRS the amount
of distributions paid during each calendar year and the amount of tax withheld,
if any. Under certain circumstances, Domestic Stockholders may be subject to
backup withholding at a rate of 31% with respect to distributions paid. Backup
withholding will apply only if the holder (i) fails to furnish its taxpayer
identification number ("TIN") (which, for an individual, would be his Social
Security number), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS
that it has failed properly to report payments of interest and dividends, or
(iv) under certain circumstances, fails to certify, under penalty of perjury,
that it has furnished a correct TIN and has not been notified by the IRS that it
is subject to backup withholding for failure to report interest and dividend
payments. Backup withholding will not apply with respect to payments made to
certain exempt recipients, such as corporations and tax-exempt organizations.
Domestic Stockholders should consult their own tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
Domestic Stockholder will be allowed as a credit against such Domestic
Stockholder's United States Federal income tax liability and may entitle such
Domestic Stockholder to a refund, provided that the required information is
furnished to the IRS.
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Stockholders. For example, the Company may
be required to withhold a portion of capital gain distributions to any
stockholders who fail to certify their non-foreign status to the Company. See
"-- Special Tax Considerations for Foreign Stockholders." Non-U.S. Stockholders
should consult their tax advisors with respect to any such information reporting
and backup withholding requirements.
STATE AND LOCAL TAXES
The Company will, and its stockholders may, be subject to state or local
taxation in various state or local jurisdictions, including those in which the
Company, its stockholders, or the Operating Partnership transact business or
reside. The state and local tax treatment of the Company and its stockholders
may not conform to the Federal income tax consequences discussed above.
Consequently, prospective stockholders should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in the
Company.
EMPLOYEE BENEFIT PLANS
A PROSPECTIVE INVESTOR THAT IS AN EMPLOYEE BENEFIT PLAN OF ANY SORT,
WHETHER OR NOT SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974,
AS AMENDED ("ERISA"), IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER APPLICABLE PROVISIONS OF ERISA, THE CODE,
AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE OFFERED
SECURITIES BY SUCH PLAN.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA
and the prohibited transaction provisions of Section 4975 of the Code that may
be relevant to prospective investors. This discussion does not purport to deal
with all aspects of ERISA or the Code that may be relevant to particular
investors in light of their particular circumstances.
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to ERISA (a "Plan") should consider the fiduciary standards
under ERISA in the context of the Plan's particular circumstances before
authorizing an investment of a portion of such Plan's assets in the Offered
Securities. In particular, such fiduciary should consider (i) whether the
investment satisfies the diversification requirements of Section 404(a)(1)(c) of
ERISA, (ii) whether the investment is in accordance with the documents and
instruments governing the Plan as required by Section 404(a)(1)(D) of ERISA
(including the Plan's funding policy), (iii) whether the investment is for the
exclusive purpose of providing benefits to participants in the
22
Plan and their beneficiaries or defraying reasonable administrative expenses of
the Plan, and (iv) whether the investment is prudent under ERISA. In addition to
the imposition of general fiduciary standards of investment prudence and
diversification, ERISA, and the corresponding provisions of the Code, prohibit a
wide rage of transactions involving the assets of a Plan or an individual
retirement account ("IRA") and persons who have certain specified relationships
to the Plan or an IRA ("parties in interest" within the meaning of ERISA, or
"disqualified persons" within the meaning of the Code). Thus, a fiduciary of a
Plan or an IRA considering an investment in the Offered Securities also should
consider whether the acquisition or the continued holding of the Offered
Securities might constitute or give rise to a direct or indirect prohibited
transaction.
The United States Department of Labor (the "IDOL") has issued final
regulations (the "Regulations") setting out the standards it will apply in
determining what constitutes assets of an employee benefit plan under ERISA.
Under the Regulations, if a Plan or an IRA acquires an equity interest in an
entity, which interest is neither a "publicly offered security" nor a security
issued by an investment company registered under the Investment Company Act of
1940, as amended, the Plan's and IRA's assets would include, for purposes of the
fiduciary responsibility provisions of ERISA and the Code, both the equity
interest and an undivided interest in each of the entity's underlying assets,
unless certain specified exceptions apply. The Regulations define a
publicly-offered security as a security that is "widely held," "freely
transferable," and either a par of a class of securities registered under the
Exchange Act, or sold pursuant to an effective registration statement under the
Securities Act (provided the securities are registered under the Exchange Act
within 120 days after he end of the fiscal year of the issuer during which the
offering occurred. The Offered Securities will be sold in an offering registered
under the Securities Act and are or will be registered under the Exchange Act.
