PROSPECTUS "Prospectus filed pursuant to Rule 424(b)(1)"
MID-ATLANTIC REALTY TRUST
2,864,000
Common Shares of Beneficial Interest
Mid-Atlantic Realty Trust (the "Company") is a fully integrated,
self-administered and self-managed real estate investment trust ("REIT") which
owns, acquires, develops, redevelops, leases and manages primarily neighborhood
or community shopping centers in the Middle Atlantic region of the United
States.
All of the Company's interest in its commercial properties are held
directly or indirectly by, and substantially all of its operations relating to
such properties are conducted through MART Limited Partnership (the "Operating
Partnership"). On July 1, 1997, the Company completed the acquisition of a
portfolio of nine shopping centers and one medical office building (the
"Acquired Properties") in the Baltimore metropolitan area from partnerships
associated with Jack H. Pechter (the "Pechter Group"). Part of the consideration
for the Acquired Properties was the issuance by the Operating Partnership to the
Pechter Group of 3,175,771 units of limited partnership interests in the
Operating Partnership (the "OP Units").
This Prospectus relates to (i) the possible issuance by the Company of
up to 2,864,000 common shares of beneficial interest (the "Redemption Shares")
par value $.01 per share ("Common Shares"), of the Company if, and to the extent
that, members of the Pechter Group tender such OP Units for redemption and (ii)
the offer and sale from time to time of up to 2,864,000 Redemption Shares that
may be issued to such persons (the "Selling Shareholders"). The Company is
registering the offer and sale by the Selling Shareholders of Redemption Shares,
but the registration of such shares does not necessarily mean that any of such
shares will be offered or sold by the holders thereof. The Company does not
currently expect to issue more than 2,864,000 Common Shares in redemption of OP
Units.
The Company's Common Shares are listed on the New York Stock Exchange
(the "NYSE") under the symbol "MRR."
The Company will not receive any proceeds from the issuance of the
Redemption Shares or the sale of such Redemption Shares by the Selling
Shareholders but has agreed to bear certain expenses of registration of the
Redemption Shares under Federal and state securities laws other than commissions
and discounts of agents or broker-dealers and transfer taxes, if any. The
Company will acquire OP Units in the Operating Partnership in exchange for any
Redemption Shares that the Company may issue to OP Unit holders pursuant to this
Prospectus.
In order to maintain the Company's qualification as a REIT for federal
income tax purposes and for other purposes, the Company's Declaration of Trust
provides that no person may own more than 9.9% of the outstanding Common Shares.
Common Shares owned in excess of such limit shall be deemed "Excess Shares"
pursuant to the Company's Declaration of Trust, in which case the holder will
lose certain ownership rights with respect to such shares and the Company will
have the right to purchase such Excess Shares from the holder. See "Description
of Common Shares of Beneficial Interest."
-----------------------
See "Risk Factors" beginning on page 5 for certain information that
should be considered by prospective shareholders.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO
THE CONTRARY IS UNLAWFUL.
----------------------
The date of this Prospectus is July 28, 1998
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such 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., Room 1024, Washington, D.C. 20549, and at the Commission's
Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10048,
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and copies may be obtained at the prescribed rates from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. The Commission also maintains a web site that contains
reports, proxy statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http:\\www.sec.gov. The Company's Common Shares are listed on the NYSE under the
symbol "MRR" and such reports, proxy statements and other information concerning
the Company can be inspected at the offices of the NYSE, 20 Broad Street, 17th
Floor, New York, New York 10005.
The Company has filed with the Commission a Registration Statement (the
"Registration Statement") on Form S-3 under the Securities Act, with respect to
the securities offered by this Prospectus. This Prospectus, which constitutes
part of the Registration Statement, omits certain of the information contained
in the Registration Statement and the exhibits thereto on file with the
Commission pursuant to the Securities Act and the rules and regulations of the
Commission thereunder. For further information with respect to the Company and
the Redemption Shares, reference is made to the Registration Statement. The
material provisions of any contract or other document referred to herein are
described in this Prospectus; statements concerning the contents of such
contracts and documents, however, are not necessarily complete, and in each such
instance reference is made to the copy of such contract or other document filed
as an exhibit to such Registration Statement, each such statement being
qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company (File No.
1-12286) with the Commission are incorporated herein by reference:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(b) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998;
(c) description of the Common Shares included in the Company's
Registration Statement on Form 8-A, dated August 24, 1993, and the information
thereby incorporated by reference contained in the Company's Registration
Statement on Form S-11, dated July 22, 1993; and
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 and to be part hereof from the
date of filing such documents. 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 incorporated by reference into the documents that this Prospectus
incorporates by reference). Requests should be directed to the Secretary, 170 W.
Ridgely Road, Suite 300, Lutherville, Maryland 21093, telephone number (410)
684-2000.
3
THE COMPANY
General
The Company is a fully integrated, self-administered and self-managed
REIT which owns, acquires, develops, redevelops, leases and manages primarily
neighborhood or community shopping centers in the Middle Atlantic region of the
United States. The Company owns and operates 30 neighborhood or community
shopping centers, one enclosed regional mall, five additional retail and
commercial properties and seven undeveloped parcels of land aggregating
approximately 125 acres (collectively, the "Properties"). The Properties have a
gross leasable area of approximately 4.5 million square feet and were 95% leased
at June 1, 1998.
All of the Company's interests in the Properties are held directly or
indirectly by, and substantially all of its operations relating to the
Properties are conducted through, the Operating Partnership. The Company
controls the Operating Partnership as the sole general partner and, therefore,
has the exclusive power to manage and conduct the business of the Operating
Partnership, subject to certain exceptions. The Company owns approximately 82%
of the OP Units. Subject to certain conditions, OP Units in the Operating
Partnership may be exchanged by the limited partners for cash or, at the option
of the Company, the obligation may be assumed by the Company and paid either in
cash or in Common Shares on a one-for-one basis.
The Company's primary objectives are to increase funds from operations
("FFO") per Common Share and to maximize shareholder value. To achieve its
objectives, the Company seeks to operate its Properties for long-term FFO
growth. The Company also acquires, develops and redevelops anchored neighborhood
or community shopping centers in the Middle Atlantic region of the United States
that provide daily necessities, consumer products or value oriented merchandise
through tenants such as super markets, drug stores, discount retailers,
restaurants and vendors of consumer goods and services.
The executive offices of the Company and the Operating Partnership are
located at 170 W. Ridgely Road, Suite 300, Lutherville, Maryland 21093, (410)
684-2000.
Securities to be Offered
On July 1, 1997, the Company completed the acquisition of a portfolio
of nine shopping centers and one medical office building (the "Acquired
Properties") in the Baltimore metropolitan area from partnerships associated
with Jack H. Pechter (the "Pechter Group"). The Acquired Properties total
approximately 1.06 million gross leasable square feet. The consideration for the
Acquired Properties was the issuance by the Operating Partnership to the Pechter
Group of 3,175,771 OP Units and the assumption of mortgage indebtedness of
approximately $84,000,000. At closing, Jack H. Pechter was elected Deputy
Chairman and a Trustee of the Company.
At the closing of the acquisition of the Acquired Properties, the
Company formed the Operating Partnership and assigned to the Operating
Partnership its interest in the Acquired Properties. As a result of this
transaction, the Company converted into an "umbrella partnership real estate
investment trust" or "UPREIT" structure, which will permit the Company to use OP
Units as consideration in property acquisitions, thereby providing certain tax
deferral benefits to sellers.
The Company, as sole general partner of the Operating Partnership, has
the exclusive power to manage and conduct the business of the Operating
Partnership, subject to certain exceptions. The Company anticipates that the
Operating Partnership will acquire additional properties in exchange for OP
Units, in which case persons that own such properties will become limited
partners of the Operating Partnership.
The Partnership Agreement of the Operating Partnership (the
"Partnership Agreement") provides that limited partners may have their OP Units
redeemed for cash beginning two years after issuance of the OP
4
Units. In connection with the acquisition of the Acquired Properties, the
members of the Pechter Group were given the right to redeem their OP Units at
any time after one year from the closing of the acquisition. Redemptions are
subject to certain limitations in the Partnership Agreement and compliance with
the ownership limits under the Company's organization documents. At its option,
the Company may assume the payment obligation at any time and pay it in cash or,
in its discretion, may substitute Common Shares of the Company in redemption of
the OP Units on a one-for-one basis. The Company has granted registration rights
to the Pechter Group pursuant to which the Company will register Common Shares
acquired by the Pechter Group upon redemption of OP Units. The registration
statement of which this Prospectus is a part registers 2,864,000 of the Common
Shares that may be issued in redemption of the OP Units issued to the Pechter
Group. The Company does not currently expect to issue more than 2,864,000 Common
Shares in redemption of OP Units.
RISK FACTORS
In addition to the historical information contained herein, the discussions in
this Prospectus and in any prospectus supplement contain certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere herein. The following risk
factors should be considered carefully in addition to the other information in
this Prospectus before purchasing the Redemption Shares.
Real Estate Investment Risks
General. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend on the
amount of income and capital appreciation generated by the related properties.
If the properties do not generate sufficient income to meet operating expenses,
including debt service, lease payments, capital expenditures and tenant
improvements, the Company's income and ability to make distributions to its
shareholders will be adversely affected. Income from properties may be adversely
affected by the general economic climate, local conditions, such as oversupply
of space or a reduction in demand for rental space in the area, the
attractiveness of the properties to tenants, competition from other available
space, the ability of the owner to provide adequate maintenance and insurance,
increased operating costs (including real estate taxes) and the inability of a
significant number of tenants to pay rent. Income from properties and real
estate values are also affected by such factors as applicable laws, including
tax laws, interest rate levels and the availability of financing. In addition,
real estate investments are relatively illiquid and, therefore, will tend to
limit the ability of the Company to vary its portfolio promptly in response to
changes in economic or other conditions.
Ability to Rent Unleased Space. The ability of the Company to rent
unleased space is affected by many factors, including certain covenants
typically found in leases with tenants in shopping center properties which
restrict the use of other space at a property. In addition, in the event of a
default by a lessee or sublessee in its obligations, the Company may experience
delays in enforcing its rights as lessor or sublessor and may incur substantial
costs and experience significant delays associated with protecting its
investment, including costs incurred in acquiring and making substantial
improvements or repairs to a property.
Risk of Bankruptcy of Tenants. At any time, a tenant of the Company's
properties may seek the protection of the bankruptcy laws, which could result in
the termination of such tenant's lease and cause a downturn in distributable
cash flow of the Company. In addition, a tenant from time to time may experience
a downturn in its business which may weaken its financial condition and result
in the failure to make rental payments when due.
Casualty. The Company carries comprehensive liability, fire, flood,
extended coverage and rental loss insurance with policy specifications, limits
and deductibles customarily carried for similar properties.
5
There are, however, certain types of extraordinary losses which may be either
uninsurable or not economically insurable. Should an uninsured loss occur, the
Company could lose its investment, anticipated profits and cash flows from a
property.
Debt Financing and Existing Debt Maturities. The Company is subject to
the risks normally associated with debt financing, including the risks that the
Company's funds from operations will be insufficient to meet required payments
of principal and interest, that existing indebtedness on the properties (which
will not necessarily have been fully amortized at maturity) will not be able to
be refinanced or that the terms of such refinancing will not be as favorable as
the terms of existing indebtedness. If prevailing interest rates or other
factors at the time of refinancing result in higher interest rates on
refinancings, the Company's interest expenses would increase, which would
adversely affect the Company's funds from operations and its ability to make
distributions to shareholders. In addition, in the event the Company were unable
to secure refinancing of such indebtedness on acceptable terms, the Company
might be forced to dispose of its properties upon disadvantageous terms, which
might result in losses to the Company and might adversely affect the cash flow
available for distribution of the Company.
Competition. There are numerous developers and real estate companies
which compete with the Company in seeking properties for acquisition and tenants
for vacant space, some of which may have greater financial resources than the
Company. There can be no assurance that the Company will continue to compete
favorably with such other companies.
Environmental Matters. Under various federal, state and local
environmental laws, ordinances and regulations, an owner of real property may be
held liable for costs of removal or remediation of certain conditions relating
to the presence of hazardous or toxic substances at, under or disposed of in
connection with such property, as well as certain other potential costs relating
to hazardous or toxic substances (including government fines and injuries to
persons and adjacent property). These laws often impose such liability without
regard to whether the owner knew of, or was responsible for, the presence of
such hazardous or toxic substances. The cost of any required remediation,
removal, fines or personal or property damages and the owner's liability
therefor could exceed the value of the property. In addition, the presence of
such substances, or the failure to properly dispose of or remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral which, in turn, would
reduce the owner's revenues.
Americans with Disabilities Act. The properties and any newly developed
or acquired properties must comply with Title III of the Americans with
Disabilities Act (the "ADA") to the extent that such properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA. Compliance
with the ADA requirements could require removal of structural barriers to
handicapped access in certain public areas of the Company's properties, where
such removal is readily achievable. The Company believes that the properties
comply with all present requirements under the ADA and applicable state laws.
Noncompliance with the ADA could result in imposition of fines or an award of
damages to private litigants. If required changes involve a greater expenditure
than the Company currently anticipates, or if the changes must be made on a more
accelerated basis than it anticipates, the Company's ability to make expected
distributions could be adversely affected. The Company believes that its
competitors face similar costs to comply with the requirements of the ADA.
6
Dependence on the Middle Atlantic Area
Approximately 99% of the properties' gross leasable area is located in
the Middle Atlantic area. As a result, the Company will be affected more by any
adverse economic conditions in the Middle Atlantic area than would a real estate
company with properties in a number of different geographic areas.
No Limitation in Organizational Documents on Incurrence of Debt
The Board of Trustees of the Company currently has adopted a policy of
limiting its secured indebtedness to not more than 50% of the estimated value of
its properties, but its Declaration of Trust does not contain any limitation on
the amount or percentage of indebtedness, funded or otherwise, the Company might
incur. Accordingly, the Board of Trustees could alter or eliminate its current
policy on borrowing. If this policy were to change, the Company could become
more highly leveraged, resulting in an increase in debt service that could
adversely affect the Company's funds from operations and ability to make
expected distributions to its shareholders and in an increased risk of default
on its obligations.
Dependence on Key Personnel
The Company is dependent on the efforts of its executive officers,
particularly F. Patrick Hughes, President and Chief Executive Officer of the
Company. The loss of Mr. Hughes' services could have an adverse effect on the
operations of the Company. The Company has key man insurance covering the life
of Mr. Hughes in the amount of $1,000,000.
Adverse Consequences of Failure to Qualify as a REIT
The Company is treated as a REIT for federal income tax purposes under
the Internal Revenue Code of 1986, as amended (the "Code"). No assurance can be
given that the Company will continue to operate in a manner enabling it to
remain so qualified. Qualification as a REIT involves the application of highly
technical and complex Code provisions for which there are only limited judicial
or administrative interpretations and the determinations of various factual
matters and circumstances not entirely within the Company's control.
Furthermore, no assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not change the tax laws
with respect to qualifications as a REIT or the federal income tax consequences
of such qualifications. The Company is not currently aware of any pending
legislation which would affect its qualification as a REIT.
