<Page>
As filed with the Securities and Exchange Commission on August 20, 2003
Registration No. 333-103799
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 3
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
INLAND WESTERN RETAIL REAL ESTATE TRUST, INC.
(Exact name of registrant as specified in governing instruments)
--------------------
2901 Butterfield Road
Oak Brook, Illinois 60523
(Address of principal executive offices)
--------------------
Robert H. Baum, Esq.
Vice Chairman, Executive Vice President and General Counsel
The Inland Group, Inc.
2901 Butterfield Road
Oak Brook, Illinois 60523
(630) 218-8000
(Name, address, including zip code and telephone number, including area code
of agent for service)
--------------------
With a copy to:
David J. Kaufman, Esq.
Duane Morris LLP
227 West Monroe Street
Suite 3400
Chicago, Illinois 60606
(312) 499-6700
--------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the registration statement becomes effective.
================================================================================
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. _________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.__________
<Page>
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.__________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. _________
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Securities Amount Being Offering Price Aggregate Offering Registration
Being Registered Registered Per Share Price Fee
Common Stock, $.001 par
value............................ 250,000,000 $ 10.00 $ 2,500,000,000 $ 202,250
Common Stock, $.001 par
value(1).......................... 20,000,000 9.50 190,000,000 $ 15,371
---------
$ 217,621(2)
=========
</Table>
(1) Represents shares issuable pursuant to the registrant's distribution
reinvestment program.
(2) Previously paid
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<Page>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 20, 2003
PROSPECTUS
270,000,000 shares of common stock - maximum offering
200,000 shares of common stock - minimum offering
Inland Western Retail Real Estate Trust, Inc.
a Real Estate Investment Trust
2901 Butterfield Road
Oak Brook, Illinois 60523
$10.00 per share Minimum Initial Purchase - 300 shares
(100 shares for Tax-Exempt Entities)
We intend to operate as a real estate investment trust or a REIT beginning
with the tax year ending December 31, 2003. We are not currently qualified as a
REIT for federal income tax purposes. We will not be requesting a ruling from
the Internal Revenue Service to qualify as a REIT. We were formed in 2003 to
acquire and manage properties which are located mainly in states west of the
Mississippi River.
We are offering:
- 250,000,000 shares to investors who meet our suitability standards;
- up to 20,000,000 shares to participants in our reinvestment plan (at
$9.50 per share);
No public market currently exists for our shares of common stock and our shares
cannot be readily sold.
A minimum of 200,000 shares of common stock must be sold within one year
from the date of this prospectus, unless extended, or we will terminate this
offering and we will return your subscription payments, with interest within
five business days after termination of this offering. Prior to the sale of the
minimum offering, your subscription payments will be placed in an escrow account
held by the escrow agent, LaSalle Bank National Association. The managing dealer
of the offering, Inland Securities Corporation, is our affiliate. The managing
dealer is not required to sell any specific number or dollar amount of shares
but will use its best efforts to sell the 250,000,000 of our shares. This
offering will end no later than August 20, 2004, unless we elect to extend it to
a date no later than August 20, 2005 in states that permit us to make this
extension.
INVESTING IN OUR COMPANY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 11 FOR A DISCUSSION OF THE MATERIAL RISK FACTORS WHICH SHOULD
BE CONSIDERED IN CONNECTION WITH YOUR INVESTMENT IN OUR COMMON STOCK. THESE
RISKS INCLUDE:
<Page>
- our common stock is not currently listed or traded on an exchange and
cannot be readily sold (and sales by stockholders may be made at a
loss);
- we have no operating history nor established financing sources;
- we have identified only one property to be purchased with the proceeds
of this offering;
- if we raise the minimum amount, we will not have sufficient resources
to acquire the identified property. We need to raise in excess of $26
million to acquire this property;
- although we anticipate that aggregate borrowings will not exceed 55%
of the combined fair market value of our properties, our charter
imposes a limitation on our borrowings of less than 300% of net
[SIDENOTE]
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<Page>
assets and there are risks associated with a high amount of leverage;
- we have no ownership in our advisor and the advisor is owned by our
sponsor or their affiliates;
- our advisor and its affiliates will receive substantial fees,
including participation in proceeds from the sales, refinancing or
liquidation of our assets;
- our advisor, property manager and two of our directors are subject to
conflicts of interest as a result of their affiliation with The Inland
Group, including conflicts of interest relating to:
- the negotiation of the terms of the advisors and property
management agreements;
- the allocation of their time between us and their other business
ventures;
- decisions whether to acquire and dispose of properties;
- the purchase and sale of properties to or from the advisor and
our affiliates;
- the allocation of investment opportunities between us and their
other business ventures.
- the management fee structure could result in our advisor recommending
riskier or more speculative investments;
- we may make distributions that include a return of principal for
federal tax purposes;
- we may fail to qualify as a REIT;
- there are limits on ownership, transferability and redemption of
shares;
- our investment policies and strategies may be changed without
stockholder consent;
- our investments will lack geographic diversification;
- risks that incentive structure of fees payable to our advisor and its
affiliates may encourage our advisor to make investments that have
greater risks to generate higher fees.
We are unable to specifically quantify the above risk factors. The actual
amounts, if any, are dependent upon many factors, such as our ability to sell
our shares, our ability to acquire properties, and general economic conditions
and results of operations. Notwithstanding the above, any stockholder loss of
capital would be limited to the amount of their investment. You should purchase
these securities only if you can afford a complete loss of your investment.
The use of forecasts in this offering is prohibited. Any representations to
the contrary and any predictions, written or oral, as to the amount or certainty
of any present or future cash benefit or tax consequence which may flow from an
investment in this program is not permitted.
<Page>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
<Table>
<Caption>
Per Share Min. Offering Max. Offering
Public offering price, primary $ 10.00 $ 2,000,000 $ 2,500,000,000
shares (1).............................
Public offering price, distribution
reinvestment program................... $ 9.50 $ 0 $ 190,000,000
Selling commissions (1)................ $ 1.05 $ 210,000 $ 262,500,000
Proceeds, before expenses, to us....... $ 8.95 $ 1,790,000 $ 2,452,500,000
</Table>
(1) The selling commission only applies to sales of primary shares and is
composed of a 7.5% selling commission (7.0% of which is reallowable), 2.5%
marketing allowance and .5% due diligence expense allowance.
The date of this Prospectus is ,2003.
<Page>
FOR RESIDENTS OF MICHIGAN ONLY:
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
DEPARTMENT OF CONSUMER & INDUSTRY SERVICES, MICHIGAN OFFICE OF FINANCIAL AND
INSURANCE SERVICES. THE DEPARTMENT HAS NOT UNDERTAKEN TO PASS UPON THE VALUE OF
THESE SECURITIES NOR TO MAKE ANY RECOMMENDATIONS AS TO THEIR PURCHASE.
THE USE OF THIS PROSPECTUS IS CONDITIONED UPON ITS CONTAINING ALL MATERIAL FACTS
AND THAT ALL STATEMENTS CONTAINED THEREIN ARE TRUE AND CAN BE SUBSTANTIATED. THE
DEPARTMENT HAS NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
NO BROKER-DEALER, SALESMAN, AGENT OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE
OFFERING HEREBY MADE OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR EFFECTIVE
LITERATURE.
THIS IS A BEST EFFORTS OFFERING, AND WE RESERVE THE RIGHT TO ACCEPT OR REJECT
ANY SUBSCRIPTION AND WILL PROMPTLY NOTIFY THE SUBSCRIBER OF ACCEPTANCE OR
REJECTION. THERE IS NO ASSURANCE THAT THIS OFFERING WILL ALL BE SOLD. THERE ARE
NO ASSURANCES AS TO WHAT SIZE WE MAY REACH.
THERE IS NO ASSURANCE THAT OUR OPERATIONS WILL BE PROFITABLE OR THAT LOSSES WILL
NOT OCCUR.
IT IS NOT OUR POLICY TO REDEEM OUR STOCK (EXCEPT AS PROVIDED IN THIS OFFERING).
ANY REPRESENTATIONS CONTRARY TO ANY OF THE FOREGOING SHOULD BE REPORTED
FORTHWITH TO THE OFFICE OF FINANCIAL AND INSURANCE SERVICE AT 611 West Ottawa
Street, 2nd Floor Ottawa Building, P.O. Box 30701, Lansing, MI 48909-8201, or
Telephone (877) 999-6442.
WHO MAY INVEST
In order to purchase shares, you must:
- Meet the financial suitability standards, and
- Purchase a minimum number of shares.
SUITABILITY STANDARDS
Because an investment in our common stock is risky and is a long-term
investment, it is suitable for you only if you have adequate financial means,
you have no immediate need for liquidity in your investment and you can bear the
complete loss of your investment.
We have established financial suitability standards for investors who
purchase shares of our common stock. In addition, residents of some states must
meet higher suitability standards under state law. These standards require you
to meet the applicable criteria below. In determining your net worth, do not
include your home, home furnishings or your automobile. INVESTORS WITH
INVESTMENT DISCRETION OVER ASSETS OF AN EMPLOYEE BENEFIT PLAN COVERED BY ERISA
SHOULD CAREFULLY REVIEW THE INFORMATION IN THE SECTION ENTITLED, "ERISA
CONSIDERATIONS."
<Page>
GENERAL STANDARDS FOR ALL INVESTORS
- Minimum net worth of at least $150,000; or
- Minimum annual gross income of at least $45,000 and net worth of at
least $45,000.