The Regulations provide that a security is "widely held" only if it is part
of a class of securities that is owned by 100 or more investors independent of
the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control.
The Regulations provide that whether a security is "freely transferable" is
a factual question to be determined on the basis of all relevant facts and
circumstances. The DOL Regulations further provide that when a security is part
of an offering in which the minimum investment is $10,000 or less, certain
restrictions ordinarily will not, alone or in combination, affect the finding
that such securities are freely transferable. The Company believes that the
restrictions imposed under the Charter on the transfer of the capital stock are
limited to the restrictions on transfer generally permitted under the
Regulations and are not likely to result in the failure of the capital stock to
be "freely transferable." The Company also believes that certain restrictions
that apply to the capital stock held by the Company or which may be derived from
contractual arrangements requested by the underwriters in connection with
Offered Securities offered pursuant to an underwritten agreement are unlikely to
result in the failure of the capital stock to be "freely transferable." The
Regulations only establish a presumption in favor of the finding of free
transferability, and, therefore, no assurance can be given that the DOL and the
U.S. Treasury Department will not reach a contrary conclusion.
Assuming that the offered Securities will be "widely held," the Company
believes that the Offered Securities will be publicly offered securities for
purposes of the Regulations and that the assets of the Company will not be
deemed to be "plan assets" of any Plan or IRA that invests in the Offered
Securities.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to investors
directly or through agents. Any such underwrite or agent involved in the offer
and sale of the Offered Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price or
prices which may be changed, at prices related to the prevailing market prices
at the time of sale or at negotiated prices. The Company also may, from time to
time, authorize underwriters acting as the Company's gents to offer and sell the
Offered Securities upon the terms and conditions as are set forth in the
applicable Prospectus Supplement. In connection with the sale of the Offered
Securities, underwriters may be deemed to have received compensation from the
Company
23
in the form of underwriting discounts or commissions and may also receive
commissions from purchasers of the Offered Securities for whom they may act as
agent. Underwriters may sell the Offered Securities to or through dealers, and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agent. Any underwriting compensation paid by the Company to
underwriters or agents in connection with the offering of the offered
Securities, and any discounts, concessions or commissions allowed by
underwriters to participating dealers, will be set forth in the applicable
Prospectus Supplement. Underwriters, dealers and agents participating in the
distribution of the Offered Securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the Offered Securities may be deemed to be underwriting discounts and
commissions, under the Securities Act. Underwriters, dealers and agents may be
entitled, under agreements entered into with the Company, to indemnification
against and contribution toward certain civil liabilities, including liabilities
under the Securities Act. Underwriters, dealers and agents may engage in
transactions with, or perform services for, or be customers of, the Company in
the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase the Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts ("Contracts") providing for payment and delivery on the date
or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate amount of the Offered Securities sold
pursuant to Contracts shall be not less nor more than, the respective amounts
stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be subject
to the approval of the Company. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Offered Securities covered by
its Contracts shall not at the time of delivery be prohibited under the laws of
any jurisdiction in the United States to which such institution is subject, and
(ii) if the Offered Securities are being sold to underwriters, the Company shall
have sold to such underwriters the total amount of the Offered Securities less
the amount thereof covered by the Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
LEGAL MATTERS
The legality of the shares of Common Stock and Preferred Stock offered
hereby will be passed upon for the Company by Piper & Marbury L.L.P., Baltimore,
Maryland. In addition, the description of Federal income tax consequences
contained in this Prospectus under the caption entitled "Federal Income Tax
Considerations" is based upon the opinion of Kramer, Levin, Naftalis & Frankel,
New York, New York.
EXPERTS
The financial statements and schedules for Agree Realty Corporation and its
predecessor entities included in the Form 10-K referred to and incorporated by
reference in this Prospectus have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report incorporated herein by reference, and are incorporated herein in
reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
24
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1,500,000 SHARES
[AGREE REALTY CORPORATION LOGO]
AGREE REALTY CORPORATION
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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FRIEDMAN BILLINGS RAMSEY
BB&T CAPITAL MARKETS
JULY , 2003
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