If in any taxable year the Company fails to qualify as a REIT, it will
be subject to federal income tax (including any applicable alternative minimum
tax) on its taxable income at corporate rates. In addition, unless entitled to
relief under certain statutory provisions, the Company will also be disqualified
from treatment as a REIT for the four taxable years following the year during
which qualification is lost. This treatment would reduce the net earnings of the
Company available for investment or distribution to shareholders because of the
additional tax liability to the Company for the year or years involved. In
addition, the Company would no longer be required by the Code to make any
distributions.
Anti-Takeover Effect of Ownership Limitations
In order to maintain its qualifications as a REIT, not more than 50% of
the Company's shares may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities). To ensure that
this rule is not violated and to safeguard the Company's qualification as a
REIT, shareholders are subject to the Beneficial Ownership Limitations which
restrict the ownership of more than 9.9% of the outstanding Common Shares,
either in the aggregate or of any class, unless waived by the Trustees. In
addition, the Constructive Ownership Limitations restrict the ownership, under
the applicable attribution rules of the Code (which are different from those
applicable with respect to the Beneficial
7
Ownership Limitations), of more than 9.9% of the outstanding Common Shares
either in the aggregate or of any class.
These ownership restrictions have the collateral effect of deterring
non-negotiated acquisitions of, and proxy fights for, the Company by a third
party. Limiting the ownership of the Common Shares may discourage a change of
control of the Company and may also (a) deter tender offers for the Common
Shares, which offers may be attractive to the shareholders, (b) limit the
opportunity for shareholders to receive a premium for their Common Shares that
might otherwise exist if an investor attempted to assemble a block of Common
Shares in excess of 9.9% of the Common Shares, or (c) limit the opportunity for
shareholders to effect a change of control of the Company.
Risks Inherent in Development and Acquisition Activities
The Company intends to continue development of its properties and may
acquire additional properties in the future. While the Company's policies with
respect to development and acquisition activities are intended to limit some of
the risks otherwise associated with those activities, the Company nevertheless
will incur certain risks related to delays in construction and lease-up, costs
of materials, financing availability, volatility in interest rates, labor
availability, failure to achieve anticipated occupancy levels, and the failure
of its properties to perform as expected.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Redemption Shares by the Selling Shareholders but will acquire OP Units in the
Operating Partnership in exchange for any Redemption Shares that the Company may
issue to a redeeming limited partner.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The summary of the terms of the capital stock set forth below does not
purport to be complete and is subject to, and qualified in its entirety by,
reference to the Company's Declaration of Trust and the Company's Bylaws.
General
The Company's Declaration of Trust authorizes it to issue up to
102,000,000 Shares, consisting of 100,000,000 of Common Shares and 2,000,000 of
Preferred Shares, and such other types or classes of shares of beneficial
interest as the Trustees may create and authorize from time to time. No
Preferred Shares are outstanding and the Company has no present plans to issue
any Preferred Shares.
The Declaration of Trust also provides that, subject to the provisions
of any class or series of the Common Shares other than Common Shares then
outstanding, the shareholders of the Company shall be entitled to vote only on
the following matters: (a) election or removal of Trustees; (b) amendment of the
Declaration of Trust; (c) termination of the Company; and (d) merger,
consolidation or share exchange of the Company or the sale or disposition of all
or substantially all of the Company's assets. Except for the election or removal
of Trustees, which requires the approval of holders of a majority of the Common
Shares present at a meeting at which a quorum is present, each of the other
matters requires the affirmative approval of holders of two-thirds of the Common
Shares issued and outstanding and entitled to vote upon the matter. Except with
respect to the foregoing matters, no action taken by the shareholders at any
meeting shall in any way bind the Trustees.
Both Maryland statutory law governing REITs and the Declaration of
Trust provide that no shareholder will be personally liable for any obligation
of the Company. Pursuant to the Declaration of Trust,
8
the Company's Bylaws further provide that the Company shall indemnify each
shareholder against any claim or liability to which the shareholder may become
subject by reason of his being or having been a shareholder, and that the
Company shall reimburse each shareholder for all legal and other expenses
reasonably incurred by him in connection with any such claim or liability. In
addition, it will be the Company's policy to include a clause in its contracts
which provides that shareholders assume no personal liability for obligations
entered into on behalf of the Company. However, with respect to tort claims,
contractual claims where shareholder liability is not so negated, claims for
taxes and certain statutory liability, the shareholder may, in some
jurisdictions, be personally liable to the extent that such claims are not
satisfied by the Company. Inasmuch as the Company will carry public liability
insurance which it considers adequate, any risk of personal liability to
shareholders is limited to situations in which the Company's assets plus its
insurance coverage would be insufficient to satisfy the claims against the
Company and its shareholders.
The transfer agent and registrar for the Common Shares is the
Continental Stock Transfer and Trust Company, located in New York, New York.
Common Shares. Each outstanding Common Share entitles the holder to one
vote on all matters submitted to a vote of shareholders, including the election
of Trustees. There is no cumulative voting in the election of Trustees, which
means that the holders of a majority of the outstanding shares can elect all of
the Trustees then standing for election. Holders of Common Shares are entitled
to such distributions as may be declared from time to time by the Trustees out
of funds legally available therefor.
Holders of Common Shares have no conversion, redemption or preemptive
rights to subscribe for any securities of the Company. All outstanding Common
Shares will be fully paid and nonassessable. In the event of any liquidation,
dissolution or winding-up of the affairs of the Company, holders of Common
Shares will be entitled to share ratably in the assets of the Company remaining
after provision for payment of liabilities to creditors and preferential rights
of the Preferred Shares, if any.
Common Shares shall have equal dividend, distribution, liquidation and
other rights, and shall have no preference, preemptive, appraisal, conversion or
exchange rights.
Preferred Shares. The Preferred Shares authorized by the Company's
Declaration of Trust may be issued from time to time in one or more series in
such amounts and with such preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms or
conditions of redemption as may be fixed by the Trustees. Under certain
circumstances, the issuance of Preferred Shares could have the effect of
delaying, deferring or preventing a change of control of the Company and may
adversely affect the voting and other rights of the holders of the Common
Shares. No Preferred Shares are outstanding and the Company has no present plans
to issue any Preferred Shares.
Classification or Reclassification of Common Shares or Preferred
Shares. The Declaration of Trust authorizes the Trustees to classify or
reclassify any unissued shares, including Common Shares or Preferred Shares, by
setting or changing the designations, preferences, conversion or other rights,
voting powers, restrictions, limitations as to distributions, qualifications or
terms or conditions of redemption of any such shares.
Excess Shares. The Declaration of Trust provides that no holder may
own, or be deemed to own under the applicable attribution rules of the Code,
Common Shares in excess of the Beneficial Ownership Limitations or the
Constructive Ownership Limitations (the "Ownership Limit"), and that no
purported transfer of Common Shares may be given effect if it results in
ownership of all of the outstanding Common Shares by fewer than 100 persons or
results in the Company being "closely held" within the meaning of Section 856(h)
of the Code (a "Prohibited Transfer"). In the event of a purported transfer or
other event that would, if effective, result in Common Share ownership in
violation of the Ownership Limit, the number of Common Shares in excess of the
Ownership Limit would automatically be converted into "Excess Shares." Excess
Shares are Common Shares automatically transferred to a special trust to be
maintained by the
9
Company in respect of each such transfer to the extent necessary to ensure that
the purported transfer or other event does not result in Common Shares ownership
in violation of the Ownership Limit.
A purported transferee of Common Shares converted into Excess Shares is
not entitled to voting rights, except to the extent required by law, or to any
dividends, distributions or other rights as a shareholder. If, after the
purported transfer or other event resulting in a conversion of Common Shares
into Excess Shares and prior to the discovery thereof by the Company, dividends
or distributions are paid with respect to such Common Shares, then such
dividends or distributions are to be repaid to the Company upon demand. Excess
Shares will be held in trust by the Company for the benefit of the ultimate
transferee of an interest in such trust. While Excess Shares are held in trust,
an interest in that trust may be transferred by the purported transferee or
other purported holder with respect to such Excess Shares only to a person whose
ownership of the Common Shares will not violate the Ownership Limit and to whom
such transfer will not constitute a Prohibited Transfer, at which time the
Excess Shares will be automatically converted into Common Shares of the same
type and class as the Common Shares for which the Excess Shares were originally
converted. The Declaration of Trust contains provisions that are designed to
ensure that the purported transferee or other purported holder of the Excess
Shares may not receive in return for such a transfer an amount that reflects any
appreciation in the Common Shares for which such Excess Shares were converted
during the period that such Excess Shares were outstanding. Any amount received
by a purported transferee or other purported holder in excess of the amount
permitted to be received must be turned over to the Company.
Restrictions on Ownership and Transfer
For the Company to qualify as a REIT under the Code, not more than 50%
of its outstanding Common Shares may be owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year; the Common Shares must be beneficially owned by
100 or more persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a shorter taxable year; and certain percentages
of the Company's gross income must be from particular activities (see "Federal
Income Tax Considerations for Holders of Common Shares of Beneficial Interest -
Federal Income Taxation of the Company"). Because the Trustees believe it is
essential for the Company to continue to qualify as a REIT, the Declaration of
Trust contains provisions that restrict the ownership and transfer of Common
Shares. The Declaration of Trust contains a number of provisions which restrict
the ownership and transfer of Common Shares and which are designed to safeguard
the Company against an inadvertent loss of REIT status. In order to prevent any
shareholder from owning Common Shares in an amount which would cause more than
50% in number or value of the outstanding Common Shares of the Trust to be held
by five or fewer individuals after the offering, the Declaration of Trust
contains Beneficial Ownership Limitations that, with certain exceptions,
restrict shareholders from owning, under the applicable attribution rules of the
Code, more than 9.9% of the outstanding Common Shares, in number or value,
either in the aggregate or of any class.
Shareholders who own, under the attribution rules of the Code that
apply for purposes of the Beneficial Ownership Limitations, more than 9.9% of
the outstanding Common Shares, in number or value, either in the aggregate or of
any class shall be required to provide the Company with information concerning
their ownership of Common Shares. In the event that such a shareholder does not
provide the Company with such information and, as a result, five or fewer
persons would, but for the exchange described below, own, under the attribution
rules of the Code that apply for purposes of the Beneficial Ownership
Limitations, more than 49.9% of the Common Shares, then, to the extent necessary
to prevent such ownership from exceeding 49.9%, Common Shares owned by such
shareholder in excess of 9.9% under the applicable attribution rules will be
automatically converted into Excess Shares on the day prior to the date that
such ownership would otherwise have risen above 49.9%, with the result that such
shareholder will not be entitled to the benefits associated with the ownership
of the Common Shares exchanged for any period following the automatic exchange.
See "Description of Shares of Beneficial Interest - General - Excess Shares"
above.
Shareholders should be aware that events other than a purchase or other
transfer of Common Shares can result in ownership, under the applicable
attribution rules of the Code, of Common Shares in excess of
10
the Beneficial Ownership Limitations. For instance, if two shareholders, each of
whom own, under the applicable attribution rules of the Code, 5% of the
outstanding Common Shares, were to marry, then after their marriage both
shareholders would own, under the applicable attribution rules of the Code, 10%
of the outstanding Common Shares, which is in excess of the Beneficial Ownership
Limitation for Common Shares. Similarly, if a shareholder who owns 9% of the
Common Shares also owns 50% of a corporation which owns 8% of the Common Shares,
then the shareholder would own, under the applicable attribution rules of the
Code, 13% of the outstanding Common Shares (one-half of the 8% owned by the
corporation, plus the 9% owned by the shareholder). Shareholders should consult
their own tax advisers concerning the application of the attribution rules of
the Code in their particular circumstances.
Under the Code, rental income received by a REIT from persons in which
the REIT is treated, under the applicable attribution rules of the Code, as
owning a 10% or greater interest does not constitute qualifying income for
purposes of the income requirements that REITs must satisfy. See "Federal Income
Tax Considerations for Holders of Common Shares of Beneficial Interest - Federal
Income Taxation of the Company - Income Tests." For these purposes, a REIT is
treated as owning any stock owned, under the applicable attribution rules of the
Code, by a person that owns 10% or more of the value of the outstanding shares
of the REIT. Therefore, in order to ensure that rental income of the Company
will not be treated as nonqualifying income under the rule described above, and
thus to ensure that there will not be an inadvertent loss of REIT status as a
result of the ownership of Common Shares by a tenant, or a person that holds an
interest in a tenant, the Declaration of Trust also contains Constructive
Ownership Limitations that restrict, with certain exceptions, shareholders from
owning, under the applicable attribution rules of the Code (which are different
from those applicable with respect to the Beneficial Ownership Limitations),
more than 9.9% of the outstanding Common Shares, in number or value, either in
the aggregate or of any class. Subject to certain exceptions, the Declaration of
Trust also contains restrictions that are designed to ensure that the
shareholders who own, under the applicable attribution rules of the Code, Common
Shares in excess of the Constructive Ownership Limitations will not, in the
aggregate, own an interest in a tenant or subtenant of the REIT of sufficient
magnitude to cause rental income received, directly or indirectly, by the REIT
from such tenant or subtenant to be treated as nonqualifying income for purposes
of the income requirements that REITs must satisfy.
Shareholders should be aware that events other than a purchase or other
transfer of Common Shares can result in ownership, under the applicable
attribution rules of the Code, of Common Shares in excess of the Constructive
Ownership Limitation. As the attribution rules that apply with respect to the
Constructive Ownership Limitations differ from those that apply with respect to
the Beneficial Ownership Limitations, the events other than a purchase or other
transfer of Common Shares which can result in Common Share ownership in excess
of the Constructive Ownership Limitations can differ from those which can result
in Common Share ownership in excess of the Beneficial Ownership Limitations.
Shareholders should consult their own tax advisers concerning the application of
the attribution rules of the Code in their particular circumstances.
For purposes of calculating the Common Shares owned by a shareholder to
determine the applicability of the Beneficial Ownership Limitations and the
Constructive Ownership Limitations, the beneficial ownership rules contained in
Regulation 13D promulgated under the Securities Exchange Act of 1934, as
amended, will be applied. Accordingly, all rights to acquire Common Shares and
all securities convertible into Common Shares will be deemed to have been
exercised or converted, as the case may be.
The Trustees may waive the Beneficial Ownership Limitations or the
Constructive Ownership Limitations, including the limitations applicable to
holders who own in excess of 9.9% either in the aggregate or of the Common
Shares of any class, if evidence satisfactory to the Trustees and the Company's
tax counsel is presented showing that such waiver will not jeopardize the
Company's status as a REIT under the Code and will not otherwise adversely
affect the Company. As a condition of such waiver, an intended transferee must
give written notice to the Company and must furnish such opinions of counsel,
affidavits, undertakings, agreements and information as may be required by the
Trustees. If, in the opinion of management, the requested waiver raises
significant issues which could adversely affect the status of the Company as a
REIT
11
for federal income tax purposes, then the Trustees will require an opinion of
counsel with respect to such issues prior to granting the waiver. The foregoing
restrictions on transferability and ownership will not apply if the Trustees
determine that it is no longer in the best interests of the Company to attempt
to qualify, or to continue to qualify, as a REIT. Any transfer of Common Shares
or any security convertible into Common Shares that would (a) create a direct or
indirect ownership of Common Shares in excess of the Beneficial Ownership
Limitations or the Constructive Ownership Limitations, (b) result in the Common
Shares being owned by fewer than 100 persons or (c) result in the Company being
"closely held" within the meaning of Section 856(h) of the Code, shall be null
and void, and the intended transferee will acquire no rights to the Common
Shares.