Standards for Maine Residents
- Minimum net worth of $200,000, or
- Minimum annual gross income of $50,000 and a minimum net worth of
$50,000.
Standards for Arizona, California, Iowa, Massachusetts, Michigan, Missouri,
Oregon or Tennessee Residents
- Minimum net worth of $225,000, or
- Minimum annual gross income of $60,000 and a minimum net worth of
$60,000.
Standards for Kansas, Missouri, Ohio and Pennsylvania Residents
- In addition to meeting the actual standard for all investors, your
investment may not exceed 10% of your liquid net worth.
In the case of sales to fiduciary accounts, these minimum standards must be
met by the beneficiary, the fiduciary account, or by the donor or grantor who
directly or indirectly supplies the funds to purchase the common stock if the
donor or the grantor is the fiduciary. INVESTORS WITH INVESTMENT DISCRETION OVER
ASSETS OF AN EMPLOYEE BENEFIT PLAN COVERED UNDER ERISA SHOULD CAREFULLY REVIEW
THE INFORMATION ENTITLED "ERISA CONSIDERATIONS."
In the case of gifts to minors, the suitability standards must be met by
the custodian account or by the donor.
MINIMUM PURCHASE
Subject to the restrictions imposed by state law, we will sell shares of
our common stock only to investors who initially purchase a minimum of 300
shares of common stock for a total purchase price of $3,000, or tax-exempt
entities which purchase a minimum of 100 shares of common stock for a total
purchase price of $1,000. For investors living in Iowa, the minimum investment
for IRAs will be 300 shares of common stock for a total purchase price of
$3,000, and for investors living in Minnesota, the minimum investment for IRAs
and qualified plan accounts will be 200 shares of common stock for a total
purchase price of $2,000. Tax-exempt entities are generally any investor that is
exempt from federal income taxation, including:
- a pension, profit-sharing, retirement, IRA or other employee benefit
plan which satisfies the requirements for qualification under
Section 401(a), 414(d) or 414(e) of the Internal Revenue Code;
- a pension, profit-sharing, retirement, IRA or other employee benefit
plan which meets the requirements of Section 457 of the Internal
Revenue Code;
- trusts that are otherwise exempt under Section 501(a) of the
Internal Revenue Code;
- a voluntary employees' beneficiary association under Section
501(c)(9) of the Internal Revenue Code; or
- an IRA which meets the requirements of Section 408 of the Internal
Revenue Code.
<Page>
The term "plan" includes plans subject to Title I of ERISA, other employee
benefit plans and IRAs subject to the prohibited transaction provisions of
Section 4975 of the Internal Revenue Code, governmental or church plans that are
exempt from ERISA and Section 4975 of the Internal Revenue Code, but that may be
subject to state law requirements, or other employee benefit plans.
Subject to any restrictions imposed by state law, subsequent additional
investments by current investors require a minimum investment of $25. This
limitation does not apply to the purchase of shares through the dividend
reinvestment provision.
[THE BALANCE OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
PROSPECTUS SUMMARY................................................................................................1
Inland Western Retail Real Estate Trust, Inc.............................................................1
The types of real estate that we may acquire and manage..................................................1
Our sponsor, our advisor and The Inland Group............................................................2
Conflicts of interest....................................................................................5
Compensation to be paid to our advisor and affiliates....................................................5
Primary business objective and strategies................................................................7
Shares sold before the offering..........................................................................8
Terms of the offering....................................................................................8
Is an investment in us appropriate for you?..............................................................8
Distributions............................................................................................9
Real property investments................................................................................9
Share repurchase program.................................................................................9
Estimated Use of Proceeds...............................................................................10
RISK FACTORS.....................................................................................................11
The price of our common stock is subjective and may not bear any relationship to what a
stockholder could receive if it was sold.......................................................11
Our common stock is not currently listed on an exchange or trading market and cannot be readily
sold...........................................................................................11
You do not know what real properties and other assets we may acquire in the future, and must
rely on our advisor, our board and officers to select them and stockholders will not
participate in these decisions.................................................................11
Competition with third parties in acquiring properties will reduce our profitability and the
return on your investment......................................................................11
We will compete with real estate investment programs sponsored by companies affiliated with us
for the acquisition of properties and for the time and services of personnel...................12
We plan to incur mortgage indebtedness and other borrowings, which may reduce the
funds available for distribution, may increase the risk of loss since defaults
may result in foreclosure and mortgages may include cross-collateralization
or cross-default provisions that increase the risk that more than one property
may be affected by a default...................................................................12
If we have insufficient working capital reserves, we will have to obtain financing from other
sources........................................................................................12
The types of properties which we intend to acquire and the area in which we may acquire retail
centers is limited.............................................................................13
The aggregate amount we may borrow is limited under our articles of incorporation.......................13
We have no operating history, and so we have no history of earnings upon which you could
evaluate our business..........................................................................13
Because of the way we are organized, we would be a difficult takeover target. This could
depress the price of our stock and inhibit a management change.................................13
Your investment return may be reduced if we are required to register as an investment company
under the Investment Company Act...............................................................15
There are many factors which can affect distributions to stockholders...................................16
</Table>
i
<Page>
<Table>
Our derivative financial instruments used to hedge against interest rate fluctuations could
reduce the overall returns on your investment..................................................17
We could issue more shares in the future, which could reduce the market price of our
outstanding shares.............................................................................17
Our share repurchase program is limited to 5% of the weighted average number of shares of our
stock outstanding during the prior calendar year and may be changed or terminated by
us, thereby reducing the potential liquidity of your investment................................17
Stockholders have limited control over changes in our policies..........................................17
If we invest in joint ventures, the objectives of our partners may conflict with our objectives.........17
If we sell properties by providing financing to purchasers, we will bear the risk of default by
the purchaser..................................................................................18
If we do not raise sufficient funds, we may not fulfill our investment objectives, including
asset diversification..........................................................................18
Delays in acquisitions of properties may have an adverse effect.........................................18
We may not be able to immediately invest proceeds in real estate, which will harm your returns..........18
We depend on our board of directors, advisor and property manager and losing those
relationships could negatively affect our operations...........................................19
There are conflicts of interest between us and our affiliates...........................................19
We cannot predict the amounts of compensation to be paid to our advisor and our other affiliates........21
The managing dealer has not made an independent review of us or the prospectus..........................21
Our rights and the rights of our stockholders to take action against our directors and officers
and the advisor are limited....................................................................21
The business of our advisor and our property manager may be acquired by us without further
action of our stockholders.....................................................................22
Your percentage of ownership may become diluted if we issue new shares of stock.........................22
There are inherent risks with real estate investments...................................................22
Adverse economic conditions in our primary geographic region and in the market for retail space
could reduce our income and distributions to you...............................................23
Rising expenses could reduce cash flow and funds available for future acquisitions......................23
If our tenants are unable to make rental payments, if their rental payments are reduced, or if
they terminate a lease, our financial condition and ability to pay distributions will
be adversely affected..........................................................................23
Our financial condition and ability to make distributions may be adversely affected by the
bankruptcy or insolvency, a downturn in the business, or a lease termination of a
tenant that occupies a large area of the retail center or an anchor tenant.....................24
If a tenant claims bankruptcy, we may be unable to collect balances due under relevant leases...........24
We may incur additional costs in acquiring or re-leasing retail properties..............................24
Our properties will be subject to competition for tenants and customers.................................24
Our properties will face competition which may affect tenants' ability to pay rent and the
amount of rent paid to us and in turn affect the cash available for distributions and
the amount of distributions....................................................................25
We may be restricted from re-leasing space..............................................................25
We may be unable to sell a property if or when we decide to do so.......................................25
If we suffer losses that are not covered by insurance or that are in excess of insurance
coverage, we could lose invested capital and anticipated profits...............................25
Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on
September 11, 2001, and other acts of violence or war may affect the markets in which
we operate, our operations and our profitability...............................................26
</Table>
ii
<Page>
<Table>
Real estate related taxes may increase and if these increases are not passed on to tenants, our
income will be reduced.........................................................................26
Revenue from our properties depends on the amount of our tenants' retail revenue, making us
vulnerable to general economic downturns and other conditions affecting the retail
industry.......................................................................................26
The costs of compliance with environmental laws and other governmental laws and regulations may
adversely affect our income and the cash available for any distributions.......................27
Our costs associated with complying with the Americans with Disabilities Act may affect cash
available for distributions....................................................................27
We may incur additional costs in acquiring newly constructed properties which may adversely
affect cash available for distributions to you.................................................28
Our investments in unimproved real property may result in additional cost to us to comply with
re-zoning restrictions or environmental regulations............................................28
Construction and development activities will expose us to risks such as cost overruns, carrying
costs of projects under construction or development, availability and costs of
materials and labor, weather conditions and government regulation..............................28
We may acquire or finance properties with lock-out provisions which may prohibit us from
selling a property, or may require us to maintain specified debt levels for a period
of years on some properties....................................................................29
Your investment has various federal income tax risks....................................................29
If we fail to qualify as a REIT or to maintain our REIT status, our dividends will not be
deductible to us, and our income will be subject to taxation...................................29
You may have tax liability on distributions you elect to reinvest in common stock.......................29
The opinion of Duane Morris LLP regarding our status as a REIT does not guarantee our ability
to remain a REIT...............................................................................29
Even REITS are subject to federal and state income taxes................................................30
An investment in our common stock may not be suitable for every employee benefit plan...................30
The annual statement of value that we will be sending to stockholders subject to ERISA and to
certain other plan stockholders is only an estimate and may not reflect the actual
value of our shares............................................................................30
CAUTIONING NOTE REGARDING FORWARD-LOOKING STATEMENTS....................................................32
HOW WE OPERATE...................................................................................................34
CONFLICTS OF INTEREST............................................................................................36
COMPENSATION TABLE...............................................................................................39
ESTIMATED USE OF PROCEEDS........................................................................................45
PRIOR PERFORMANCE OF OUR AFFILIATES..............................................................................46
Prior Investment Programs...............................................................................46
Summary Information.....................................................................................46
Publicly Registered REITs...............................................................................48
Publicly Registered Limited Partnerships................................................................50
Private Partnerships....................................................................................50
Private Placement Real Estate Equity Program............................................................52