The Declaration of Trust provides that the Company, by notice to the
holder thereof, may purchase any or all Excess Shares resulting from any
transfer or other event. The price at which the Company may purchase such Excess
Shares shall be equal to the lesser of (a) in the case of Excess Shares
resulting from a purported transfer for value, the price per share in the
purported transfer that caused the automatic exchange for such Excess Shares or,
in the case of Excess Shares resulting from some other event, the market price
of such Common Shares on the date of the automatic conversion into Excess
Shares, or (b) the market price of such Common Shares on the date the Company
accepts the offer to purchase such Excess Shares. Any dividend or distribution
paid to a proposed transferee on Excess Shares prior to the discovery by the
Company that such Common Shares have been transferred in violation of the
provisions of the Company's Declaration of Trust shall be repaid to the Company
upon demand. If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decision, statute, rule or regulation, then the
intended transferee or holder of any Excess Shares may be deemed, at the option
of the Company, to have acted as an agent on behalf of the Company in acquiring
such Excess Shares and to hold such Excess Shares on behalf of the Company.
All persons who own, directly or by virtue of the attribution
provisions of the Code, more than 9.9% in number or value either in the
aggregate or of any class of the outstanding Common Shares must give a written
notice to the Company containing the information specified in the Declaration of
Trust by January 30 of each year. In addition, each shareholder shall upon
demand be required to disclose to the Company in writing such information with
respect to the direct, indirect and constructive ownership of beneficial
interests as the Trustees deem necessary to comply with the provisions of the
Code applicable to a REIT, to comply with the requirements of any taxing
authority or governmental agency or to determine any such compliance.
The Ownership Restrictions may have the effect of precluding
acquisition of control of the Company unless the Trustees determine that
maintenance of REIT status is no longer in the best interests of the Company.
DESCRIPTION OF UNITS
The following description of the material terms of the OP Units and
other securities of the Operating Partnership and certain other material
provisions of the Partnership Agreement, does not purport to be complete and is
subject to, and qualified in its entirety by reference to, applicable provisions
of Maryland law and the Partnership Agreement. For a comparison of the rights of
partners in the Operating Partnership and shareholders of the Company, see
"Comparison of Ownership of OP Units and Common Shares."
General
Holders of OP Units (other than the Company in its capacity as general
partner) hold a limited partnership interest in the Operating Partnership, and
all holders of OP Units (including the Company in its capacity as general
partner) are entitled to share in cash distributions from, and in the profits
and losses of, the Operating Partnership.
Issuance of OP Units
12
From time to time, subject to and in accordance with the provisions of
the Partnership Agreement, the Company, in its capacity as general partner, may
cause the Operating Partnership to issue additional OP Units as follows:
(a) OP Units to the Company upon the issuance by the Company
of additional Common Shares and the contribution of the net proceeds thereof as
an additional capital contribution to the Operating Partnership, as provided for
in the Partnership Agreement. The Company may issue Common Shares in connection
with option plans, restricted share plans or other benefit or compensation plans
and arrangements (for example, shares issued in lieu of fees or compensation),
and the Company may issue Common Shares in payment of the redemption price of
any OP Units, without receiving any proceeds and the issuance of such Common
Shares shall nonetheless entitle the Company to additional OP Units. In such
event, the Operating Partnership shall issue a number of OP Units equal to the
number of Common Shares being issued by the Company.
In the event of any stock split, stock dividend,
reclassification, recapitalization or other adjustment in respect of the
outstanding Common Shares, the number of OP Units will be proportionately
adjusted so that the OP Units will equate to the Common Shares on a one-to-one
basis.
(b) OP Units to partners (including itself) that hold other
units of partnership interest or other securities that are convertible into or
exchangeable for OP Units, upon the exercise of such conversion or exchange in
accordance with the terms, conditions and provisions of the Partnership
Agreement.
(c) If the Company, in its capacity as general partner,
creates and administers a reinvestment program in substantial conformance with a
dividend reinvestment program which may be available from time to time to
holders of Common Shares, each limited partner holding OP Units shall have the
right to reinvest any or all cash distributions payable to it from time to time
pursuant to the Partnership Agreement by having some or all (as the limited
partner elects) of such distributions contributed to the Operating Partnership
as additional capital contributions, and in such event the Operating Partnership
shall issue to each such limited partner additional OP Units, or the Company may
elect to cause distributions with respect to which a limited partner has elected
reinvestment to be contributed to the Company in exchange for the issuance of
Common Shares. At the option of the Company, such a program may also be made
available with respect to other units of partnership interest and other
securities if and to the extent of each such partner's participation in any such
reinvestment program.
(d) In the event that the Company assumes any debt of the
Operating Partnership as provided in the Partnership Agreement, the Operating
Partnership shall issue to the Company additional OP Units and other units of
partnership interest in an amount equal to the quotient (rounded to the nearest
whole number) arrived at by dividing (i) the total debt assumed by the Company
(including any interest obligation) by (ii) the market price.
(e) In all other cases, OP Units, other units of partnership
interest, and/or other securities as determined by the Company, may be issued by
the Company in its sole and absolute discretion, to existing or newly-admitted
partners (including itself) in exchange for capital contributions or additional
capital contributions by a partner to the Operating Partnership.
Preference Units and Other Securities
From time to time, subject to and in accordance with the provisions of
the Partnership Agreement, the Company, in its capacity as general partner, may
cause the Operating Partnership to issue "Preference Units", as defined herein.
A Preference Unit is a unit of partnership interest having such rights,
preferences and other privileges, variations and designations as may be
determined by the Company in its sole and absolute discretion, but not in
violation of the provisions of the Partnership Agreement, the Maryland Revised
Uniform Partnership Act, as amended from time to time, or of any other
Preference Unit(s), such rights,
13
preferences and other privileges, variations and designations to be as described
in a preference certificate which must be appended to the Partnership Agreement
and distributed to all partners. There may be more than one series or class of
Preference Units having differing terms and conditions, but all Preference Units
within a given series or class shall have the same rights, preferences and other
privileges, variations and designations. A Preference Unit may be convertible
into one or more OP Units or be capable of being valued in OP Units. With
respect to each series or class of Preference Units, the Company may also, in
its discretion, determine and fix, among other terms and conditions, any of the
following: (a) the series to which such Preference Units shall belong, (b) the
distribution rate therefore, (c) the price at and the terms and conditions on
which such Preference Units may be redeemed, (d) the amount payable in respect
of such Preference Units in the event of involuntary or voluntary liquidation,
(e) the terms and conditions on which such Preference Units may be converted, if
such Preference Units are issued with the privilege of conversion, and (f) the
number of such Preference Units to be issued as a part of such series. Once
determined and fixed, however, the terms and conditions of a particular series
or class of Preference Units may not be changed without the written consent of
the holders of at least two-thirds of the Preference Units within the class or
series (or such greater percentage as may be provided for in the applicable
preference certificate).
In addition, the Company may cause the Operating Partnership from time
to time to issue such other securities, as the Company deems necessary.
Redemption Rights and Exchange of OP Units for Common Shares
Partnership Put. In accordance with the Partnership Agreement,
commencing from and after the second anniversary of the date that a limited
partner is admitted as a partner of the Operating Partnership, such partner (the
"Putting Partner") has the right (a "Partner Put") to require the Operating
Partnership to repurchase during any two-year period up to 20% of the number of
OP Units issued to such partner. The Partner Put may be exercised upon not less
than 60 days prior written notice to the Operating Partnership (a "Put Notice")
setting forth the number of OP Units to be repurchased by the Operating
Partnership pursuant to the Partner Put.
Notwithstanding the foregoing provisions in the Partnership Agreement,
pursuant to the Agreement for Contribution of Interest (the "Contribution
Agreement"), dated April 1, 1997, among the Company, the Operating Partnership
and the limited partners constituting the members of the Pechter Group that
received the initial OP Units (the "Initial OP Units"), the holders of the
Initial OP Units have the right to exercise a Partner Put with respect to the
Initial OP Units at any time, in whole or in part, from and after the first
anniversary of the closing date of the Contribution Agreement, or July 1, 1998.
Notwithstanding the provisions of the Partnership Agreement, in the event of a
Partner Put pursuant to the Contribution Agreement, settlement for the
repurchase of Initial OP Units shall take place on the 30th day after a Put
Notice is given.
Partnership Call. In accordance with the Partnership Agreement, the
Operating Partnership has the right (a "Partnership Call") upon the death of an
individual partner or upon the termination, dissolution, liquidation or other
termination of existence of any partner that is an entity, upon not less than 30
days prior written notice (a "Call Notice") to the heirs, personal
representatives or estate of an OP Unit holder, to repurchase all or part of the
OP Units held by such partner (the "Call Partner") at any time within one year
after the later of the occurrence of such event or the date that the Operating
Partnership is notified of such occurrence by or on behalf of such Partner.
Notwithstanding the foregoing provisions, the Company and the Operating
Partnership have agreed in the Contribution Agreement that the Operating
Partnership shall not effect a Partnership Call with respect to the repurchase
of the Initial OP Units.
Settlement. Settlement for the repurchase of any OP Units by the
Operating Partnership pursuant to a Partner Put or a Partnership Call shall take
place on the 60th day after the Put Notice is given or on the 30th day after the
Call Notice is given, as the case may be. The purchase of any OP Unit pursuant
to a Partner Put or a Partnership Call shall be at a price (the "Redemption
Price") equal to the market price per Common Share on the date the Put Notice or
the Call Notice, as the case may be, was given.
14
At the settlement, the Partnership shall pay to the OP Unit holder in
cash an amount equal to 10% of the Redemption Price and shall deliver to the OP
Unit holder a promissory note of the Operating Partnership in the principal
amount equal to the balance of the Redemption Price (the "Redemption Note"). The
Redemption Note shall provide, among other things, that (a) payments shall be
made in ten equal consecutive annual installments, together with interest on the
unpaid balance at an interest rate per annum equal to the rate of interest in
effect from time to time under the Company's line of credit with its principal
lender; (b) the Operating Partnership shall have an unlimited right of
prepayment without penalty; (c) at the option of the holder, in the event of
default in the payment of any installment of principal or interest, the holder
may accelerate all amounts payable under the Redemption Note; and (d) the
Redemption Note may be assumed by the Company.
Under the Contribution Agreement, however, the Company and the
Operating Partnership have agreed that, in the event of a repurchase of any
Initial OP Units pursuant to a Partner Put, the entire Redemption Price shall be
paid in cash at the time of settlement. If the obligation to pay the Redemption
Price has been assumed by the Company (see "Description of OP Units - Redemption
Rights and Exchange of OP Units for Common Shares - Assumption by the Company"),
and the Company has made an election to pay the Redemption Price in Common
Shares, all such Common Shares issuable in respect of such redemption shall be
issued at the settlement.
Assumption by the Company. The Company has the right at its option, at
any time to, assume all or any part of the Operating Partnership's obligation to
repurchase OP Units under the Partnership Agreement, to pay all or any part of
the Redemption Price, or to pay all or any part of any Redemption Note. If the
Company elects to assume any such obligation, the Company shall have the right,
upon notice to the Putting Partner or the Call Partner, as the case may be, to
pay all or part of the Redemption Price by issuance to such partner of a number
of Common Shares equal to the amount to be so paid divided by the market price
per Common Share on the date such notice is given. If the Company elects to pay
such obligation in cash, the Operating Partnership shall loan to the Company an
amount in cash equal to the obligation to be paid by the Company; in such event,
the Company shall discharge such loan by surrender to the Operating Partnership
of OP Units acquired in connection therewith.
Limit on Redemptions. Notwithstanding the provisions of the Partnership
Agreement and the Contribution Agreement, if the Company assumes the obligation
to pay all or any part of the Redemption Price and elects to make such payment
in Common Shares, then, to the extent that the delivery of Common Shares in
payment of the redemption price would result in any person, entity, or group
being the Beneficial Owner of Common Shares in excess of the applicable
Ownership Limit or otherwise cause such Common Shares to be Excess Shares, such
portion of the Partner Put shall be deemed to be canceled and neither the
Company nor the Operating Partnership shall be obligated to repurchase OP Units
or to deliver Common Shares in connection with such canceled portion of the
Partner Put.
Tax Treatment of Redemption of OP Units
The following discussion summarizes the material federal income tax
considerations that may be relevant to a limited partner who exercises his or
her right to require the redemption of his or her OP Units. This discussion only
applies to limited partners that provide an affidavit to the Operating
Partnership, at the time their OP Units are redeemed, stating under penalties of
perjury (a) that the limited partner is not a foreign person and (b) the limited
partner's taxpayer identification number.
LIMITED PARTNERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES TO THEM OF THE REDEMPTION OF THEIR OP UNITS,
INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF SUCH
REDEMPTION IN THEIR PARTICULAR CIRCUMSTANCES AND POTENTIAL CHANGES IN APPLICABLE
LAWS.
15
General. If the Company assumes and performs the redemption obligation,
the Partnership Agreement provides that the redemption will be treated by the
Company, the Operating Partnership and the redeeming limited partner as a sale
of OP Units by such limited partner to the Company at the time of such
redemption. (A limited partner's right to require the redemption of OP Units is
referred to as the "Redemption Right.") Such sale will be fully taxable to the
redeeming limited partner and such redeeming limited partner will be treated as
realizing for tax purposes an amount equal to the sum of the cash or the value
of the Common Shares received in the exchange plus the amount of Operating
Partnership liabilities (including the Operating Partnership's share of the
liabilities of certain entities in which the Operating Partnership owns an
interest) allocable to the redeemed OP Units at the time of the redemption. The
determination of the amount of gain or loss is discussed more fully below.
If the Company does not elect to assume the obligation to redeem a
limited partner's OP Units, the Operating Partnership will redeem such OP Units
for cash. If the Operating Partnership redeems OP Units for cash that the
Company contributes to the Operating Partnership to effect such redemption, the
redemption likely would be treated for tax purposes as a sale of such OP Units
to the Company in a fully taxable transaction, although the matter is not free
from doubt. In that event, the redeeming limited partner would be treated as
realizing an amount equal to the sum of the cash received in the exchange plus
the amount of Operating Partnership liabilities (including the Operating
Partnership's share of the liabilities of certain entities in which the
Operating Partnership owns an interest) allocable to the redeemed OP Units at
the time of the redemption. The determination of the amount of gain or loss in
the event of sale treatment is discussed more fully below.
If, instead, the Operating Partnership chooses to redeem a limited
partner's OP Units for cash that is not contributed by the Company to effect the
redemption, the tax consequences would be the same as described in the previous
paragraph, except that if the Operating Partnership redeems less than all of a
limited partner's OP Units, the limited partner would not be permitted to
recognize any loss occurring on the transaction and would recognize taxable gain
only to the extent that the cash, plus the share of Operating Partnership
liabilities (including the Operating Partnership's share of the liabilities of
certain entities in which the Operating Partnership owns an interest) allocable
to the redeemed OP Units, exceeded the limited partner's adjusted basis in all
of such limited partner's OP Units immediately before the redemption.
Potential Application of Disguised Sale Regulations to a Redemption of OP Units.
There is a risk that a redemption of OP Units may cause the original transfer of
property to the Operating Partnership in exchange for OP Units to be treated as
a "disguised sale" of property. The Code and the Treasury Regulations thereunder
(the "Disguised Sale Regulations") generally provide that, unless one of the
prescribed exceptions is applicable, a partner's contribution of property to a
partnership and a simultaneous or subsequent transfer of money or other
consideration (including the assumption of or taking subject to a liability)
from the partnership to the partner will be presumed to be a sale, in whole or
in part, of such property by the partner to the partnership. Further, the
Disguised Sale Regulations provide generally that, in the absence of an
applicable exception, if money or other consideration is transferred by a
partnership to a partner within two years of the partner's contribution of
property to the partnership, the transactions will be, when viewed together,
presumed to be a sale of the contributed property unless the facts and
circumstances clearly establish that the transfers do not constitute a sale. The
Disguised Sale Regulations also provide that if two years have passed between
the contribution of property to the partnership and the transfer of money or
other consideration from a partnership to a partner, the transactions will be
presumed not to be a sale unless the facts and circumstances clearly establish
that the transfers constitute a sale.
Accordingly, if an OP Unit is redeemed by the Operating Partnership,
the Internal Revenue Service (the "Service") could contend that the Disguised
Sale Regulations apply because the redeeming limited partner will receive cash
or Common Shares subsequent to his previous contribution of property to the
Partnership. If the Service were successful in making such an assertion, the
transactions in connection with the issuance of the OP Units themselves could be
taxable as a disguised sale under the Disguised Sale Regulations.
16
Tax Treatment of Disposition of OP Units by Limited Partners Generally.
If an OP Unit is redeemed in a manner that is treated as a sale of the OP Unit
the determination of gain or loss from the sale or other disposition will be
based on the difference between the amount considered realized for tax purposes
and the limited partner's tax basis in such OP Unit. See "-- Basis of OP Units"
below. Upon the sale of an OP Unit, the "amount realized" will be measured by
the sum of the cash and fair market value of other property received (e.g.,
Redemption Shares) plus the portion of the Operating Partnership's liabilities
(including the Operating Partnership's share of the liabilities of certain
entities in which the Operating Partnership owns an interest) allocable to the
OP Unit sold. To the extent that the amount exceeds the limited partner's basis
in the OP Unit disposed of, such limited partner will recognize gain. It is
possible that the amount of gain recognized or even the tax liability resulting
from such gain could exceed the amount of cash and the value of any other
property (e.g., Redemption Shares) received upon such disposition.
Except as described below, any gain recognized upon a sale or other
disposition of OP Units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount realized
upon the sale of an OP Unit attributable to a limited partner's share of
"unrealized receivables" of the Operating Partnership (as defined in Section 751
of the Code) exceeds the basis attributable to those assets, such excess will be
treated as ordinary income. Unrealized receivables include, to the extent not
previously included in Operating Partnership income, any rights to payment for
services rendered or to be rendered. Unrealized receivables also include amounts
that would be subject to recapture as ordinary income if the Operating
Partnership had sold its assets at their fair market value at the time of the
transfer of an OP Unit.
For non-corporate holders, the maximum rate of tax on the net capital
gain from the sale or exchange of a capital asset held for more than 18 months
is 20%, and the maximum rate of tax from the sale or exchange of a capital asset
held for more than one year but not more than 18 months is 28%. The maximum rate
for net capital gains attributable to the sale of depreciable real property held
for more than 18 months is 25% to the extent of the prior deductions for
"unrecaptured Section 1250 gain" (that is depreciation deductions not otherwise
recaptured as ordinary income under the existing depreciation recapture rules).
The IRS has authority to issue regulations that could, among other
things, apply these rates on a look-through basis in the case of "pass-through"
entities such as the Company. The IRS has not yet issued such regulations, and
if it does not issue such regulations in the future, the rate of tax that would
apply to the disposition of an OP Unit by a non-corporate holder would be
determined based upon the period of time over which such non-corporate holder
held such OP Unit. No assurances, however, can be provided that the IRS will not
issue regulations that would provide that the rate of tax that would apply to
the disposition of an OP Unit by a non-corporate holder would be determined
based upon the nature of the assets of the Operating Partnership and the periods
of time over which the Operating Partnership held such assets. Moreover, no
assurances can be provided that such regulations would not be applied
retroactively.
Basis of OP Units. In general, a limited partner who received OP Units in
exchange for contributing an interest in a partnership has an initial tax basis
in such OP Units ("Initial Basis") equal to his or her basis in the contributed
partnership interest. A limited partner's Initial Basis in his or her OP Units
generally is increased by (a) such limited partner's share of Operating
Partnership taxable and tax-exempt income, (b) increases in his or her share of
the liabilities of the Operating Partnership (including the Operating
Partnership's share of the liabilities of certain entities in which the
Operating Partnership owns an interest) and (c) any gain recognized under
Section 737 of the Code due to the receipt of a distribution from the Operating
Partnership within seven years (five years in the case of contributions on or
before June 7, 1997) of a contribution of property to the Operating Partnership.
Generally, such Partner's Initial Basis in his or her OP Units is decreased (but
not below zero) by (a) his or her share of Operating Partnership distributions,
(b) decreases in his or her share of liabilities of the Operating Partnership
(including the Operating Partnership's share of the liabilities of certain
entities in which the Operating Partnership owns an interest), (c) his or her
share of losses of the Operating Partnership, and (d) his or her share of
nondeductible expenditures of the Operating Partnership that are not chargeable
to capital.
17
REGISTRATION RIGHTS
The following description of the material terms of the Registration
Rights Agreement among the Company and the Initial OP Unit holders named
therein, dated as of June 27, 1997 (the "Registration Agreement"), does not
purport to be complete and is qualified in its entirety by reference to the
Registration Agreement, a copy of which is an exhibit to this Registration
Statement.
Shelf Registration
Pursuant to the Registration Agreement, the Company agreed to prepare
and file a shelf registration statement under Rule 415 of the Securities Act to
register the Redemption Shares. The Company agreed to use its best efforts to
cause such registration statement to be declared effective as soon as possible
after the first anniversary of the closing under the Contribution Agreement and
to keep such registration statement continuously effective for a period of four
years (the "Shelf Period"). The Shelf Period may be extended for an additional
number of days equal to the number of business days during the pendency of all
"Suspension Periods" and "Blackout Periods," as defined herein.
Demand Registration
At any time during the period beginning with the end of the Shelf
Period and ending on the earliest of (a) the completion of demand registrations
for all Registrable Securities, as defined below, held by persons entitled to
registration rights (the "Qualified Holders"), or (b) at such time as the number
of outstanding Registrable Securities is less than 300,000, or (c) the 20th
anniversary of the closing of the acquisition of the Acquired Properties (the
"Demand Period"), Qualified Holders holding at least 300,000 Registrable
Securities or such Qualified Holder holding the largest number of Registrable
Securities may request in writing (a "Registration Request") that the Company
file a registration statement under the Securities Act on Form S-3 (each, a
"Demand Registration") covering the registration of at least 100,000 Registrable
Securities. Within 10 days after the receipt of a Registration Request, the
Company is required to give written notice to all other Qualified Holders (the
"Registration Notice") of such request and permit such other Qualified Holders
to participate in such registration by written notice (the "Holder Notice")
received by the Company within 10 days after the date the Registration Notice
was given.
"Registrable Securities" defined in the Registration Agreement as all
the Common Shares held by a Qualified Holder that are: (a) issued to them upon a
Put of Initial OP Units by a Qualified Holder, or issuable to them upon the
exercise by the Company of its election to pay the Redemption Price in Common
Shares, and (b) issued as a stock split, stock dividend or other distribution or
in connection with any recapitalization or reclassification with respect to any
Common Shares referred to in clause (a); excluding in all cases, however, (y)
any Registrable Securities sold pursuant to registration under the Securities
Act, and (z) any Registrable Securities sold or eligible for sale without
registration pursuant to Rule 144 (or similar or successor rule) promulgated
under the Securities Act.
Nothing in the Registration Agreement is intended to confer upon any
person the right to demand Common Shares upon the Put of their Initial OP Units,
or to require the Company to exercise its right to issue Common Shares in
payment of the Redemption Price.
Upon a Registration Request the Company is required to use its best
efforts to cause the Demand Registration to become effective within 45 days
("Outside Effective Date") and to remain in effect for at least 90 days
(excluding business days during the pendency of any Suspension Period or
Blackout Period. The Company is obligated to effect only two Demand
Registrations in any 12 month period ("Permitted Demand Registrations"). If,
however, Qualified Holders that elect to include their Registrable Securities in
a registration pursuant to the terms of the Registration Agreement (a
"Participating Holder") have made two consecutive requests for a Demand
Registration and no registration statements shall have been declared
18
effective as a result of two or more Suspension Periods or Blackout Periods,
then the Participating Holders in such registrations have the right to make a
special request for a Demand Registration (the "Third Demand Registration")
without regard to the number of prior Permitted Demand Registrations during such
12 month period.
Demand In Connection with a Put. If a Participating Holder exercises
his or her demand rights in connection with a Put of Initial OP Units, then the
Put will not be settled for Common Shares prior to the effective date of the
registration statement. If the registration statement is not declared effective
by the Outside Effective Date, then any Participating Holder may withdraw his or
her Registrable Securities from such registration and such registration will not
count toward the number of Permitted Demand Registrations in such 12 month
period. If a Third Demand Registration request is made immediately following two
consecutive Registration Requests that have not been declared effective or have
not permitted sales due to consecutive Suspension Periods and/or Blackout
Periods, and the Third Demand Registration is not declared effective by the
180th day after the first Registration Request was made, even if such delay is
due to a Market Stand-Off Period, as defined under the Registration Agreement,
then the Company shall be required to honor the Put by payment of cash to the
Participating Holders promptly following such 180th day.
Puts by Small Holders. If a Qualified Holder puts less than 100,000
Initial OP Units and there is not then pending, requested or proposed any
registration of Registrable Securities for any Qualified Holder, and if the
Company elects to assume the obligation of the Operating Partnership to pay the
Redemption Price, then, notwithstanding the provisions of the Registration
Agreement, the Company shall either (a) pay the Redemption Price in cash or (b)
register the Common Shares that may be issued to such holder in accordance with
all other terms of the Registration Agreement. In such event, the registration
of such Common Shares shall not be deemed as a Demand Registration for purposes
of calculating the Permitted Demand Registrations under the Registration
Agreement.
Underwritten Demand Registration. If the Participating Holders
initiating the Demand Registration request ("Initiating Holders") intend to
distribute their Registrable Securities covered by their request by means of an
underwritten offering, they are required to advise the Company as a part of
their request for registration pursuant to the Registration Agreement, and the
Company shall include such information in the Registration Notice. In such
event, the right of any Participating Holder to include their Registrable
Securities in such Demand Registration shall be conditioned upon such
Participating Holder's entering into an underwriting agreement in customary form
with the managing underwriter or underwriters selected for such underwriting by
the Company, provided that the charges payable by the Participating Holders to
such underwriter shall be commercially reasonable. If the underwriter(s)
advise(s) the Company in writing that successful marketing of the securities
requires a limitation of the number of securities to be underwritten, then the
number of Registrable Securities that may be included shall be reduced on a pro
rata basis.
Piggyback Registration
If at any time that at least 10% of the Registrable Securities are held
by Qualified Holders, the Company proposes to file a registration statement
under the Securities Act with respect to a primary offering (a "Primary
Offering") of Common Shares (other than registration for employee benefit plans,
merger transactions and similar issuances), the Company will give written notice
of such proposed Primary Offering to all Qualified Holders at least 20 days
before the anticipated filing date of the registration statement (the "Piggyback
Notice"), stating the date that the offering is anticipated to become effective,
and shall include in such proposed Primary Offering all Registrable Securities
specified in written requests by the Qualified Holders that are received by the
Company within 10 days after the date the Piggyback Notice was given.
The piggyback registration rights do not apply in the event that it is
reasonably anticipated that the Primary Offering will commence within 20 days,
the underwriters determine that the Primary Offering would be unreasonably
delayed by the allowance of piggyback registrations rights, and the Primary
Offering, in fact, does not include any Common Shares held by any person other
than the Company.
19
If the Primary Offering is an underwritten public offering on behalf of
the Company, the Company's obligation to include in such registration the
Registrable Securities of any Participating Holder shall be conditioned upon the
Participating Holder entering into an underwriting agreement with the
underwriters, agreeing to be bound by all terms and conditions of the offering,
and providing such complete and accurate information as the underwriter may
request, including information for inclusion in the registration statement. If
the managing underwriter advises the Company in writing that the total number of
Common Shares requested to be included in such offering by the Participating
Holders and by the Company exceeds the number of Common Shares which, in the
opinion and at the reasonable discretion of such managing underwriter, can be
included in the offering without adversely affecting the offering, the price
range of the Common Shares offered or the probability of success of such
offering, the Company will include in such offering (a) first, all Common Shares
that the Company proposes to offer, and (b) second, up to the full number of
Registrable Securities requested by Participating Holders to be included in such
registration that the managing underwriter reasonably believes will not so
affect the offering. In such event, the number of Common Shares to be included
in such offering by all holders, including the Participating Holders, shall be
allocated pro rata among all such holders on the basis of the total number of
Common Shares (including Registrable Securities) subject to registration rights
that are held by each such holder (regardless of the number of Common Shares
requested to be included in such registration). In the case of a request for
registration pursuant to a Piggyback Registration in connection with a Put, the
Put will not be settled for Common Shares before the effective date of the
registration statement which includes such Registrable Securities and shall be
considered as never having been exercised to the extent that the Registrable
Securities are not so included.
Suspension Period; Blackout Period.
Suspension Period. The Company's obligation under the Registration
Agreement to register any Registrable Securities shall be suspended upon notice
by the Company to all Participating Holders of the occurrence of any one or more
of the following events ("Suspension Events"):
(a) a determination by the Company, evidenced by a certificate
signed by the President or Chief Executive Officer of the
Company, stating that in the good faith judgment of the Board
of Trustees of the Company, it would be seriously detrimental
to the Company and its stockholders for such registration
statement to be filed and it is therefore essential to defer
the filing of such registration statement;
(b) a determination by the Company to effect an underwritten
Primary Offering, if the Company is advised by the managing
underwriter that the offer or sale of Registrable Securities
hereunder would have a material adverse effect on the proposed
offering;
(c) pending negotiations relating to, or consummation of, a
transaction or the occurrence of an event that would require
additional disclosure of material information by the Company
in the registration statement or which renders the Company
unable to comply with applicable disclosure requirements in
connection with the registration or sale of the Registrable
Securities; or
(d) the issuance of a stop order.