Private Placement Note and Mortgage Program.............................................................53
1031 Exchange Private Placement Offering Program........................................................54
Summary Tables..........................................................................................59
MANAGEMENT.......................................................................................................61
Inland Affiliated Companies ............................................................................60
</Table>
iii
<Page>
<Table>
Our General Management..................................................................................64
Our Directors and Executive Officers....................................................................65
Committees of Our Board of Directors....................................................................67
Compensation of Directors and Officers..................................................................68
Executive Compensation..................................................................................68
Independent Director Stock Option Plan..................................................................68
Our Advisor.............................................................................................70
Our Advisory Agreement..................................................................................71
The Property Manager and the Management Agreement.......................................................75
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS, OFFICERS AND OUR ADVISOR...............................80
PRINCIPAL STOCKHOLDERS...........................................................................................82
OUR STRUCTURE AND FORMATION......................................................................................83
Structure...............................................................................................83
SELECTED FINANCIAL DATA..........................................................................................84
INVESTMENT OBJECTIVES AND POLICIES...............................................................................85
General.................................................................................................85
Distributions...........................................................................................85
Types of Investments....................................................................................85
Property Acquisition Standards..........................................................................86
Description of Leases...................................................................................87
Property Acquisition....................................................................................88
Borrowing...............................................................................................88
Sale or Disposition of Properties.......................................................................89
Change in Investment Objectives and Policies............................................................90
Investment Limitations..................................................................................90
Other Investments.......................................................................................90
Appraisals..............................................................................................90
Return of Uninvested Proceeds...........................................................................91
Additional Offerings and Exchange Listing...............................................................91
Joint Ventures..........................................................................................92
Construction and Development Activities.................................................................92
Other Policies..........................................................................................93
REAL PROPERTY INVESTMENTS.................................. .....................................................95
General ................................................................................................95
Insurance Coverage on Properties........................................................................97
Properties..............................................................................................97
Potential Property Acquisitions.........................................................................98
Potential Property: Peoria Station, Peoria, Arizona ....................................................98
CAPITALIZATION..................................................................................................101
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION.................................................102
Liquidity and Capital Resources........................................................................102
Capital Resources......................................................................................103
Results of Operations..................................................................................104
Funds from Operations..................................................................................105
Initial Property.......................................................................................105
Critical Accounting Policies ..........................................................................105
</Table>
iv
<Page>
<Table>
Inflation .............................................................................................108
Quantitative and Qualitative Disclosures About Market Risk.............................................108
DESCRIPTION OF SECURITIES.......................................................................................110
Authorized Stock.......................................................................................110
Common Stock...........................................................................................110
Preferred Stock........................................................................................111
Issuance of Additional Securities and Debt Instruments.................................................112
Restrictions on Issuance of Securities.................................................................112
Restrictions on Ownership and Transfer.................................................................112
Provisions of Maryland Law and of Our Articles of Incorporation and Bylaws.............................115
SHARES ELIGIBLE FOR FUTURE SALE.................................................................................117
Shares to be Outstanding or Issuable upon Exercise or Conversion of Other Outstanding Securities.......117
Securities Act Restrictions............................................................................117
Independent Director Stock Option Plan.................................................................118
Effect of Availability of Shares on Market Price of Shares.............................................118
Registration Rights....................................................................................118
SUMMARY OF OUR ORGANIZATIONAL DOCUMENTS.........................................................................120
Articles of Incorporation and Bylaw Provisions.........................................................120
Stockholders' Meetings.................................................................................120
Board of Directors.....................................................................................121
Stockholder Voting Rights..............................................................................121
Rights of Objecting Stockholders.......................................................................122
Stockholder Lists; Inspection of Books and Records.....................................................122
Amendment of the Organizational Documents..............................................................123
Dissolution or Termination of the Company..............................................................123
Advance Notice of Director Nominations and New Business................................................123
Restrictions on Certain Conversion Transactions and Roll-Ups...........................................124
Limitation on Total Operating Expenses.................................................................126
Transactions with Affiliates...........................................................................127
Restrictions on Borrowing..............................................................................127
Restrictions on Investments............................................................................128
FEDERAL INCOME TAX CONSIDERATIONS...............................................................................131
Federal Income Taxation as a REIT......................................................................131
Federal Income Taxation of Stockholders................................................................137
Other Tax Considerations...............................................................................140
ERISA CONSIDERATIONS............................................................................................142
PLAN OF DISTRIBUTION............................................................................................145
General ...............................................................................................145
Escrow Conditions......................................................................................145
Subscription Process...................................................................................146
Representations and Warranties in the Subscription Agreement...........................................147
Determination of Your Suitability as an Investor.......................................................147
Compensation We Will Pay for the Sale of Our Shares....................................................148
Volume Discounts.......................................................................................149
Deferred Commission Option.............................................................................150
Indemnification........................................................................................152
HOW TO SUBSCRIBE................................................................................................154
</Table>
v
<Page>
<Table>
SALES LITERATURE................................................................................................156
DISTRIBUTION REINVESTMENT AND SHARE REPURCHASE PROGRAMS.........................................................157
Distribution Reinvestment Program......................................................................157
Share Repurchase Program...............................................................................158
REPORTS TO STOCKHOLDERS.........................................................................................161
PRIVACY POLICY NOTICE...........................................................................................162
LITIGATION......................................................................................................162
RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................................163
LEGAL MATTERS...................................................................................................168
EXPERTS.........................................................................................................168
WHERE YOU CAN FIND MORE INFORMATION.............................................................................168
Index to Financial Statements...................................................................................F-i
Appendix A - Prior Performance Tables...........................................................................A-1
Appendix B - Dividend Reinvestment Plan.........................................................................B-1
Appendix C - Subscription Agreement.............................................................................C-1
Appendix D - Transfer on Death Designation......................................................................D-1
Appendix E1 - Letter of Direction..............................................................................E1-1
Appendix E2 - Notice of Revocation.............................................................................E2-1
Appendix F - Privacy Policy Notice..............................................................................F-1
</Table>
vi
<Page>
PROSPECTUS SUMMARY
This summary highlights all of the material information in this prospectus.
Because this is a summary, it does not contain all the information that may be
important to you. You should read this entire prospectus and its appendices
carefully before you decide to invest in our shares of common stock.
INLAND WESTERN RETAIL REAL ESTATE TRUST, INC.
We are a Maryland corporation formed in March 2003. We intend to operate as
a real estate investment trust, or a REIT, for federal and state income tax
purposes beginning with the tax year ending December 31, 2003. We intend that
our company will own all of our assets, either directly or indirectly. We
currently have one stockholder, our advisor, Inland Western Retail Real Estate
Advisory Services, Inc. In March 2003, our advisor purchased from us 20,000
shares for $10 per share for an aggregate purchase price of $200,000 in
connection with our organization.
Our principal executive offices are located at 2901 Butterfield Road, Oak
Brook, Illinois 60523 and our telephone number is (630) 218-8000.
THE TYPES OF REAL ESTATE THAT WE MAY ACQUIRE AND MANAGE
Our advisor is experienced in acquiring and managing real estate,
particularly retail focused shopping centers. We intend to acquire and manage a
diversified (by geographical location and by type and size of retail centers)
portfolio of real estate primarily improved for use as retail establishments,
principally multi-tenant shopping centers. Our portfolio will consist
predominantly of grocery and discount store anchored retail, including net lease
retail. We may acquire certain mixed use properties that may include lodging,
office and/or multi-family residential if they are part of a retail center. And,
we may also acquire other types of retail shopping centers, such as enclosed
malls, outlet malls and power centers. We also anticipate acquiring real estate
improved with other commercial facilities which provide goods and services as
well as double or triple net leased properties, which are either commercial or
retail, including properties acquired in sale and leaseback transactions. A
triple-net leased property is one which is leased to a tenant who is responsible
for the base rent and all costs and expenses associated with their occupancy,
including property taxes, insurance, repairs and maintenance. We have, however,
only identified one property in Phoenix, Arizona, to purchase from the proceeds
of this offering.
The retail centers we intend to acquire would be located primarily in
states west of the Mississippi River in the United States. Where feasible, we
will endeavor to acquire multiple properties within the same major metropolitan
markets where the acquisitions result in efficient property management
operations with the potential to achieve market dominance.
We do not intend to invest in real estate properties that are primarily:
- farms;
- health care facilities;
- industrial properties;
- leisure home sites;
- manufacturing facilities;
- mining properties;
1
<Page>
- ranches;
- single-family residential properties;
- timberlands; or
- unimproved properties not intended to be developed (vacant land).
Subject to compliance with the applicable requirement under the federal
income tax laws, we may also undertake construction and development activities
and render services in connection with such activities.
OUR SPONSOR, OUR ADVISOR AND THE INLAND GROUP
Our sponsor is Inland Real Estate Investment Corporation, which is owned by
The Inland Group, Inc. The Inland Group, together with its subsidiaries and
affiliates, is a fully-integrated group of legally and financially separate
companies that have been engaged in diverse facets of real estate for over 35
years providing property management, leasing, marketing, acquisition,
disposition, development, redevelopment, syndication, renovation, construction,
finance and other related services. Inland Western Retail Real Estate Advisory
Services, Inc., is a wholly owned subsidiary of our sponsor and is our advisor.
Inland Securities Corporation, another affiliate of The Inland Group, is the
managing dealer of this offering. Inland Western Management Corp., our property
manager, is an entity owned principally by individuals who are affiliates of The
Inland Group. The principal executive offices of The Inland Group, our sponsor,
our advisor and our property manager are located at 2901 Butterfield Road, Oak
Brook, Illinois 60523 and their telephone number is (630) 218-8000.
The following organizational chart depicts the services that affiliates or
our sponsor will render to us and our organizational structure.
2
<Page>
ORGANIZATIONAL CHART
<Table>
----------- ---------- ----------- ----------
Daniel L. Robert H. G. Joseph Robert D.
Goodwin* Baum* Cosenza* Parks*
----------- ---------- ----------- ----------
|| || || ||
============================================================================
||
-----------------------
THE INLAND GROUP, INC.*
-----------------------
||
================================================================================================================
|| || || || |
- --------------- ------------------- ------------------- ------------------- |
The Inland The Inland Property Inland Real Inland Real |
Services Group, Management Estate Investment Estate Transaction |
Inc. Group, Inc. Corporation Group, Inc. |
(our sponsor) |
- --------------- ------------------- ------------------- ------------------- |
| | || | |
| | ========================================= | |
| | || || || | |
| | ------------- --------------------- ------------------ | ----------------------
| | Inland Inland Western Retail Inland Partnership | Inland Mortgage
- --------------- ------------------ Securities Real Estate Advisory Property Sales | Investment Corporation
Inland Risk and Inland Western Corporation Services, Inc. Corporation |
Insurance Management Corp. (our advisor) |
Management (property manager) ------------- --------------------- ------------------ | ----------------------
Services, Inc. | | | |
- --------------- ------------------ | | | |
| | | | ============================== ================
| | | | || || || || ||
| | | | ------------- ----------- ----------- ----------- ---------------
| | | | Inland Real Inland Real Inland Real Inland Inland Mortgage
--------- | | | Estate Sales, Estate Estate Mortgage Servicing
Insurance | | | Inc. Development Acquisitions, Corporation Corporation
Services | | | Corporation Inc.
--------- | | | ------------- ----------- ----------- ----------- ---------------
| | | | | | | | |
| | | | | | | | |
| | | | -------------- | | | |
| | | | Real Estate | | | |
| | | | Sales Services | | | |
| | | | -------------- | | | |
| | | | | | | | |
| | | | | | | | |
| -------------------- ---------- --------------- | ------------------ ----------- --------- -------------
| Property Management Securities Organization, | Construction and Property Mortgage Mortgage Loan
| and Related Services Sales Advisory | Development Acquisition Brokerage Servicing
| and Real Estate | Services Services Services
| Services |
| -------------------- ---------- --------------- | ------------------ ----------- --------- -------------
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
- ------------------------------------------------------------------------------------------------------------------------------------
Inland Western Retail Real Estate Trust, Inc.
We will be principally owned by public investors. Ownership is represented by shares of our common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</Table>
Solid lines indicate 100% ownership. Broken lines indicate service.
* The four indicated individuals control The Inland Group, Inc. and own
substantially all of its stock.
3
<Page>
Investment in shares of our common stock involves risks. If we are unable
to effectively manage the impact of these risks, we may not meet our investment
objectives and, therefore, you may lose some or all of your investment. The
following is a summary of the material risks which we believe are most relevant
to an investment in the shares. These risks are generally listed in the order of
priority.
- our common stock is not currently listed or traded on an exchange and
cannot be readily sold (sales by stockholders may be made at a loss);
- we have no operating history nor established financing sources;
- we have identified only one property to be purchased with the proceeds
of this offering;
- if we raise the minimum amount, we will not have sufficient resources to
acquire the identified property. We need to raise in excess of $26
million to acquire this property;
- although we anticipate that aggregate borrowings will not exceed 55% of
the combined fair market value of our properties, our charter imposes a
limitation on our borrowings of less than 300% of net assets and there
are risks associated with a high amount of leverage;
- we have no ownership in our advisor and the advisor is owned by our
sponsor or their affiliates;
- our advisor and its affiliates will receive substantial fees, including
participation in proceeds from the sales, refinancing or liquidation of
our assets;
- our advisor, property manager and two of our directors are subject to
conflicts of interest as a result of their affiliation with The Inland
Group, including conflicts of interest relating to:
- the negotiation of the terms of the advisors and property management
agreements;
- the allocation of their time between us and their other business
ventures;
- decisions whether to acquire and dispose of properties;
- the purchase and sale of properties to or from the advisor and our
affiliates; and
- the allocation of investment opportunities between us and their other
business ventures.
- the management fee structure could result in our advisor recommending
riskier or more speculative investments;
- we may make distributions that include a return of principal for federal
tax purposes;
- we may fail to qualify as a REIT;
- there are limits on ownership, transferability and redemption of shares;
- our investment policies and strategies may be changed without
stockholder consent;
- our investments will lack geographic diversification;
- we will not be able to meet our business objectives if we only acquire
one single net leased property; and
4
<Page>
- risks that incentive structure of fees payable to our advisor and its
affiliates may encourage our advisor to make investments that have
greater risks to generate higher fees.
CONFLICTS OF INTEREST
CONFLICTS OF INTEREST EXIST BETWEEN US AND SOME OF OUR AFFILIATES, INCLUDING OUR
ADVISOR. THESE AFFILIATES INCLUDE, INLAND REAL ESTATE CORPORATION, INLAND RETAIL
REAL ESTATE TRUST, INC. AND INLAND REAL ESTATE EXCHANGE CORPORATION. INLAND REAL
ESTATE CORPORATION IS A PUBLICLY REGISTERED REIT. INLAND REAL ESTATE CORPORATION
IS A SELF-ADMINISTERED REIT AND IS NO LONGER AFFILIATED WITH THE INLAND GROUP.
INLAND REAL ESTATE CORPORATION PURCHASES SHOPPING CENTERS LOCATED IN THE
MIDWEST. INLAND RETAIL REAL ESTATE TRUST, INC. IS AFFILIATED WITH THE INLAND
GROUP. INLAND RETAIL REAL ESTATE TRUST, INC. PURCHASES SHOPPING CENTERS LOCATED
EAST OF THE MISSISSIPPI RIVER. INLAND REAL ESTATE EXCHANGE CORPORATION IS A
SUBSIDIARY OF INLAND REAL ESTATE INVESTMENT CORPORATION. INLAND REAL ESTATE
EXCHANGE CORPORATION PROVIDES REPLACEMENT PROPERTIES FOR PEOPLE WISHING TO
COMPLETE AN IRS SECTION 1031 REAL ESTATE EXCHANGE. Midwest Real Estate Equities,
Inc. is not a subsidiary of The Inland Group, Inc or its affiliates but does
have some of the same shareholders as The Inland Group, Inc. Midwest Real Estate
Equities buys, manages and sells commercial and multi-family property.
Some of these conflicts include:
- competition for the time and services of personnel that work for us
and our affiliates, including, such persons as Daniel L. Goodwin,
Robert H. Baum, G. Joseph Cosenza, Robert D. Parks, Roberta S.
Matlin, Scott W. Wilton, Kelly E. Tucek, and Brenda G. Gujral, which
may limit the amount of time these people may spend on our business
matters;
- substantial compensation payable by us to Inland Securities
Corporation, Inland Western Retail Real Estate Advisory Services,
Inc. and Inland Western Management Corp. for their various services
which may not be on market terms and is payable, in most cases,
whether or not our stockholders receive distributions;
- competition for properties, although our affiliates are governed by
the Property Acquisition Service Agreement which, with certain
limitations, gives us a right of first refusal for all properties
west of the Mississippi River;
- acquisition of properties from an affiliate who has a contract to
acquire it from PDG America; and
- the possibility that we may do business with entities that have
pre-existing relationships with our affiliates which may result in a
conflict between our business and the ongoing business relationships
our affiliates have with each other.
Conflicts of interest may also arise in connection with the potential sale or
refinancing of our properties or the enforcement of agreements.
We have an option to acquire or consolidate into us the business conducted
by our advisor and/or our property manager for shares of common stock.
COMPENSATION TO BE PAID TO OUR ADVISOR AND AFFILIATES
We intend to pay our advisor and affiliates substantial fees for managing
our business.
5
<Page>
We will also pay the advisor and other affiliates of our sponsor a number
of other fees for services or expense reimbursements during our offering,
operational and liquidation stage.
Set forth below is a tabular summary of fees and compensation payable to our
advisor and other affiliates.
Type of Compensation
Nonsubordinated payments:
Offering stage:
<Table>
Selling commissions 7.5% of the sale price for each share
Estimated maximum: $187,500,000
Marketing contribution and due diligence 3.0% of the gross offering proceeds
allowance Estimated maximum: $75,000,000
Reimbursable expenses and other We will reimburse our sponsor for actual costs incurred on
expenses of issuance our behalf in connection with this offering.