Any suspension shall commence on the date notice is given by the
Company to all Participating Holders of such Suspension Event, and shall
continue in effect until such time that (a) notice is given by the Company that
such Suspension Event or its effect no longer exists, or (b) the passage of 120
days after the suspension notice was given (the "Suspension Period"), whichever
is earlier.
Blackout Period. Following the effectiveness of any registration
statement under the Registration Agreement, each Participating Holder agreed
that no offers or sales of any Registrable Securities owned or held by such
person will be effected after the Company shall have given notice ("Blackout
Notice") of any
20
Suspension Event which states that no offers or sales shall be made, until such
time that (a) notice is given by the Company that offers and sales may
recommence, or (b) the passage of 120 days after the Blackout Notice has been
given (the "Blackout Period"), whichever is earlier.
Limit on No Sale Period. The Registration Agreement provides that in no
event will the combined duration of all Suspension Periods and Blackout Periods
during any calendar year exceed 150 days, and the combined duration of all
Suspension Periods, Blackout Periods and Market Stand-Off Periods during any
calendar year exceed 180 days. If in connection with any Put the combined
duration of all Suspension Periods, Blackout Periods and Market Stand-Off
Periods during any calendar year exceeds 180 days, then the Company shall be
required to honor the Put by payment of cash to the Putting Participating
Holders promptly following such 180th day.
Expenses of Registration
All expenses incurred in connection with a registration pursuant to the
Registration Agreement, including, without limitation, all federal and "blue
sky" registration and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company shall be borne by the Company. Each
Participating Holder shall bear a proportionate share of all discounts,
commissions or other amounts payable to underwriters or brokers in connection
with such offering and of the expenses of counsel for Participating Holders. The
Company shall not be required to pay for expenses of any registration request
pursuant to a Demand Registration if the registration request is subsequently
withdrawn at the request of the Participating Holders of a majority of all of
the Registrable Securities to be registered unless such withdrawal is pursuant
to a right of withdrawal provided for in the Registration Agreement.
Indemnification
Indemnification by the Company. In the event that any Registrable
Securities are included in a registration statement under the Registration
Agreement, the Company agreed to indemnify and hold harmless each Participating
Holder, the partners, officers and directors of each Participating Holder, any
underwriter (as defined in the Securities Act) for such Participating Holder and
each person, if any, who controls such Participating Holder or underwriter
within the meaning of the Securities Act or the Exchange Act, against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively, a "Violation"):
(a) any untrue statement or alleged untrue statement
of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto,
(b) the omission or alleged omission to state therein
a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or
(c) any violation or alleged violation by the Company
of the Securities Act, the Exchange Act, any federal or state
securities law or any rule or regulation promulgated under the
Securities Act, the Exchange Act or any federal or state
securities law in connection with the offering covered by such
registration statement,
and the Company agreed to reimburse each such Participating Holder, partner,
officer, or director, underwriter or controlling person for any legal or other
expenses reasonably incurred by them, as incurred, in connection with
investigating or defending such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in the Registration
Agreement shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable
21
in any case for any such loss, claim, damage, liability or action to the extent
that it arises out of or is based upon a Violation which occurs in reliance upon
and in conformity with written information furnished expressly for use in
connection with such registration by such Participating Holder, partner,
officer, director, underwriter or controlling person of such Participating
Holder.
Indemnification by Participating Holders of Registrable Securities. To
the extent permitted by law, each Participating Holder agreed to indemnify and
hold harmless the Company, each of its directors, each of its officers who have
signed the registration statement, each person, if any, who controls the Company
within the meaning of the Securities Act, any underwriter and any other
Participating Holder selling securities under such Registration statement or any
of such other Participating Holder's partners, directors or officers or any
person who controls such Participating Holder within the meaning of the
Securities Act or the Exchange Act, against any losses, claims, damages or
liabilities (joint or several) to which the Company or any such director,
officer, controlling person, underwriter or other such Participating Holder,
partner or director, officer or controlling person of such other Participating
Holder may become subject under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Participating Holder expressly for use in connection with such registration; and
each such Participating Holder shall reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, controlling
person, underwriter or other Participating Holder, partner, officer, director or
controlling person of such other Participating Holder in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this Section shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Participating Holder, which consent shall not be unreasonably withheld; and
provided further, that the total amounts payable in indemnity by a Participating
Holder under the Registration Agreement in respect of any Violation shall not
exceed the net proceeds received by such Participating Holder in the registered
offering out of which such Violation arises.
COMPARISON OF OWNERSHIP OF OP UNITS AND COMMON SHARES
The information below highlights a number of the significant
differences and similarities between the Operating Partnership and the Company
relating to, among other things, form of organization, investment objectives,
policies and restrictions, asset diversification, capitalization, management
structure, duties, liability, exculpation and indemnification of the general
partner and the trustees, and investor voting and other rights. These
comparisons are intended to assist partners in understanding how their
investment will be changed if they redeem their OP Units and the Company
exercises its right to assume the Operating Partnership's obligation with
respect to such redemption and to acquire the OP Units in exchange for Common
Shares. See "Redemption Rights and Exchange of OP Units for Common Shares"
above. This discussion is summary in nature and does not constitute a complete
discussion of these matters, and limited partners should carefully review the
balance of this Prospectus for additional important information.
Form of Organization and Purpose
The Operating Partnership is a limited partnership organized under the
laws of the State of Maryland. The Operating Partnership owns interests in
shopping center properties and certain other properties and investments. See
"The Company and the Operating Partnership" above. The Operating Partnership may
also invest in other types of real estate and in such geographic areas as the
Company deems appropriate. The Company conducts the business of the Operating
Partnership in such a manner as to permit the Company to be classified as a REIT
under the Code.
The Company is a Maryland real estate investment trust organized under
the Maryland REIT Law. Although the Company currently intends to continue to
qualify as a REIT under the Code and to operate as a self-administered REIT, the
Company is not under any contractual obligation to continue such qualification
and there can be no assurance that the Company (or any successor general partner
in the Operating
22
Partnership) will continue to maintain such qualification or mode of operation
in the future. Except as otherwise permitted in the Partnership Agreement, the
Company is obligated to conduct its activities through the Operating
Partnership. The Company is the sole general partner of the Operating
Partnership.
Nature of Investment
The OP Units constitute equity interests entitling each limited partner
in the Operating Partnership to his or her pro rata share of cash distributions
made to the limited partners in the Operating Partnership. See "Description of
OP Units." The Operating Partnership would ordinarily expect to retain and
reinvest proceeds of the sale of property or excess refinancing proceeds in its
business, except in certain circumstances.
The Common Shares constitute equity interests in the Company. The
Company is entitled to receive its pro rata share of distributions made by the
Operating Partnership with respect to the OP Units owned by it. Each holder of
Common Shares of the Company is entitled to his or her pro rata share of any
dividends or distributions paid with respect to those Common Shares, which
distributions will generally match distributions made in respect of OP Units.
The dividends payable to holders of Common Shares are not fixed in amount and
are only paid if, when and as authorized and declared by the Trustees out of
assets legally available therefor. In order to qualify as a REIT, the Company
must distribute at least 95% of its taxable income (excluding capital gains),
and any taxable income (including capital gains) not distributed will be subject
to corporate income tax.
The OP Units and the Common Shares represent equity interests entitling
the holders thereof to participate in the growth and income of the Operating
Partnership and the Company, respectively. The Partnership Agreement states that
the Company, as general partner shall make distributions of cash to the partners
not less frequently than quarterly to the extent that such funds are available
therefor from the Available Cash (as defined in the Partnership Agreement) of
the Operating Partnership. Except as required by the provisions of any
Preference Units (as defined in the Partnership Agreement), all such
distributions shall be paid to all OP Unit holders on a pro rata basis.
Dividends on Common Shares of the Company are payable in the discretion of the
Trustees.
The Operating Partnership (and thus the Company) generally expects to
reinvest proceeds of any sale of property and refinancings, except in certain
limited circumstances. Thus, limited partners in the Operating Partnership will
not be able to realize upon their investments through distributions of sale and
refinancing proceeds. Instead, limited partners will be able to realize upon
their investments primarily through the exercise of their Redemption Right and,
if Common Shares of the Company are issued in satisfaction of such right, the
subsequent sale of such shares.
Length of Investment
The Operating Partnership has a stated term expiring on December 31,
5757. The Operating Partnership has no specific plans for disposition of its
assets. To the extent that the Operating Partnership sells or refinances its
assets, the net proceeds therefrom generally will be retained by the Operating
Partnership for working capital and new investments rather than being
distributed to its partners (including the Company), except that the Company
currently expects that it generally will distribute the capital gains portion of
proceeds it receives from the sale of properties. The Operating Partnership
constitutes a vehicle for taking advantage of future investment opportunities
that may be available in the real estate market.
The Company has a perpetual term and intends to continue its operations
for an indefinite time period. Pursuant to the Declaration of Trust, the
dissolution of the Company must be approved at any meeting of shareholders
called for that purpose by the affirmative vote of the holders of not less than
a two- thirds of Shares (as defined in the Declaration of Trust) outstanding.
The Company has an indirect interest in the properties and property service
businesses owned by the Operating Partnership.
23
The Operating Partnership (and the Company) generally will reinvest the
proceeds of asset dispositions, if any, in new properties or other appropriate
investments consistent with their investment objectives. Beginning on July 1,
1998, limited partners in the Operating Partnership are entitled to exercise
their Redemption Right to have their OP Units redeemed either for Common Shares
or for cash, at the option of the Company. Shareholders of the Company are
expected to realize liquidity of their investments by the trading of the Common
Shares on the NYSE.
Liquidity
OP Units are not registered under the Securities Act or any state
securities laws and therefore may not be sold, pledged, hypothecated or
otherwise transferred unless first registered under the Securities Act and any
applicable state securities laws, or unless an exemption from registration is
available, and unless the other transfer restrictions discussed below have been
satisfied. The Company and the Operating Partnership do not intend to register
the OP Units under the Securities Act or any state securities laws.
In no event may the Company, as the general partner, at any time
assign, mortgage, sell, transfer, pledge, grant a security interest in,
hypothecate or otherwise encumber all or any portion of its OP Units except by
operation of law or to a subsidiary or affiliate of the Company.
The Partnership Agreement provides that a limited partner may not
assign, mortgage, sell, transfer, pledge, grant a security interest in,
hypothecate or otherwise encumber (a "transfer") its OP Units for a period of
two years after acquisition (the "Holding Period"), without the consent of the
Company, which may be unreasonably withheld. After the expiration of the Holding
Period, a limited partner may, without the consent of the Company, transfer all
or some of its OP Units to members of the limited partner's immediate family or
to a trust established for such purpose for estate planning purposes (a "Family
Transfer").
Except for a Family Transfer, a limited partner may not transfer its OP
Units, in whole or in part, to a third party without the prior written consent
of the Company. Any transfer of the partnership interest, in whole or in part,
of a limited partner shall not be effective unless: (a) an executed or
authenticated copy of the instrument of assignment is delivered to the Company
and the Company's consent is indicated thereon in writing and on signed on
behalf of the Company; (b) the transfer of the partnership interest will not
violate the Securities Act of 1933, as amended, or applicable state securities
laws; (c) after such transfer, the Operating Partnership will continue to be
classified as a partnership for Federal income tax purposes and not as an
association taxable as a corporation; (d) such transfer, when taken together
with other prior transfers, if any, will not result in a "termination" of the
Operating Partnership for Federal income tax purposes; (e) the transferee shall
pay all of the Operating Partnership's reasonable costs and expenses in
connection with such transfer, including the fees and expenses of counsel to the
Operating Partnership; and (f) the transferee executes and agrees to be bound by
all the terms and conditions of the Partnership Agreement. The Company, in its
sole and absolute discretion, may require that as a condition of any such
transfer, the Operating Partnership receive a favorable opinion of its counsel,
at the sole cost and expense of the transferor, as to the matters described in
clauses (b), (c), and (d) above.
In the event that a limited partner dies or is determined to be
incompetent, his or her partnership interest may be transferred as follows:
(a) If a limited partner shall die, his or her executor,
personal representative, administrator, or if a limited partner shall be
adjudicated incompetent by a court of competent jurisdiction, his or her
guardian, conservator or other validly appointed legal representative (in each
of the preceding examples, the representative is referred to as the
"Fiduciary"), the Fiduciary shall become an "assignee" of the limited partner.
If such assignee satisfies the requirements of the Partnership Agreement such
assignee shall be admitted as a limited partner of the Operating Partnership.
(b) Anything in the Operating Agreement to the contrary
notwithstanding, each limited partner shall have the right to designate in his
Last Will and Testament his successor (or successors) to his
24
Operating Partnership interest in accordance with the provisions of Section
1.706-1(e)(3)(iii) of the Regulations under the Code, and each such successor
shall, upon the death of such limited partner, be substituted for and have all
rights and all of the obligations of the limited partner, provided that such
successor complies with all of the provisions.
In no event will the Operating Partnership be required to recognize any
transfer of a limited partner interest if upon such a transfer the transferee
would be deemed to be the beneficial owner of Common Shares in excess of the
Beneficial Ownership Limitations contained in the Company's Declaration of
Trust.
Any Common Shares issued in exchange for redeemed OP Units will be
registered under the Securities Act and freely transferable, subject to the
ownership limits in the Declaration of Trust. The Company's Common Shares are
currently listed on the NYSE under the ticker symbol of "MRR". The future
breadth and strength of this secondary market will depend, among other things,
upon the number of Common Shares outstanding, the Company's financial results
and prospects, the general interest in the Company's and other real estate
investments, and the Company's dividend yield compared to that of other debt and
equity securities.
Potential Dilution of Rights
The Company as general partner of the Operating Partnership is
authorized, in its sole discretion and without limited partner approval, to
cause the Operating Partnership to issue additional limited partnership
interests and other equity securities for any partnership purpose at any time to
the Company, the limited partners or other persons on terms established by the
Company. See "Description of OP Units -- Issuance of OP Units" above.
The Board of Trustees of the Company may issue, in its discretion,
additional Common Shares and other equity securities of the Company, including
one or more classes or series of common or preferred shares of beneficial
interest, with such voting rights, dividend or interest rates, preferences,
subordinations, conversion or redemption prices or rights, maturity dates,
distribution, exchange or liquidation rights or other rights as the Board of
Trustees may specify at the time. See "Description of Common Shares of
Beneficial Interest" above. The issuance of additional shares of either Common
Shares or other similar equity securities may result in the dilution of the
interests of the shareholders. As permitted by the Maryland REIT Law, the
Declaration of Trust contains a provision permitting the Board of Trustees,
without any action by the shareholders of the Company, to amend the Declaration
of Trust to enable the Company to qualify as a REIT. Pursuant to the Declaration
of Trust, holders of Common Shares do not have any preemptive rights to
subscribe to any securities of the Company.
The limited partners in the Operating Partnership are subject to
potential dilution of their interests with respect to cash available for
distribution if the Company, in its sole discretion, causes the Operating
Partnership to issue additional OP Units or other equity securities. The Company
shareholders are also subject to potential dilution if the Board of Trustees, in
its discretion, decides to issue additional Common Shares or other equity
securities.
Management Control
All management powers over the business and affairs of the Operating
Partnership are vested in the Company as the general partner of the Operating
Partnership, and no limited partner of the Operating Partnership has any right
to participate in or exercise control or management power over the business and
affairs of the Operating Partnership.
The Board of Trustees has exclusive control over the direction of the
Company's business and affairs, subject only to certain restrictions in the
Declaration of Trust and Bylaws, the Partnership Agreement and applicable law.
The Company's Declaration of Trust provides that the number of trustees of the
Company, which is currently eight, cannot be less than three nor more than 15.
The Declaration of Trust and Bylaws
25
provide that an annual meeting of shareholders be held to elect the Trustees who
will serve for the ensuing year and until their successors are duly elected and
qualify. Any vacancy (including a vacancy created by an increase in the number
of trustees) will be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the Trustees. The Trustees will each
serve for a term of one year (except that an individual who has been elected to
fill a vacancy will hold office only for the unexpired term of the Trustee he is
replacing).
The policies adopted by the Board of Trustees may be altered or
eliminated without a vote of the shareholders. Accordingly, except for their
vote in the elections of Trustees, shareholders have no control over the
ordinary business policies of the Company.
Because the Board of Trustees is elected each year by the shareholders
at the Company's annual meeting, the shareholders have greater control over the
management of the Company than the limited partners have over the Operating
Partnership.
Duties of General Partner and Trustees
The Company (as the general partner of the Operating Partnership) is
not liable or accountable, in damages or otherwise, to the Operating Partnership
or to any partner for any error of judgment or for any mistakes of fact or law
of for anything which it may do or refrain from doing in connection with the
business and affairs of the Operating Partnership except in the case of fraud,
breach of fiduciary duty or breach of the Partnership Agreement. The Company is
not personally liable for the return of any limited partner's capital
contribution.
Under Maryland law, there is no statute specifying the duties of
trustees of a REIT such as the Company. However, counsel to the Company believes
that it is likely that a Maryland court would refer to the Maryland General
Corporation Law (the "MGCL"), which requires directors of a Maryland corporation
to perform their duties in good faith, in a manner that they reasonably believe
to be in the best interests of the corporation and with the care of an
ordinarily prudent person in a like position under similar circumstances.
Management Liability and Indemnification
Under the Partnership Agreement, the Operating Partnership has agreed
to indemnify and hold the Company (which includes its trustees, directors,
officers, shareholders and employees) harmless from and against, and shall
advance sums to the Company in respect to any and all claims, actions,
proceedings losses, liabilities, damages or expenses (the "Losses"), including
without limitation legal fees, costs of investigation and defense, and sums
expended in settlement of any claim incurred by it by reason of any action taken
or not taken by the Company; provided, however, that the Operating Partnership's
shall not be required to indemnify the Company with respect to any losses
resulting from the Company's fraud, breach of fiduciary duty or breach of the
Partnership Agreement. The Company shall be entitled to reimbursement from the
Operating Partnership for any amounts paid by it in satisfaction of
indemnification obligations owed by the Company to present or former trustees or
directors of the Company, as provided for in or pursuant to the Declaration of
Trust and Bylaws of the Company. The right of indemnification set forth in the
Partnership Agreement is in addition to (but not duplicative of) any rights to
which the person or entity seeking indemnification may otherwise be entitled and
shall inure to the benefit of the successors and assigns of any such person or
entity. No partner can be held personally liable with respect to any claim for
indemnification pursuant to the Partnership Agreement, but such claim shall be
satisfied solely out of assets of the Operating Partnership.
The Maryland REIT Law permits a Maryland real estate investment trust
to include in its declaration of trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of any improper benefit or
profit in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material
26
to the cause of action. The Declaration of Trust of the Company contains such a
provision which eliminates such liability to the maximum extent permitted by the
Maryland REIT Law.
The Company's Declaration of Trust requires that the Company's, Bylaws
to authorize the Company, to the maximum extent permitted by Maryland law, to
indemnify, and pay reasonable expenses to, as such expenses are incurred by each
shareholder, Trustee Officer, employee or agent, (including any person who,
while a Trustee of the Company, is or was serving at the request of the Company
as a director, officer, partner, trustee, employee or agent, of another foreign
or domestic corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan) from all claims liabilities to which such person may
become subject by reason of his being or having been a shareholder, Trustee,
officer employee or agent.
The Maryland REIT Law permits a Maryland real estate investment trust
to indemnify and advance expenses to its trustees and officers to the same
extent as permitted by the MGCL for directors and officers of Maryland
corporations. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (b) was committed in bad faith or (c) was the result of active
and deliberate dishonesty, or (d) the director or officer actually received an
improper personal benefit in money, property or services or (e) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL permits a
corporation to advance reasonable expenses to a director or officer upon the
corporation's receipt of (a) a written affirmation by the director or officer of
his good faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by him or on
his behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met.
Thus, the management of the Operating Partnership and the Company have
substantially the same rights to indemnification.
Liability of Investors
Under the Partnership Agreement and applicable state law, the liability
of the limited partners for the Operating Partnership's debts and obligations
generally is limited to the amount of their investments in the Operating
Partnership, together with an interest in the Operating Partnership's
undistributed income, if any.
Under the Maryland REIT Law, shareholders are not personally liable for
the obligations of the Company. The Common Shares, upon issuance, will be fully
paid and nonassessable.
Thus, the limited partners in the Operating Partnership and the
shareholders of the Company have substantially the same personal liability.
Voting Rights
Except for the right of limited partners to vote on matters
specifically provided for in the Act or in the Partnership Agreement, the
limited partners have no right or authority to act for or bind the Partnership.
The Declaration of Trust provides that, subject to the provisions of
any class or series of the Common Shares other than Common Shares then
outstanding, the shareholders of the Company shall be entitled to vote only on
the following matters: (a) election or removal of Trustees; (b) amendment of the
Declaration of Trust;
27
(c) termination of the Company; and (d) merger, consolidation or share exchange
of the Company or the sale or disposition of all or substantially all of the
Company's assets. Except for the election or removal of Trustees, which requires
the approval of holders of a majority of the Common Shares present at a meeting
at which a quorum is present, each of the other matters requires the affirmative
approval of holders of two-thirds of the Common Shares issued and outstanding
and entitled to vote upon the matter. Except with respect to the foregoing
matters, no action taken by the shareholders at any meeting shall in any way
bind the Trustees.
Amendment of the Partnership Agreement or the Declaration of Trust
Subject to certain limitations, the Company generally has the power,
without the consent of any limited partners, to amend the Partnership Agreement
as may be required to reflect any changes that the Company deems necessary or
appropriate in its sole discretion, provided that such amendment does not
adversely affect or eliminate any right granted to a limited partner that is
protected by certain special voting provisions. For example, the limited
partners rights to vote on amendments are restricted to those which (a)
increases the obligation of any limited partner to contribute to the Operating
Partnership, (b) increases the responsibility of any limited partner as such for
liabilities of the Operating Partnership, (c) materially alters the guaranteed
payments or redemption payments to which a limited partner is entitled, (d)
materially alters the rights of the holders of OP Units to receive distributions
with respect to the OP Units on a pro rata basis (other than amendments to make
guaranteed payments to limited partners in connection with contributions of
property to the Operating Partnership), or (e) materially alters the allocation
to a limited partner of items of income, gain, loss, deduction or credit to
which a partner is entitled, and, therefore, require the written consent of a
majority in interest of the limited partners who would be similarly affected by
such amendments. Notwithstanding the foregoing, the limited partners
acknowledged that factors such as the distributions and allocations may be
adversely affected by such actions as, among other things, authorized Operating
Partnership transactions, admissions of new partners, contributions of property
to the Operating Partnership, issuances of new OP Units and/or Preference Units,
and redemptions of OP Units and Preference Units; the limited partners agreed
that notwithstanding any other provision of the Partnership Agreement, but
subject to the Company's performance of its fiduciary duties, any such amendment
to the Partnership Agreement necessary to accomplish any such action shall not
require the consent of any limited partner.
The Declaration of Trust may be amended by a two-thirds vote of the
shares then outstanding and entitled to vote thereon. In addition, the Trustees,
by a two-thirds vote, may amend the provisions of the Company's Declaration of
Trust from time to time to qualify the Company as a REIT.
Review of Investor Lists
Under Maryland law, one or more persons who together are partners with
at least five percent interest in the Operating Partnership (determined on the
basis of the sharing of profits and loses) may inspect and copy in person or by
agent, on written request from time to time upon reasonable demand, a current
list of the name and last known business, residence, or mailing address of each
partner.
Under the MGCL, as applicable to REITs, one or more shareholders
holding of record for at least six months at least 5% of the outstanding shares
of beneficial interest of any class of a real estate investment trust may upon
written request inspect and copy during usual business hours the share ledger of
such real estate investment trust and a verified list of shareholders, setting
forth their names and addresses and the number of shares of each class held by
the shareholder.
Thus, the limited partners in the Operating Partnership and the
shareholders of the Company have substantially the same rights to inspect and,
at their own expense, make copies of investor lists, subject to certain
limitations.
Review of Books and Records
28
Under the Partnership Agreement, limited partners are entitled to,
during reasonable business hours and upon reasonable prior notice, access to the
books of the Operating Partnership, and in addition at its expense, have the
right to copy such books. The Company, at the expense of the Operating
Partnership, has agreed to the preparation and distribution to the partners of
annual financial data sufficient to reflect the status and operations of the
Operating Partnership and its assets, including, but not limited to, audited
financial statements of the Operating Partnership and copies of all federal
state tax information returns filed by the Operating Partnership, so to enable
each partner to file its federal income tax return.
Under the MGCL, as applicable to REITs, a shareholder or his agent may
inspect and copy during normal business hours the following real estate
investment trust documents: (a) bylaws; (b) minutes of the proceedings of
shareholders; (c) annual statements of affairs; and (d) voting trust agreements
on file at the real estate investment trust's principal office. In addition, a
shareholder holding at least 5% of the outstanding shares of a real estate
investment trust may, upon written request, inspect and copy during usual
business hours the books of account of such real estate investment trust.
Issuance of Additional Equity
The Operating Partnership is authorized to issue OP Units, Preference
Units and other securities as determined by the Company, as the general partner,
in its sole discretion as follows:
(a) (i) OP Units to the Company upon the
issuance by the Company of additional Common Shares and the contribution of the
net proceeds thereof as an additional capital contribution to the Operating
Partnership; however, the Company may issue Common Shares in connection with
option plans, restricted share plans or other benefit or compensation plans and
arrangements (for example, shares issued in lieu of fees or compensation), and
the Company may issue Common Shares in payment of the Redemption Price of any OP
Units in accordance with the Partnership Agreement, without receiving any
proceeds and that the issuance of Common Shares shall nonetheless entitle the
Company to additional OP Units. In such event, the Company, as the general
partner, shall cause the Operating Partnership to issue a number of OP Units
equal to the number of Common Shares being issued by the Company.
(ii) Preference Units to the Company upon
the issuance by the Company of equity securities other than Common Shares, and
the contribution of the net proceeds thereof as a capital contribution to the
Operating Partnership.
(iii) Other securities to the Company upon
the issuance by the Company of securities other than Common Shares or equity
securities described in the Partnership Agreement and the contribution of the
net proceeds thereof to the Operating Partnership.
(iv) In the event of any stock split, stock
dividend, reclassification, recapitalization or other adjustment in respect of
the outstanding Common Shares, the number of OP Units will be proportionately
adjusted so that the OP Units will equate to the Common Shares on a one-to-one
basis.
(b) OP Units to partners (including itself) that
hold Preference Units or other securities that are convertible into or
exchangeable for OP Units, provided, however, that the Company will convert
Preference Units or other securities that are convertible into or exchangeable
for OP Units, if, and only if, and only to the extent that, the holders of the
corresponding securities issued by the Company elect to convert such securities
into Common Shares.
(c) If the Company, as the general partner,
creates and administers a reinvestment program in substantial conformance with a
dividend reinvestment program which may be available from time to time to
holders of Common Shares, each limited partner holding OP Units shall have the
right to reinvest any or all cash distributions payable to it from time to time
pursuant to the Partnership
29
Agreement by having some or all (as the limited partner elects) of such
distributions contributed to the Operating Partnership as additional capital
contributions, and in such event the Operating Partnership shall issue to each
such limited partner additional OP Units, or the Company may elect to cause
distributions with respect to which a limited partner has elected reinvestment
to be contributed to the Company in exchange for the issuance of Common Shares.
At the option of the Company, such a program may also be made available with
respect to Preference Units and other securities if and to the extent of each
such partner's participation in any such reinvestment program.
(d) In the event that the Company assumes any
debt of the Operating Partnership, the Operating Partnership shall issue to the
Company additional units in an amount equal to the quotient (rounded to the
nearest whole number) arrived at by dividing (i) the total debt assumed by the
Company (including any interest obligation) by (ii) the market price.
(e) In all other cases, OP Units, Preference
Units, and/or other securities as determined by the Company, in its sole and
absolute discretion, to existing or newly-admitted partners (including itself)
in exchange for capital contributions or additional capital contributions by a
partner to the partnership.
The Board of Trustees may issue, in its discretion, additional Common
Shares and other equity securities of the Company, including one or more classes
of common or preferred shares, with such preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption, provided that the total number of shares
issued does not exceed the authorized number of shares of beneficial interest
set forth in the Company's provision permitting the Board of Trustees, without
any action by the shareholders of the Company, to amend the Declaration of Trust
to increase or decrease the aggregate number of shares of beneficial interest or
the number of shares of any class of shares of beneficial interest that the
Company has authority to issue.
Borrowing Policies
The Operating Partnership has no restrictions on borrowings, and the
Company as general partner has full power and authority to borrow money on
behalf of the Operating Partnership.
The Company is not restricted under its Declaration of Trust from
borrowing. However, under the Partnership Agreement, the Company, as general
partner, may not issue debt securities or otherwise incur any debts unless it
contributes the proceeds therefrom to the Operating Partnership. Therefore, all
indebtedness incurred by the Company will be for the benefit of the Operating
Partnership.
Permitted Investments
The Operating Partnership's purpose is to conduct any business that may
be lawfully conducted by a Maryland limited partnership, provided that such
business is to be conducted in a manner that permits the Company to be qualified
as a REIT (unless the Company ceases to qualify as a REIT for any reason). The
Operating Partnership is authorized to perform any and all acts for the
furtherance of the purposes and business of the Operating Partnership, including
making investments, provided that the Operating Partnership may not take, or
refrain from taking, any action which, in the judgment of the Company as general
partner (a) could adversely affect the ability of the general partner to
continue to qualify as a REIT, (b) could subject the general partner to any
additional taxes under Section 857 or Section 4981 of the Code or (c) could
violate any law or regulation of any governmental body (unless, in each case,
such action, or inaction, is specifically consented to by the Company).