Estimated amount: $14,684,000
Acquisition stage:
Acquisition expenses We will reimburse Inland Real Estate Acquisitions, Inc. for
costs incurred, on our behalf, in connection with the
acquisition of properties:
Estimated maximum: $13,450,000
Operational stage:
Property management fee 4.5% of the gross income from the properties.
This fee terminates upon A BUSINESS COMBINATION (cannot exceed 90% of the fee which would be payable to an
WITH OUR PROPERTY MANAGER. unrelated third party). Actual amounts cannot be determined at
the present time. We will pay the fee for services in
connection with the rental, leasing, operation and management of
the properties.
Loan servicing fee .08% of the total principal amount of the loans being
serviced for each full year, up to the first $100 million and
a lesser percentage on a sliding scale thereafter. Actual
amounts cannot be determined at the present time.
Reimbursable expenses relating to The compensation and reimbursements to our advisor and
administrative services its affiliates will be approved by a majority of our directors.
Actual amounts cannot be determined at the present time.
These may include cost of goods and services and non-
supervisory services performed directly for us by
independent parties.
</Table>
6
<Page>
Liquidation stage:
<Table>
Property disposition fee Lesser of 3% of sales price or 50% of the customary
THIS FEE TERMINATES UPON A BUSINESS commission which would be paid
COMBINATION WITH OUR ADVISOR. to a third party. Actual
amounts cannot be determined at the present time.
Subordinated payments:
Operational stage:
Advisor asset management fee Not more than 1% per annum of our average assets; subordinated
THIS FEE TERMINATES UPON A BUSINESS COMBINATION to a non-cumulative, non-compounded return, equal to 6% per
WITH OUR ADVISOR. annum. Actual amounts cannot be determined at the present
time. We will pay the fee for services in connection with
our day-to-day operations, including administering our
bookkeeping and accounting functions, services as our
consultant in connection with policy decisions made by our
board, managing our properties or causing them to
be managed by another party and providing other services
as our board deems appropriate.
Liquidation stage:
Incentive advisory fee After our stockholders have first received a 10%
THIS FEE TERMINATES UPON A BUSINESS COMBINATION cumulative, non-compounded return and a return on their
WITH THE ADVISOR. net investment, an incentive advisory fee equal to 15% on
net proceeds from the sale of a property will be
paid to our advisor. Actual amounts cannot be determined
at the present time. We will pay the fee for services in
connection with the disposition of our properties.
</Table>
PRIMARY BUSINESS OBJECTIVE AND STRATEGIES
Our primary business objective is to enhance the performance and value of
our properties through active management. Key elements of our strategy are:
Acquisitions:
- To selectively acquire real properties that are diversified types
and well-located.
- To selectively acquire properties on an all-cash basis if necessary
to provide us with a competitive advantage over potential purchasers
who must secure financing. We may, however, acquire properties
subject to existing indebtedness if we believe this is in our best
interest. We may acquire properties free and clear of permanent
mortgage debt by paying the entire purchase price of each property
in cash or for shares, interests in entities that own one or more of
our properties or a combination of these. However, as of the date of
this prospectus, we had not paid the purchase price of any
properties using shares or interests in entities that will own our
properties.
7
<Page>
- To diversify geographically within the states west of the
Mississippi by acquiring properties primarily located in major
metropolitan areas to minimize the potential adverse impact of
economic downturns in local markets.
Operations:
- We intend to actively manage costs and minimize operating expenses
by centralizing all management, leasing, marketing, financing,
accounting, renovation and data processing activities.
- We intend to improve rental income and cash flow by aggressively
marketing rentable space.
- We intend to emphasize regular maintenance and periodic renovation
to meet the needs of tenants and to maximize long-term returns.
- We intend to maintain a diversified tenant base at our retail
centers, consisting primarily of retail tenants providing consumer
goods and services.
SHARES SOLD BEFORE THE OFFERING
This is our initial public offering. We issued 20,000 shares of our common
stock for $10 per share, or an aggregate purchase price of $200,000, to our
advisor in connection with our organization.
TERMS OF THE OFFERING
If we only sell the minimum offering, we will have sold a total of 220,000
shares. If we sell the maximum amount of shares under the offering, we will have
sold a total of 250,020,000. These numbers do not include shares issued upon
exercise of options granted and which may be granted under our independent
director stock option plan.
We are offering a minimum of 200,000 shares ($2,000,000) and a maximum of
250,000,000 shares ($2,500,000,000). We are offering 250,000,000 shares on a
best efforts basis through the managing dealer at $10.00 per share, subject to
discounts in some cases. An offering on a best efforts basis is one in which the
securities dealers participating in the offering are under no obligation to
purchase any of the securities being offered and, therefore, no specified number
of securities are guaranteed to be sold and no specified amount of money is
guaranteed to be raised from the offering.
We are also offering up to 20,000,000 shares at a purchase price of $9.50
per share to stockholders who elect to participate in our distribution
reinvestment program.
The offering price of our shares is subjective and was determined by our
board of directors. Our board of directors determined the offering price based
upon the offering price of earlier REITs organized by our sponsor, the range of
other REITs that do not have a public trading market and the recommendation of
the managing dealer based on its consultations with likely soliciting dealers.
IS AN INVESTMENT IN US APPROPRIATE FOR YOU?
An investment in us might be appropriate as part of your investment
portfolio if:
- You are looking for regular distributions. We intend to pay regular
monthly distributions to our domestic stockholders and regular
quarterly distributions to our foreign
8
<Page>
stockholders. The maximum time that you should have to wait to
receive the first distribution is 45 days from the date in which we
accept your subscription.
- You are looking for a hedge against inflation. We intend to hedge
against inflation by entering into leases with tenants which provide
for scheduled rent escalations or participation in the growth of
tenant sales. This is designed to provide increased distributions
and capital appreciation.
- You are looking for capital preservation and appreciation. We intend
to acquire a portfolio of diverse properties, usually on an all cash
basis, that are well located. After acquiring these properties, we
may finance them, but we anticipate that aggregate borrowings
secured by our properties will not exceed 55% of their combined fair
market value.
WE CANNOT GUARANTEE THAT WE WILL ACHIEVE THESE OBJECTIVES.
DISTRIBUTIONS
We intend to pay regular monthly distributions to our domestic stockholders
and regular quarterly distributions to our foreign stockholders. The maximum
time that you should have to wait to receive the first distribution is 45 days
from the date in which we accept your subscription.
In order to maintain our REIT status under federal income tax laws, we
intend to distribute at least 90% of our taxable income to our stockholders. For
federal income tax purposes only, we may make distributions that include a
return of principal or an amount in excess of 95% of cash available to us.
REAL PROPERTY INVESTMENTS
We have identified one property for purchase in the state of Arizona.
We anticipate purchasing an existing shopping center known as Peoria
Station, which will contain 181,500 gross leasable square feet upon completion
of the current redevelopment. The center currently contains 140,019 gross
leasable square feet. The center is located at 10160 North 67th Avenue in
Peoria, Arizona.
An affiliate of our advisor has entered into a contract to acquire this
property. We anticipate that the affiliate will assign this purchase contract to
us for no cost to us. We would then anticipate purchasing Peoria Station from
PDG America, an unaffiliated third party. Our total acquisition cost, including
expenses, is expected to be approximately $25,867,000. This amount may be
adjusted based on actual rental rates achieved on the redeveloped square feet.
This amount may also increase by additional costs, which have not yet been
finally determined. We expect any additional costs to be insignificant. Our
acquisition cost is expected to be approximately $143 per square foot of
leasable space.
SHARE REPURCHASE PROGRAM
We intend to institute a share repurchase program. Our share repurchase
program may provide eligible stockholders with limited interim liquidity by
enabling them to sell shares back to us. The prices at which shares may be sold
back to us will be one year from the purchase date at $9.25 per share; two years
from the purchase date at $9.50 per share; three years from the purchase date at
$9.75 per share; and four years from the purchase date at the greater of $10.00
per share or a price equal to ten times our "funds available for distribution"
per weighted average share outstanding for the prior calendar year. We may
terminate, reduce or otherwise change the above share repurchase program.
9
<Page>
ESTIMATED USE OF PROCEEDS
The amounts listed in the table below represent our current estimates
concerning the use of the offering proceeds. Since these are estimates, they may
not accurately reflect the actual receipt or application of the offering
proceeds. This first scenario assumes we sell the minimum number of 200,000
shares of common stock in this offering. The second scenario assumes:
- we sell the maximum of 250,000,000 shares in this offering at $10
per share; and
- we sell the maximum of 20,000,000 shares in our distribution
reinvestment program at $9.50 per share.
Under both scenarios we have not given effect to any special sales or
volume discounts which could reduce selling commissions.
<Table>
<Caption>
MAXIMUM OFFERING
(INCLUDING SHARES SOLD UNDER THE
MINIMUM OFFERING DISTRIBUTION REINVESTMENT
200,000 SHARES PROGRAM)
------------------------- --------------------------------
AMOUNT PERCENT AMOUNT PERCENT
-------------- ------- --------------- -------
Gross proceeds ................................... $ 2,000,000 100.0% $ 2,690,000,000 100.00%
-------------- ------- --------------- ------
Less expenses:
Selling commissions ........................... 150,000 7.5% 187,500,000 6.97%
Marketing contribution ........................ 60,000 3.0% 75,000,000 2.79%
Organization and offering ..................... 90,000 4.5% 14,684,000 .55%
-------------- ------- --------------- ------
Total expenses 300,000 15.0% 277,184,000 10.30%
-------------- ------- --------------- ------
Gross amount available ........................... 1,700,000 85.0% 2,412,816,000 89.70%
Less
Acquisition expenses .......................... 10,000 0.5% 13,450,000 0.50%
Working capital reserve ....................... 20,000 1.0% 26,900,000 1.00%
-------------- ------- --------------- ------
Net cash available ............................... $ 1,670,000 83.50% $ 2,372,466,000 88.20%
============== ======= =============== ======
</Table>
10
<Page>
RISK FACTORS
An investment in our shares involves significant risks and therefore is
suitable only for those persons who understand those risks and the consequences
of their investment and who are able to bear the risk of loss of their entire
investment. You should consider the following material risks in addition to
other information set forth elsewhere in this prospectus before making your
investment decisions.
THE PRICE OF OUR COMMON STOCK IS SUBJECTIVE AND MAY NOT BEAR ANY
RELATIONSHIP TO WHAT A STOCKHOLDER COULD RECEIVE IF IT WAS sold. Our board of
directors determined the offering price of our shares of common stock based on
the following factors:
- the offering price of the earlier REITs organized by our sponsor;
- the range of offering prices of other REITs that do not have a
public trading market; and
- the recommendation of the managing dealer based on its consultations
with likely soliciting dealers.
However, the offering price of our shares of common stock may not be the
same as the price at which the shares may trade if they were listed on an
exchange or actively traded by brokers, nor of the proceeds that a stockholder
may receive if we were liquidated or dissolved. As such, any sales may be made
at a loss.
OUR COMMON STOCK IS NOT CURRENTLY LISTED ON AN EXCHANGE OR TRADING MARKET
AND CANNOT BE READILY SOLD. There is currently no public trading market for the
shares and we cannot assure you that one will develop. We may never list the
shares for trading on a national stock exchange or include the shares for
quotation on a national market system. The absence of an active public market
for our shares could impair your ability to sell our stock at a profit or at
all. By August 20, 2008 our board of directors will determine whether it is in
our best interests to apply to have the shares listed on a national stock
exchange or included for quotation on a national market system if we meet the
applicable listing requirements at that time.
YOU DO NOT KNOW WHAT REAL PROPERTIES AND OTHER ASSETS WE MAY ACQUIRE IN THE
FUTURE, AND MUST RELY ON OUR ADVISOR, OUR BOARD AND OFFICERS TO SELECT THEM AND
STOCKHOLDERS WILL NOT PARTICIPATE IN THESE DECISIONS. We intend to acquire
commercial retail properties. We have only recently identified one property we
intend to acquire. However, no information is available as to the
identification, location, operating histories, lease terms or other relevant
economic and financial data of any real properties or other assets we may
purchase in the future. As a result, you must rely on us to locate and acquire
suitable investment properties. In addition, our board of directors may approve
future equity offerings or obtain financing, the proceeds of which may be
invested in additional properties; therefore, you will not have an opportunity
to evaluate all of the properties that will be in our portfolio. Stockholders
will not participate in evaluating these investment opportunities. Nonetheless,
you will be unable to evaluate the manner in which we invest the proceeds of
this offering or the economic merit of particular properties prior to their
acquisition. This prospectus only describes the parameters we will use to
acquire additional real properties and other assets.
COMPETITION WITH THIRD PARTIES IN ACQUIRING PROPERTIES WILL REDUCE OUR
PROFITABILITY AND THE RETURN ON YOUR INVESTMENT. We compete with many other
entities engaged in real estate investment activities, many of which have
greater resources than we do. Larger REITs may enjoy significant competitive
advantages that result from, among other things, a lower cost of capital and
enhanced operating efficiencies. In addition, the number of entities and the
amount of funds competing for suitable
11
<Page>
investment properties may increase. This will result in increased demand for
these assets and therefore increased prices paid for them. If we pay higher
prices for properties, our profitability is reduced and you will experience a
lower return on your investment.
WE WILL COMPETE WITH REAL ESTATE INVESTMENT PROGRAMS SPONSORED BY COMPANIES
AFFILIATED WITH US FOR THE ACQUISITION OF PROPERTIES AND FOR THE TIME AND
SERVICES OF PERSONNEL. Affiliated companies have previously sponsored other
REITs, private real estate equity programs and private placement mortgage and
note programs, and affiliated companies in the future may sponsor other real
estate investment programs. These affiliated companies include Inland Real
Estate Corporation, Inland Retail Real Estate Trust, Inc., Inland Real Estate
Exchange Corporation and other entities to be formed by The Inland Group, Inc.
We will compete with these existing and future real estate investment programs
for the acquisition of properties of a type suitable for our investment, for the
time and services of personnel of our advisor and affiliates of our advisor in
connection with our operation and the management of our assets, and for
obtaining and retaining investors for our common stock. We will be limited to
acquiring properties that are located west of the Mississippi River and single
net lease properties located anywhere in the United States and therefore our
geographic diversity will be limited.
WE PLAN TO INCUR MORTGAGE INDEBTEDNESS AND OTHER BORROWINGS, WHICH MAY
REDUCE THE FUNDS AVAILABLE FOR DISTRIBUTION, MAY INCREASE THE RISK OF LOSS SINCE
DEFAULTS MAY RESULT IN FORECLOSURE AND MORTGAGES MAY INCLUDE
CROSS-COLLATERALIZATION OR CROSS-DEFAULT PROVISIONS THAT INCREASE THE RISK THAT
MORE THAN ONE PROPERTY MAY BE AFFECTED BY A DEFAULT. We may, in some instances,
use either existing financing or borrow new funds to acquire properties. We
intend to incur or increase our mortgage debt by obtaining loans secured by
selected or all of the real properties to obtain funds to acquire additional
real properties. We may also borrow funds if necessary to satisfy the
requirement that we distribute to stockholders as dividends at least 90% of our
annual REIT taxable income, or otherwise as is necessary or advisable to assure
that we maintain our qualification as a REIT for federal income tax purposes.
We may incur mortgage debt on a particular real property if we believe the
property's projected cash flow is sufficient to service the mortgage debt.
However, if there is a shortfall in cash flow, then the amount available for
distributions to stockholders may be affected. In addition, incurring mortgage
debt increases the risk of loss since defaults on indebtedness secured by
properties may result in foreclosure actions initiated by lenders and our loss
of the property securing the loan which is in default. For tax purposes, a
foreclosure of any of our properties would be treated as a sale of the property
for a purchase price equal to the outstanding balance of the debt secured by the
mortgage. If the outstanding balance of the debt secured by the mortgage exceeds
our basis in the property, we would recognize taxable income on foreclosure, but
would not receive any cash proceeds. We may give full or partial guarantees to
lenders of mortgage debt to the entity that owns our properties. In such cases,
we will be responsible to the lender for satisfaction of the debt if it is not
paid by such entity. If any mortgages contain cross-collateralization or
cross-default provisions, there is a risk that more than one real property may
be affected by a default.
If mortgage debt is unavailable at reasonable rates, we will not be able to
place financing on the properties, which could reduce distributions per share.
If we place mortgage debt on the properties, we run the risk of being unable to
refinance the properties when the loans come due, or of being unable to
refinance on favorable terms. If interest rates are higher when the properties
are refinanced, our net income could be reduced, which would reduce cash
available for distribution to stockholders and may prevent us from raising
capital by issuing more stock and may prevent us from borrowing more money.
IF WE HAVE INSUFFICIENT WORKING CAPITAL RESERVES, WE WILL HAVE TO OBTAIN
FINANCING FROM OTHER SOURCES. We intend to establish working capital reserves
which we believe are adequate to cover our cash needs. However, if these
reserves are insufficient to meet our cash needs, we may have to obtain
12
<Page>
financing from either affiliated or unaffiliated sources to fund our cash
requirements. We cannot assure you that sufficient financing will be available
or, if available, will be available on economically feasible terms or on terms
acceptable to us. Additional borrowing for working capital purposes will
increase our interest expense and therefore, our financial condition and our
ability to pay distributions may be adversely affected.
THE TYPES OF PROPERTIES WHICH WE INTEND TO ACQUIRE AND THE AREA IN WHICH WE
MAY ACQUIRE RETAIL CENTERS IS LIMITED. We intend to primarily acquire and manage
retail centers. Our acquisition of retail centers is limited primarily to states
west of the Mississippi River. Adverse economic conditions affecting that area
could adversely affect our profitability to a greater degree than if we had
diversified our investments to include other types of real estate over a larger
geographic region.
WE CURRENTLY PLAN TO ACQUIRE ONLY ONE SINGLE NET LEASED PROPERTY. We
currently only have an agreement to acquire one single net leased property. We
will not be able to meet our business objectives if we only acquire one single
net leased property. This limitation could have an adverse effect on our
business.
THE AGGREGATE AMOUNT WE MAY BORROW IS LIMITED UNDER OUR ARTICLES OF
INCORPORATION. Our articles of incorporation limit the aggregate amount we may
borrow, secured and unsecured, to 300% of our net assets, absent a satisfactory
showing that a higher level is appropriate. That limitation could have adverse
consequences on our business, including:
- freezing our ability to purchase properties;
- causing us to lose our REIT status if borrowing was necessary to
distribute the required minimum amount of cash to our stockholders
for us to qualify as a REIT;
- causing operational problems if there are cash flow shortfalls for
working capital purposes; and
- resulting in the loss of a property if, for example, financing was
necessary to cure a default on a mortgage.