Under its Declaration of Trust, the Company may engage in any lawful
activity permitted by the Maryland REIT Law. To maintain its qualification as a
Maryland real estate investment trust, the Maryland REIT Law requires that the
Company hold, either directly or indirectly, at least 75% of the value of its
assets in real estate assets, mortgages or mortgage-related securities,
government securities, cash and cash
30
equivalent items, including high-grade short-term securities and receivables.
The Maryland REIT Law also prohibits using or applying land for farming,
agricultural, horticultural or similar purposes. Under the Partnership
Agreement, the Company, as general partner, agrees that it will not, directly or
indirectly, enter into or conduct any business other than in connection with the
ownership, acquisition and disposition of partnership properties and the
management of the business of the Operating Partnership and such activities as
are incidental thereto.
Other Investment Restrictions
Other than restrictions precluding investments by the Operating
Partnership that would adversely affect the qualification of the Company as a
REIT and restrictions on transactions with affiliates, the Partnership Agreement
does not generally restrict the Operating Partnership's authority to make
investments, lend Operating Partnership funds or reinvest the Operating
Partnership's cash flow and net sale or refinancing proceeds.
The Company's Declaration of Trust authorizes the Company to enter into
any contract or transaction of any kind (including the purchase or sale of
property) with any person, including any trustee, officer, employee or agent of
the trust, whether or not any of them has a financial interest in the
transaction.
Business Combinations
Under MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of its stock (an "Interested Shareholder") must be (a) recommended by the
directors of such corporation and (b) approved by the affirmative vote of at
least (i) 80% of the votes entitled to be cast by holders of outstanding shares
of voting stock of the corporation and (ii) two-thirds of the votes entitled to
be cast by holders of outstanding shares of voting stock other than stock held
by the Interested Shareholder with whom the business combination is to be
effected, unless, among other things, the corporation's common shareholders
receive a minimum price (as defined in the statute) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Shareholder for his shares. In addition, an Interested Shareholder or
any affiliate thereof may not engage in a "business combination" with the
corporation for a period of five years following the date he becomes an
Interested Shareholder. These provisions of Maryland law do not apply, however,
to business combinations that are approved or exempted by the board of directors
of the corporation prior to the time that the Interested Shareholder becomes an
Interested Shareholder. The foregoing provisions of the Maryland General
Corporations Law apply to Maryland REITs.
Control Share Acquisitions
The MGCL provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by such person, or in respect of which such person is able
to exercise or direct the exercise of voting power, would entitle the acquiror
to exercise voting power in electing directors within one of the following
ranges of voting power: (i) one-fifth or more but less than one-third, (ii)
one-third or more but less than a majority, or (iii) a majority. Control shares
do not include shares the acquiring person is then entitled to vote as a result
of having previously obtained stockholder approval. A "control share
acquisition" means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel a board of directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any stockholders meeting.
31
Unless the Declaration of Trust or Bylaws provide otherwise, if voting
rights are not approved at the meeting or if the acquiring person does not
deliver an acquiring person statement within 10 days following a control share
acquisition, then, subject to certain conditions and limitations, the Company
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without regard
to the absence of voting rights for control shares, as of the date of the last
control share acquisition or of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. Moreover, unless the
Declaration of Trust or Bylaws provide otherwise, if voting rights for control
shares are approved at a stockholders' meeting and the acquiror becomes entitled
to vote a majority of the shares entitled to vote, all other stockholders may
exercise appraisal rights. The fair value of the shares as determined for
purposes of such appraisal rights may not be less than the highest price per
share paid by the acquiring person in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenters'
rights do not apply in the context of a control share acquisition.
FEDERAL INCOME TAX CONSIDERATIONS FOR HOLDERS
OF COMMON SHARES OF BENEFICIAL INTEREST
The Company believes that it has qualified and intends to remain
qualified to be taxed as a REIT for federal income tax purposes under Sections
856 through 860 of the Code, commencing with the Company's taxable year ended
December 31, 1993. The following discussion addresses the material tax
considerations relevant to the taxation of the Company and summarizes certain
federal income tax consequences that may be relevant to certain shareholders.
However, the actual tax consequences of holding particular securities being
issued by the Company may vary in light of a prospective securities holder's
particular facts and circumstances. Certain holders, such as tax-exempt
entities, insurance companies and financial institutions, are generally subject
to special rules. In addition, the following discussion does not discuss issues
under any foreign, state or local tax laws. The tax treatment of a holder of any
of the securities offered by Prospectus Supplements will vary depending upon the
terms of the specific securities acquired by such holder, as well as his
particular situation, and this discussion does not attempt to address aspects of
federal income taxation relating to holders of particular securities. Certain
federal income tax considerations relevant to holders of the particular
securities will be provided in the applicable Prospectus Supplement relating
thereto. Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC has acted as
tax counsel to the Company in connection with the filing of this Prospectus.
This summary is qualified in its entirety by the applicable Code provisions,
rules and regulations promulgated thereunder, and administrative and judicial
interpretations thereof. No rulings have been obtained or are expected to be
obtained from the IRS concerning any of the matters discussed herein. It should
be noted that the Code, rules, regulations, and administrative and judicial
interpretations are all subject to change (possibly on a retroactive basis).
EACH INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS
SUPPLEMENT, AS WELL AS WITH HIS OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES
TO HIM OF THE ACQUISITION, OWNERSHIP AND SALE OF THE REDEMPTION SHARES,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
It is the opinion of Gordon, Feinblatt, Rothman, Hoffberger &
Hollander, LLC that the Company is organized and is operating in conformity with
the requirements for qualification and taxation as a REIT commencing with the
Company's taxable year ended December 31, 1993, and its method of operation will
enable it to continue to meet the requirements for qualification and taxation as
a REIT under the Code. It must be emphasized that this opinion is based on
various assumptions and is conditioned upon certain representations made by the
Company as to factual matters including, but not limited to, those set forth
below in this discussion of "Federal Income Tax Considerations" and those
concerning its business and properties as set forth in this Prospectus and in
any Prospectus Supplement. Moreover, such qualification and taxation as a REIT
depends upon the Company's ability to meet, through actual annual (and with
respect to certain tests quarterly) operating results, the various income,
asset, distribution, stock ownership and other tests
32
discussed below, the results of which will not be reviewed by Gordon, Feinblatt,
Rothman, Hoffberger & Hollander, LLC. Accordingly, no assurance can be given
that the actual results of the Company's operations for any one taxable year (or
quarter) will satisfy such requirements.
If the Company initially failed to elect or qualify for taxation as a
REIT or ceases to qualify as a REIT, and the relief provisions do not apply, the
Company's income that is distributed to shareholders would be subject to the
"double taxation" on earnings (once at the corporate level and again at the
shareholder level) that generally results from investment in a corporation.
Failure to qualify and to maintain qualification as a REIT would force the
Company to reduce significantly its distributions and possibly incur substantial
indebtedness or liquidate substantial investments in order to pay the resulting
corporate taxes. In addition, the Company, once having obtained REIT status and
having lost such status, would not be eligible to elect REIT status for the four
subsequent taxable years, unless its failure to maintain its qualification was
due to reasonable cause and not willful neglect, and certain other requirements
were satisfied. In order to elect to again be taxed as a REIT, just as with the
original election, the Company would be required to distribute all of its
earnings and profits accumulated in any non-REIT taxable year.
Federal Income Taxation of the Company
General. If the Company qualifies for tax treatment as a REIT pursuant
to Code Sections 856 through 860, it will generally not be subject to Federal
corporate taxation on its net income to the extent currently distributed to its
shareholders. This substantially eliminates the "double taxation" that typically
results from the use of investment vehicles, which are treated as corporations
for income tax purposes.
The Company will be subject to federal income tax, however, as follows:
First, the Company will be taxed at regular corporate rates on its 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 to the extent that tax exceeds its regular
tax. Third, if the Company has net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, any net income that the Company has from prohibited transactions
(which are, in general, certain sales or other dispositions of property other
than foreclosure property held primarily for sale to customers in the ordinary
course of business) will be subject to a 100% tax. Fifth, if the Company should
fail to satisfy either the 75% or 95% gross income tests (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 net 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 fails to distribute during each 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 preceding periods, the Company will be subject to a
nondeductible 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if (a) during the 10-year period
commencing on the first day of the first taxable year that the Company qualifies
as a REIT, the Company recognizes a gain from the disposition of an asset held
by the Company at the beginning of such period, or (b) during the 10-year period
commencing on the date the Company acquires appreciated property from a
Subchapter C corporation in a transaction in which the Company inherits the tax
basis in such asset from the Subchapter C corporation and the Company recognizes
a gain from the disposition of such asset, then the Company will be subject to
tax at the highest regular corporate rate on the lesser of (i) the recognized
gain or (ii) the excess, if any, of the fair market value over the adjusted
basis of any such asset as of the beginning of such 10-year period (the
"Built-In-Gain"). Moreover, the aggregate Built-In-Gain during the 10-year
period cannot exceed the total net Built-In-Gain of all assets at the beginning
of the 10-year period. Subject to certain limitations, the Company may, to the
extent available, utilize any pre-REIT net operating loss (NOL) carry forwards
to offset recognized gains.
Code Section 856(a) defines a Real Estate Investment Trust as a
corporation, trust or association (i) managed by one or more trustees or
directors; (ii) the beneficial ownership of which is evidenced by
33
transferable shares, or by transferable certificates of beneficial interest;
(iii) which (except for the provisions of Sections 856 through 860 of the Code)
would be taxable as a domestic corporation; (iv) is neither a financial
institution nor an insurance company pursuant to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi)
during the last half of each taxable year, not more than 50% in number or value
of the outstanding shares are owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities); and (vii)
meets certain other tests, described below, regarding its income and assets. The
requirements and conditions set forth in (i) through (iv), inclusive, must be
met during each day of the taxable year. The requirements set forth in (v) must
be met during at least 335 days of a taxable year of 12 months, or during the
proportionate part of a taxable year of less than 12 months.
The Company is owned by more than 100 persons and management has
represented that not more than 50% in number or value of the outstanding stock
of the Company is owned by five or fewer individuals. Moreover, the Declaration
of Trust provides for restrictions regarding ownership of the Common Shares,
which will assist the Company in continuing to satisfy the beneficial ownership
requirements described above. See "Description of Shares of Beneficial Interest
- - Restrictions on Ownership and Transfer."
The Company owns and operates a number of properties through
wholly-owned subsidiaries. Code section 856(i) provides that a corporation which
is a "qualified REIT subsidiary" shall not be treated as a separate corporation,
and all assets, liabilities and items of income, deduction and credit of a
qualified REIT subsidiary shall be treated as assets, liabilities, and such
items (as the case may be) of the REIT. Thus, in applying the requirements
described herein, the Company's qualified REIT subsidiaries will be ignored, and
all assets, liabilities and items of income, deduction and credit of its
wholly-owned subsidiaries will be treated as assets, liabilities and items of
the Company. In addition, the Company will be deemed to own its proportionate
share of the assets and liabilities of any partnership in which it is a partner.
Income Tests. There are two percentage tests relating to the sources of
the Company's gross income. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) must be directly or
indirectly derived each taxable year from investments relating to real property
or mortgages on real property or certain temporary investments. Second, at least
95% of the Company's gross income (excluding gross income from prohibited
transactions) must be directly or indirectly derived each taxable year from any
of the sources qualifying for the 75% test or from dividends, interest, and gain
from the sale or disposition of stock or securities. In applying these tests, if
the Company invests in a partnership, the Company will be treated as realizing
its share of the gross income of the partnership, and the character of such
income, as well as other partnership items, will be determined at the
partnership level.
The term "prohibited transaction" means a sale or other distribution of
property which would constitute stock in trade of the taxpayer, property which
would properly be included in inventory of the taxpayer or property held by the
taxpayer primarily for sale to customers in the ordinary course of his trade or
business, which is not foreclosure property. However, a prohibited transaction
does not include a sale of property which is a real estate asset as defined
below if all of the following conditions are satisfied: (i) the REIT has held
the property for at least four years; (ii) aggregate expenditures made by the
REIT, or any partner of the REIT, during the four year period preceding the date
of sale which are includable in the basis of the property do not exceed 30% of
the net selling price of the property; (iii) (I) during a taxable year the REIT
does not make more than seven sales of property (other than foreclosure
property), or (II) the aggregate adjusted basis (as determined for purposes of
computing earnings and profits) of properties (other than foreclosure property)
sold during the taxable year does not exceed 10% of the aggregate basis (as so
determined) of all of the assets of the REIT as of the beginning of the taxable
year; (iv) in the case of property, which consists of land or improvements, not
acquired through foreclosure or deed in lieu of foreclosure, or lease
termination, the REIT has held the property for not less than four years for
production of rental income; and (v) if the requirement of clause (iii)(I) is
not satisfied, substantially all of the marketing and development expenditures
with respect to the property were made through an independent contractor (as
defined in Code section 856(d)(3)) from whom the REIT itself does not derive or
receive any income.
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Rents received by the Company qualify as "rents from real property" for
purposes of satisfying the gross income tests for a REIT only if several
conditions are met. First, the amount of rent must not be based in whole or in
part on the income or profits of any person, although rents generally will not
be excluded merely because they are based on a fixed percentage of receipts or
sales. Second, rents received from a tenant will not qualify as "rents from real
property" if the REIT, or an owner of 10% or more of the REIT, also directly or
constructively owns 10% or more of such tenant. Third, if rent attributable to
personal property leased in connection with a lease of real property is greater
than 15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Fourth, for rents to qualify as "rents from real property," the REIT
generally must not operate or manage the property or furnish or render services
to the tenants of such property, other than through an independent contractor
from whom the REIT derives no income; provided, however, the Company may
directly perform certain services other than services which are considered
rendered to the occupant of the Property. In determining whether a REIT
satisfies the income tests, a REIT's rental income from a property will not
cease to qualify as "rents from real property" merely because the REIT performs
services for a tenant other than permitted customary services if the amount that
the REIT is deemed to have received as a result of performing impermissible
services does not exceed 1% of all amounts received directly or indirectly by
the REIT with respect to such property. The amount that a REIT will be deemed to
have received for performing impermissible services will be at least 150% of the
direct cost to the REIT of providing those services. The Company has represented
that it does not charge rent for any property that is based in whole or in part
on the income or profits of any person other than rent based on a percentage of
receipts or sales, as described above, and that it does not rent any property to
a related party tenant as described above. The Constructive Ownership
restrictions described above will assist the Company in satisfying this
requirement. See "Description of Shares of Beneficial Interest - Restrictions on
Ownership and Transfer." Finally, the Company directly performs services under
certain of its leases.
The term "interest" generally does not include any amount if the
determination of such amount depends in whole or in part on the income or
profits of any person, although an amount generally will not be excluded from
the term "interest" solely by reason of being based on a fixed percentage of
receipts or sales.
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 eligible for relief under certain provisions of the Code.
These relief provisions will be generally available if the Company's failure to
meet such tests was due to reasonable cause and not due to willful neglect. It
is not now possible to determine the circumstances under which the Company may
be entitled to the benefit of these relief provisions. If these relief
provisions apply, a special tax is imposed on the greater of the amount by which
the Company failed the 75% test or the 95% test.