In order to change this limitation, we must obtain approval by a majority
of our independent directors and by a majority of our stockholders. There will
be a delay before approval can be obtained, if it can be obtained at all. It is
possible that even if the required approval is obtained, it may not be obtained
in sufficient time to avoid the adverse consequences of not having the
additional funding when it is needed.
WE HAVE NO OPERATING HISTORY, AND SO WE HAVE NO HISTORY OF EARNINGS UPON
WHICH YOU COULD EVALUATE OUR BUSINESS. We were incorporated on March 5, 2003. We
have only recently begun operations. We have not acquired any properties or
hired any employees. Therefore, we have no operating history upon which you can
evaluate our business and prospects. We have no income, cash flow, funds from
operations or funds available to make distributions to you. We may be unable to
conduct our business as we intend to do. You must carefully consider the risks
and uncertainties frequently encountered in new companies like ours. Because we
have no operating history, we have no historical basis for predicting if our
business will be successful.
BECAUSE OF THE WAY WE ARE ORGANIZED, WE WOULD BE A DIFFICULT TAKEOVER
TARGET. THIS COULD DEPRESS THE PRICE OF OUR STOCK AND INHIBIT A MANAGEMENT
CHANGE. Provisions which may have an anti takeover effect and inhibit a change
in our management include:
13
<Page>
- THERE ARE OWNERSHIP LIMITS AND RESTRICTIONS ON TRANSFERABILITY AND
OWNERSHIP IN OUR ARTICLES OF INCORPORATION. In order for us to
qualify as a REIT, no more than 50% of the outstanding shares of our
stock may be beneficially owned, directly or indirectly, by five or
fewer individuals at any time during the last half of each taxable
year. To assure that we will not fail to qualify as a REIT under
this test, our articles of incorporation provide that, commencing
March 1, 2003, subject to some exceptions, no person may
beneficially own more than 9.8% of our common stock.
This restriction may:
- have the effect of delaying, deferring or preventing a change
in control of us, including an extraordinary transaction (such
as a merger, tender offer or sale of all or substantially all
of our assets) that might involve a premium price for holders
of our common stock; or
- compel a stockholder who had acquired more than 9.8% of our
stock to dispose of the additional shares and, as a result, to
forfeit the benefits of owning the additional shares.
- OUR ARTICLES OF INCORPORATION PERMIT OUR BOARD OF DIRECTORS TO ISSUE
PREFERRED STOCK WITH TERMS THAT MAY DISCOURAGE A THIRD PARTY FROM
ACQUIRING US. Our articles of incorporation permit our board of
directors to issue, without stockholder approval, up to 10 million
shares of preferred stock. The board may classify or reclassify any
unissued preferred stock and establish preferences, conversion or
other rights, voting power, restrictions, limitations as to
dividends and other distributions, qualifications, or terms or
conditions of redemption, of any preferred stock. Thus, our board
could authorize, without the approval by our stockholders, the
issuance of preferred stock with terms and conditions which could
have the effect of delaying, deferring or preventing a change in
control of us, including an extraordinary transaction (such as
merger, tender offer or sale of all or substantially all of our
assets) that might provide a premium for holders of our common
stock.
- MARYLAND LAW MAY DISCOURAGE A THIRD PARTY FROM ACQUIRING US.
Maryland law restricts mergers and other business combinations
between us and an interested stockholder. Under the Maryland
Business Combination Act, an anti-takeover statute, for a period of
five years after the most recent acquisition of stock by an
interested stockholder, we may not engage in any merger or other
business combination with that interested stockholder or any
affiliate of that interested stockholder. After the five-year
period, any merger or other business combination must be approved by
our board of directors and by at least 80% of all the votes entitled
to be cast by holders of outstanding shares of our voting stock and
two-thirds of all the votes entitled to be cast by holders of
outstanding shares of our voting stock other than the interested
stockholder with whom the business combination is to be effected
unless, among other things, the stockholders of the company receive
in the business combination a minimum consideration for their common
stock equal to the highest price paid by the interested stockholder
for its common stock. However, our articles of incorporation provide
that the business combination provisions of Maryland law do not
apply to any business combination involving us and our affiliates.
As a result, the five-year prohibition and the super-majority
stockholder vote requirements will not apply to any business
combinations between us and our affiliates. The Maryland Business
Combination Act could have the effect of discouraging offers from
third parties to acquire us and of increasing the
14
<Page>
difficulty of successfully completing a business combination. See
"Description of Securities - Provisions of Maryland Law and our
Articles of Incorporation and Bylaws."
- MARYLAND LAW ALSO LIMITS THE ABILITY OF A THIRD PARTY TO BUY A LARGE
STAKE IN US AND EXERCISE VOTING POWER IN ELECTING directors.
Maryland law provides a second anti-takeover statute, its Control
Share Acquisition Act, which provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have
no voting rights except to the extent approved by the corporation's
disinterested stockholders by a vote of a two-thirds of the votes
entitled to be cast on the matter; shares of stock owned by
interested stockholders, that is, by the acquirer, by officers or by
directors who are employees of the corporation, are not entitled to
be cast on the matter. "Control shares" are voting shares of stock
which would entitle the acquirer to exercise voting power in
electing directors within specified ranges of voting power. 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. The control share acquisition statute does not apply
(i) to shares acquired in a merger, consolidation or share exchange
if the corporation is a party to the transaction or (ii) to
acquisitions approved or exempted by the articles of incorporation
or bylaws of the corporation. Our bylaws exempt our affiliates from
the Maryland control share acquisition statute. This statute could
have the effect of discouraging offers from third parties to acquire
us and increasing the difficulty of successfully completing this
type of offer by anyone other than our affiliates or any of their
affiliates. See "Description of Securities - Provisions of Maryland
Law and our Articles of Incorporation and Bylaws - Control Share
Acquisition."
YOUR INVESTMENT RETURN MAY BE REDUCED IF WE ARE REQUIRED TO REGISTER AS AN
INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT. We are not registered as an
investment company under the Investment Company Act of 1940. If we were
obligated to register as an investment company, we would have to comply with a
variety of substantive requirements under the Investment Company Act. These
requirements include:
- limitations on capital structure;
- restrictions on specified investments;
- prohibitions on transactions with affiliates; and
- compliance with reporting, record keeping, voting, proxy disclosure
and other rules and regulations that would significantly change our
operations.
In order to maintain our exemption from regulation under the Investment
Company Act of 1940, we must engage primarily in the business of buying real
estate, and these investments must be made within a year after the offering
ends. If we are unable to invest a significant portion of the proceeds of this
offering in properties within one year of the termination of the offering, we
may avoid being required to register as an investment company by temporarily
investing any unused proceeds in government securities with low returns. This
would reduce the cash available for distribution to investors and possibly lower
your returns.
To maintain compliance with the Investment Company Act exemption, we may be
unable to sell assets we would otherwise want to sell and may need to sell
assets we would otherwise wish to retain. In addition, we may have to acquire
additional income or loss generating assets that we might not otherwise
15
<Page>
have acquired or may have to forgo opportunities to acquire interests in
companies that we would otherwise want to acquire and would be important to our
strategy.
If we were required to register as an investment company but failed to do
so, we would be prohibited from engaging in our business, and criminal and civil
actions could be brought against us. In addition, our contracts would be
unenforceable unless a court were to require enforcement, and a court could
appoint a receiver to take control of us and liquidate our business.
THERE ARE MANY FACTORS WHICH CAN AFFECT DISTRIBUTIONS TO STOCKHOLDERS.
Distributions will be based principally on cash available from our properties,
real estate securities, and other investments. The amount of cash available for
distributions will be affected by many factors, such as our ability to buy
properties as offering proceeds become available, the yields on securities of
other REITs which we invest in, and our operating expense levels, as well as
many other variables. Actual cash available for distributions may vary
substantially from estimates. We can give no assurance that we will be able to
pay or maintain distributions or that distributions will increase over time. Nor
can we give any assurance that rents from the properties will increase, that the
securities we buy will increase in value or provide increased dividends over
time, or that future acquisitions of real properties or our investments in
securities will increase our cash available for distributions to stockholders.
Our actual results may differ from the assumptions used by our board of
directors in establishing the initial distribution rate to stockholders. Some of
these factors are beyond our control, and a change in any one factor could
adversely affect our ability to pay future distributions:
- If one or more tenants defaults or terminates their lease, there
could be a decrease or cessation of rental payments which would mean
less cash available for distributions.
- Cash available for distributions may be reduced if we are required
to spend money to correct defects or to make improvements to
properties.
- Cash available to make distributions may decrease if the assets we
acquire have lower yields than expected.
- There may be a delay between the sale of the common stock and our
purchase of real properties. During that time, we may invest in
lower yielding short term instruments, which could result in a lower
yield on your investment.
- Federal income tax laws require REITs to distribute at least 90% of
their taxable income to stockholders. This limits the earnings which
we may retain for corporate growth, such as property acquisition,
development or expansion and makes us more dependent upon additional
debt or equity financing than corporations which are not REITs. If
we borrow more funds in the future, more of our operating cash will
be needed to make debt payments and cash available for distributions
may therefore decrease.
- In connection with future property acquisitions, we may issue
additional shares of common stock or interests in other entities
that own our properties. We cannot predict the number of shares of
common stock, units or interests which we may issue, or the effect
that these additional shares might have on cash available for
distributions to you. If we issue additional shares, they could
reduce the cash available for distributions to you.