Asset Tests. At the close of each quarter of its taxable year, the
Company must also satisfy several tests relating to the nature and
diversification of its assets. First, at least 75% of the value of the Company's
total assets must be represented by real estate assets, cash, cash items
(including receivables arising in the ordinary course of the Company's
operation) and government securities. For these purposes, a REIT's assets
include its allocable share of assets held by partnerships in which the REIT
owns an interest and is held by qualified REIT subsidiaries of the REIT. It also
includes stock or debt instruments held for not more than one year which were
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the REIT. In addition, not more than 25% of the
Company's total assets may be represented by securities other than those
includable in the 75% asset class. Moreover, of the investments included in the
25% asset class, the value of any one issuer's securities owned by the Company
may not exceed 5% of the Company's total assets. Finally, of the investments
included in the 25% asset class, the Company may not own more than 10% of any
one issuer's outstanding voting securities.
If the Company inadvertently fails to satisfy one or more of the asset
tests at the end of the calendar quarter, the Company would still not lose its
REIT status, provided that (i) it satisfied all of the asset tests at the close
of the preceding quarter, and (ii) the discrepancy between the value of the
Company's assets and
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the standards imposed by the asset tests either did not exist immediately after
the acquisition of any particular asset or was not wholly or partly caused by
such an acquisition. Even if the provisions of clause (ii) are not met, the
Company could avoid disqualification by eliminating any discrepancy within 30
days after the close of the calendar quarter in which such discrepancy arose.
The Company has numerous wholly owned subsidiaries. All of the
Company's current subsidiaries should be treated as "qualified REIT
subsidiaries." As noted above, such subsidiaries will not be treated as separate
corporations for United States federal income tax purposes pursuant to the
provisions of Code Section 856(i). Thus, for these purposes, the Company will
not own more than 10% of the outstanding securities of any one issuer as a
result of the ownership of its subsidiaries.
Dividend Requirements
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to make distributions (other than capital gain dividends) to
its shareholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the after tax net
income, if any, from foreclosure property, minus (B) the sum of certain items of
non-cash income. In addition, the Company will be required to distribute at
least 95% of any Built-in Gain (after tax ) it may recognize during the 10-year
period commencing on the date it acquires assets with a built-in gain from a
Subchapter C corporation in a carryover basis transaction. Such distributions
must be paid 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 distribution 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 thereon at regular
corporate tax rates. Finally, as discussed above, the Company may be subjected
to an excise tax if it fails to meet certain other distribution requirements.
It is possible that the Company, from time to time, may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
due to timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company. In the
event that such timing differences occur, the Company may find it necessary to
arrange for borrowings or pay taxable stock dividends in order to meet the 95%
requirement.
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 shareholders in a later year, which may be included in the
Company's deduction for distributions paid for the earlier year. Thus, although
the Company may be able to avoid being taxed on amounts distributed as
deficiency distributions, it will be required to pay interest based upon the
amount of any deduction taken for deficiency distributions.
Failure to Qualify as a Real Estate Investment Trust
The Company's election to be treated as a REIT will be automatically
terminated if the Company fails to meet the requirements described above. In
that event, the Company will be subject to tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, and
distributions to shareholders will not be deductible by the Company. All
distributions to shareholders will be taxable as ordinary income to the extent
of current and accumulated earnings and profits and will be eligible for the 70%
dividends received deduction for corporations. The Company will not be eligible
again to elect REIT status until the fifth taxable year which begins after the
year for which the Company's election was terminated unless the Company did not
willfully fail to file a timely return with respect to the termination taxable
year, inclusion of incorrect information in such return was not due to fraud
with intent to evade tax, and the Company establishes that failure to meet the
requirement was due to reasonable cause and not willful neglect.
36
Failure to qualify for even one year could result in the Company incurring
substantial indebtedness (to the extent borrowings are feasible) or liquidating
substantial investments in order to pay the resulting taxes.
Federal Income Taxation of Shareholders
General. As long as the Company qualifies for taxation as a REIT,
distributions made to the Company's shareholders out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
includable by the shareholders as ordinary income for federal income tax
purposes. None of these distributions will be eligible for the dividends
received deduction for corporate shareholders. Distributions that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Company's actual net capital gain for the taxable
year) without regard to the period for which the shareholder has held his
shares. Thus, subject to certain limitations, capital gains dividends received
by an individual U.S. shareholder may be eligible for the 20%, 25% or 28% tax
rates on capital gains. Corporate shareholders, however, may be required to
treat up to 20% of certain capital gain dividends as ordinary income. A REIT may
elect to retain and pay income tax on any net long-term capital gains and
require its shareholders to include such undistributed net capital gains in
their income. If a REIT makes such an election, the REIT's shareholders would
receive a tax credit attributable to their share of capital gains tax paid by a
REIT on the undistributed net capital gains that were included in the
shareholders' income, and such shareholders will receive an increase in the
basis of their shares in the amount of undistributed net capital gain included
in their income reduced by the amount of the credit.
Distributions in excess of current or accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Common Shares. Shareholders will be required
to reduce the tax basis of their Common Shares by the amount of such
distributions until such basis has been reduced to zero, after which such
distributions will be taxable at capital gain rates (except with respect to a
shareholder who holds his Common Shares as a dealer). The tax basis as so
reduced will be used in computing the capital gain or loss, if any, realized
upon the sale of the Common Shares. Shareholders may not include in their
individual federal income tax returns any net operating losses or capital losses
of the Company. In addition, any distribution declared by the REIT in October,
November or December of any year payable to a shareholder of record on a
specified date in any such month shall be treated as both paid by the REIT and
received by the shareholder on December 31 of such year, provided that the
dividend is actually paid by the REIT no later than January 31 of the following
year. The REIT may be required to withhold a portion of capital gain
distributions to any shareholders who fail to certify their non-foreign status
to the REIT.
Foreign Shareholders. In general, each foreign corporation, partnership
and nonresident alien individual that does not hold its, his or her REIT shares
in connection with the conduct of a United States trade or business, will be
subject to a 30% tax (or lesser amount, as provided by an applicable income tax
treaty) on all ordinary dividends paid with respect to such REIT shares. The
REIT itself will be required to withhold and pay over such tax. If a foreign
shareholder holds such shareholder's REIT shares in connection with the conduct
of a Untied States trade or business, and provides the REIT with a properly
executed Form 4224, such shareholder will be subject to tax on ordinary
dividends in the same manner as a United States person and the REIT will not
withhold any distributions to such shareholder. Distributions in excess of
current and accumulated earnings and profits of the Company will not be taxable
to a non-U.S. shareholder to the extent they do not exceed the adjusted basis of
the shareholder's Common Shares. Rather, such distributions will reduce the
adjusted basis of such Common Shares, but not below zero. To the extent that
such distributions exceed the adjusted basis of a non-U.S. shareholder's Common
Shares, they will give rise to tax liability if the non-US shareholder would
otherwise be subject to tax on any gain from the sale or disposition of the
Common Shares in the Company as described below. If, at the time the
distribution was made, it cannot be determined whether the distribution will be
in excess of current and accumulated earnings and profits, the distributions
will be subject to withholding at the same rate as a dividend. However, such
amounts would be refundable if it is subsequently determined that such
distribution was in excess of current and accumulated earnings and profits of
the Company.
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To the extent a foreign shareholder receives REIT distributions
attributable to the sale or exchange of United States real property interests
held by the REIT, each foreign shareholder will be treated as having engaged in
a United States trade or business and, therefore, will be subject to United
States federal income tax in the same manner as a United States person on such
distributions. The REIT (or the United States nominees of a foreign shareholder)
must withhold 34% of all distributions to a foreign shareholder attributable to
the disposition of United States real property interests which are designated as
capital gain dividends, unless the foreign shareholder has provided the REIT (or
its United States nominee) with a statement claiming a withholding exemption
from the Internal Revenue Service. A foreign shareholder will be entitled to a
credit against his United States income tax equal to the amount so withheld.
Generally, a foreign person will not be subject to United States income
tax on any gain recognized upon a sale or exchange of such person's REIT shares.
However, if the REIT does not qualify as a "domestically controlled REIT", a
non-U.S. shareholder will be subject to tax on gain recognized upon the sale of
the shares. A domestically controlled REIT is defined as a REIT in which at all
times during a specified testing period less than 50% in number or value of the
shares are held directly or indirectly by foreign persons. It is anticipated
that the Company will qualify as a domestically controlled REIT. Non-U.S.
shareholders will also be taxed on gain recognized from the sale of their shares
in the REIT if (i) the investment in such shares is effectively connected with
the non-U.S. shareholder's United States trade or business, in which case a
shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain, or (ii) the non-U.S. shareholder is a non-resident alien
who is present in the United States for 183 days or more during the taxable year
and has a tax home in the United States, in which case the non-resident alien
will be subject to a 30% tax on the individual's capital gain.
Foreign persons contemplating an investment in REIT shares should
consult their home country tax advisors concerning the tax treatment of such
investment under their home country laws, including their ability, if any, to
obtain a tax credit for any United States taxes paid.
Backup Withholding. The REIT will report to its shareholders and the
IRS the amount of distributions paid during each calendar year, and the amount
of tax withheld, if any. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 20%, which rate will increase to
31% for amounts paid after December 31, 1993, with respect to distributions paid
unless such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) has provided a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding, and otherwise complies with applicable requirements of
the backup withholding rules. A shareholder that does not provide the REIT with
a correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability.
Tax-Exempt Shareholders. The IRS has ruled that amounts distributed as
distributions by a REIT to a certain tax exempt pension trust did not constitute
unrelated business taxable income ("UBTI"). Although rulings are merely
interpretations of law by the IRS and may be revoked or modified, based on this
analysis, indebtedness incurred by the REIT 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. A Tax Exempt Entity that incurs
indebtedness to finance its purchase of shares, however, will have UBTI by
virtue of the acquisition indebtedness rules.
Tax exempt organizations contemplating an investment in REIT shares
should consult their individual tax advisors concerning the tax treatment of
such investment.
State and Local Taxation
The Company and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they transact business or reside. Consequently, prospective
38
shareholders should consult their own tax advisors regarding the effect of state
and local tax laws on an investment in the Company.
SELLING SHAREHOLDERS
As described elsewhere herein, "Selling Shareholders" are only those
persons who may receive Redemption Shares upon the exchange of 3,175,771 OP
Units acquired pursuant to the Contribution Agreement. The following table
provides the number of OP Units held by each Selling Shareholder and, therefore,
the maximum number of Redemption Shares issuable upon exchanges of such OP
Units. The Company does not currently expect to issue more than 2,864,000 Common
Shares of redemption of OP Units.
The 2,864,000 Redemption Shares offered by this Prospectus may be
offered from time to time by the Selling Shareholders named below.
39
Name OP Units Owned Name OP Units Owned
- ------------------------------------ -------------------------------------------------
*Jack H. Pechter 325,833 Emmanuel Glasser 58,796
MHP Investments, L.P. 633,287 Nancy Cohen 58,796
JSP Investments, L.P. 603,287 TSC Associates 60,062
Shelly Pechter Himmelrich 112,932 Albert Perlow and Sonia
Trust F/B/O Melissa Pechter 5,292 Barbara Perlow 41,861
Marilyn Pechter 14,997 Morton Greenberg 40,041
Pechter Family Limited Ronald Weitzman 13,323
Partnership 666,949 TSFP Associates 26,718
Tripec Associates Limited Dora Schwartz 20,093
Partnership 163,138 Stuart Weitzman 13,323
Radcliffe Properties, Inc. 889 Robert N. Meyers 40,041
Victor Cohen Irrevocable Darrell Friedman 21,841
Trust 205,785 Ben Schreibman 21,841
Saul Offit 13,323 Non-Exempt Marital Trust
u/w/o Albert Weitzman 13,323
- ---------------------------------------
*Mr. Pechter is the Deputy Chairman of the Board of Trustees and the Senior Real
Estate Advisor to the Company.
PLAN OF DISTRIBUTION
This Prospectus relates to (a) the possible issuance by the Company of
up to 2,864,000 Redemption Shares, it, and to the extent that, holders of up to
2,864,000 OP Units tender such OP Units for exchange, and (b) the offer and sale
from time to time of up to 2,864,000 Redemption Shares that may be issued to the
Selling Shareholders. The Company does not currently expect to issue more than
2,864,000 Common Shares in redemption of OP Units.
The Company has registered the Redemption Shares for sale to permit the
holders thereof to sell such shares without restriction in the open market or
otherwise, but registration of such shares does not necessarily mean that any of
such shares will be offered or sold by the holders thereof.
The Company will not receive any cash proceeds from the offering by the
Selling Shareholders or from the issuance of the Redemption Shares to holders of
OP Units upon receiving a notice of redemption. The Company will acquire one OP
Unit from an exchanging partner, in exchange for each Redemption Share that the
Company issues. Consequently, with each redemption, the Company's interest in
the Operating Partnership will increase.
Secondary shares may be sold from time to time by the Selling
Shareholders, or by their pledgees, donees, transferees or other successors in
interest. Such sales may be made on the NYSE, in the over-the-counter market or
otherwise, at prices and at terms then prevailing or at prices related to the
then current market price, or in negotiated transactions. Secondary shares may
be sold by the Selling Shareholders by one or more of the following: (a) a block
trade in which the broker-dealer so engaged will attempt to sell such Secondary
Shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction; (b) purchase of such secondary shares by a
broker-dealer as principal and resale by such broker-dealer for its account
pursuant to this Prospectus; and (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers. In effecting sales,
broker-dealers engaged by the Selling Shareholders may arrange for other
broker-dealers to participate in the resales.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from Selling Shareholders in amounts to be
negotiated in connection with the sales. Such
40
broker-dealers and any other participating broker-dealers may be deemed to be
"underwriters" within the meaning of the Securities Act, in connection with such
sales, and any such commission, discount or concession may be deemed to be
underwriting discounts or commissions under the Securities Act. In addition, any
Common Shares covered by this Prospectus which qualify for sale pursuant to Rule
144 under the Securities Act may be sold under Rule 144 rather than pursuant to
this Prospectus.
All costs, expenses and fees in connection with the registration of the
Redemption Shares, including any Secondary Shares sold by the Selling
Shareholders, will be borne by the Company. Commissions and discounts, if any,
attributable to the sales of Secondary Shares by the Selling Shareholders will
be borne by the Selling Shareholders.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Gordon,
Feinblatt, Rothman, Hoffberger & Hollander, LLC, Baltimore, Maryland. Marc P.
Blum, a trustee of the Company, is a member of such firm and LeRoy E.
Hoffberger, Chairman of the Board of Trustees of the Company, is of counsel to
such firm.
EXPERTS
The financial statements and schedules of Mid-Atlantic Realty Trust as
of December 31, 1997 and 1996 and for each of the years in the three-year period
ended December 31, 1997, have ben incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein and
upon the authority of said firm as experts in accounting and auditing. The
report of KPMG Peat Marwick LLP covering the December 31, 1995 financial
statements refers to a change in the method of accounting for percentage rent
revenues.
C74231.626 L:1
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