- We make distributions to our stockholders to comply with the
distribution requirements of the Internal Revenue Code and to
eliminate, or at least minimize, exposure to federal income taxes
and the nondeductible REIT excise tax. Differences in timing between
the
16
<Page>
receipt of income and the payment of expenses and the effect of
required debt payments could require us to borrow funds on a short
term basis to meet the distribution requirements that are necessary
to achieve the tax benefits associated with qualifying as a REIT.
OUR DERIVATIVE FINANCIAL INSTRUMENTS USED TO HEDGE AGAINST INTEREST RATE
FLUCTUATIONS COULD REDUCE THE OVERALL RETURNS ON YOUR INVESTMENT. We may use
derivative financial instruments to hedge exposures to changes in interest rates
on loans secured by our properties. To the extent we do, we are exposed to
credit risk and market risk. Credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty owes us, which creates credit
risk for us. When the fair value of a derivative contract is negative, we owe
the counterparty and, therefore, it does not possess credit risk.
Our hedging strategy and use of derivative financial instruments may reduce
the overall returns on your investments.
As we have yet to raise any money, our board has not yet established
policies and procedures regarding our use of derivative financial instruments
for hedging or other purposes.
WE COULD ISSUE MORE SHARES IN THE FUTURE, WHICH COULD REDUCE THE MARKET
PRICE OF OUR OUTSTANDING SHARES. We have the power to issue more shares of our
common stock in the future. We cannot predict the effect on the market price of
our outstanding common stock, if any, of future sales by us of shares of our
common stock, or the availability of shares for future sales through the
exercise of options granted to independent directors under our independent
director stock option plan. The issuance of these additional shares, or the
perception that these shares could be issued, could adversely affect the
prevailing market prices, if any, for our common stock.
OUR SHARE REPURCHASE PROGRAM IS LIMITED TO 5% OF THE WEIGHTED AVERAGE
NUMBER OF SHARES OF OUR STOCK OUTSTANDING DURING THE PRIOR CALENDAR YEAR AND MAY
BE CHANGED OR TERMINATED BY US, THEREBY REDUCING THE POTENTIAL LIQUIDITY OF YOUR
INVESTMENT. In accordance with our share repurchase program, a maximum of 5% of
the weighed average number of shares of our stock outstanding during the prior
calendar year may be repurchased by us. This standard limits the number of
shares we can purchase. Our board also has the ability to change or terminate,
at any time, our share repurchase program. If we terminate or modify our share
repurchase program or if we do not have sufficient funds available to repurchase
all shares that our stockholders request to repurchase, then our stockholders'
ability to liquidate their shares will be diminished.
STOCKHOLDERS HAVE LIMITED CONTROL OVER CHANGES IN OUR POLICIES. Our board
of directors determines our major policies, including our investment objectives,
financing, growth, debt capitalization, REIT qualification and distributions.
Our board of directors may amend or revise these and other policies without a
vote of the stockholders. This means that stockholders will have limited control
over changes in our policies.
IF WE INVEST IN JOINT VENTURES, THE OBJECTIVES OF OUR PARTNERS MAY CONFLICT
WITH OUR OBJECTIVES. We may make investments in joint ventures or other
partnership arrangements between us and affiliates of our sponsor or with
unaffiliated third parties. Investments in joint ventures which own real
properties may involve risks otherwise not present when we purchase real
properties directly. For example, our co venturer may file for bankruptcy
protection, may have economic or business interests or goals which are
inconsistent with our interests or goals, or may take actions contrary to our
instructions, requests, policies or objectives. Among other things, actions by a
co venturer might subject real properties owned by the
17
<Page>
joint venture to liabilities greater than those contemplated by the terms of the
joint venture or other adverse consequences.
IF WE SELL PROPERTIES BY PROVIDING FINANCING TO PURCHASERS, WE WILL BEAR
THE RISK OF DEFAULT BY THE PURCHASER. If we decide to sell any of our
properties, we will use our best efforts to sell for cash. However, we may sell
our properties by providing financing to purchasers. When we provide financing
to purchasers, we will bear the risk of default by the purchaser and will be
subject to remedies provided by law. There are no limitations or restrictions on
our ability to take purchase money obligations. We may therefore take a purchase
money obligation secured by a mortgage as part payment for the purchase price.
The terms of payment to us will be affected by custom in the area where the
property being sold is located and the then-prevailing economic conditions. If
we receive promissory notes or other property in lieu of cash from property
sales, the distribution of the proceeds of sales to our stockholders, or their
reinvestment in other properties, will be delayed until the promissory notes or
other property are actually paid, sold, refinanced or otherwise disposed of. In
some cases, we may receive initial down payments in cash and other property in
the year of sale in an amount less than the selling price and subsequent
payments will be spread over a number of years.
IF WE DO NOT RAISE SUFFICIENT FUNDS, WE MAY NOT FULFILL OUR INVESTMENT
OBJECTIVES, INCLUDING ASSET DIVERSIFICATION. We are making this offering on a
best efforts basis and it is conditioned on the sale of at least 200,000 shares
of common stock for $2,000,000. Because this offering will be made on a best
efforts basis, our potential profitability and our ability to continue to
diversify our investments, both geographically and by type of properties
purchased, will be limited by the amount of funds we raise. We will be able to
purchase additional properties only as additional funds are raised. We cannot
guarantee that we will sell the minimum number of shares and, if we do not, all
proceeds from subscribers will be returned to them together with the interest
earned on the proceeds. We have committed to pay approximately $26 million for
the property to be purchased by us located in Phoenix, Arizona. In addition,
expenses that we will incur in connection with this offering will impact the
amount of funds that we have available to fulfill our investment objectives. If
we only sell the minimum amount, we will incur $300,000 in expenses, and
therefore will only have $1.7 million available for investment purposes. Funds
that we apply towards offering expenses will reduce the amount of funds
available for investment purposes. If we do not raise the minimum offering
amount, then we will not be able to fulfill our investment objectives. See "Plan
of Distribution -- Escrow Conditions" for explanations of when uninvested
proceeds and escrowed funds will be returned to you. If we sell the maximum
amount, we estimate our total expenses will be $277 million, leaving
approximately $2.4 billion available for investment purposes.
DELAYS IN ACQUISITIONS OF PROPERTIES MAY HAVE AN ADVERSE EFFECT. Delays we
encounter in the selection, acquisition and development of properties could
adversely affect your returns and distributions on your investment. Where we
acquire properties prior to the start of construction or during the early stages
of construction, it will typically take several months to complete construction
and rent available space. Therefore, you could suffer delays in your
distributions attributable to those particular properties. In addition, it takes
a certain amount of time to locate, negotiate an acceptable purchase contract,
conduct due diligence and ultimately acquire a property. If we are unable to
invest our offering proceeds in income producing real properties in a timely
manner, this may adversely affect the funds available for distribution.
WE MAY NOT BE ABLE TO IMMEDIATELY INVEST PROCEEDS IN REAL ESTATE, WHICH
WILL HARM YOUR RETURNS. Until we invest the proceeds of this offering in real
estate investments, we may invest in short-term, highly liquid or other
authorized investments. Such short-term investments are not likely to earn as
high a return as we expect to earn on our real estate investments, and we cannot
guarantee how long it will take us to fully invest the proceeds of this offering
in real estate investments. If we are unable to locate and
18
<Page>
close on real estate investments promptly, or in a manner consistent with the
capital we raise, the funds available for your distributions could be reduced.
WE DEPEND ON OUR BOARD OF DIRECTORS, ADVISOR AND PROPERTY MANAGER AND
LOSING THOSE RELATIONSHIPS COULD NEGATIVELY AFFECT OUR OPERATIONS. Our board of
directors has supervisory control over all aspects of our operations. Our
ability to achieve our investment objectives will depend to a large extent on
the board's ability to oversee, and the quality of, the management provided by
the advisor, the property manager, their affiliates and employees for day-to-day
operations. Therefore, we depend heavily on the ability of the advisor and its
affiliates to retain the services of each of its executive officers and key
employees. However, none of these individuals has an employment agreement with
the advisor or its affiliates. The loss of any of these individuals could have a
material adverse effect on us. These individuals include Robert D. Parks, G.
Joseph Cosenza, Thomas P. McGuinness, Roberta S. Matlin and Brenda G. Gujral.
Our advisor must reimburse us for certain operational stage expenses
exceeding 15%. If the advisor's net worth or cash flow is not sufficient to
cover these expenses, we will not be reimbursed.
THERE ARE CONFLICTS OF INTEREST BETWEEN US AND OUR AFFILIATES. Our
operation and management may be influenced or affected by conflicts of interest
arising out of our relationship with our affiliates. Our advisor and its
affiliates are or will be engaged in other activities that will result in
potential conflicts of interest with the services that the advisor and
affiliates will provide to us. Those officers could take actions that are more
favorable to other entities than to us. The resolution of conflicts in favor of
other entities could have a negative impact on our financial performance. These
affiliates include, Inland Retail Real Estate Trust, Inc., Inland Western Retail
Real Estate Advisory Services, Inc., Inland Real Estate Corporation, Inland Real
Estate Exchange Corporation and entities to be formed by The Inland Group, Inc.,
Inland Western Retail Real Estate Advisory Services, Inc., our advisor. Inland
Real Estate Corporation is a publicly registered REIT. Inland Real Estate
Corporation is a self-administered REIT and is no longer affiliated with The
Inland Group. Inland Real Estate Corporation purchases shopping centers located
in the Midwest. Inland Retail Real Estate Trust, Inc. is affiliated with The
Inland Group, Inc. Inland Retail Real Estate Trust, Inc. purchases shopping
centers located east of the Mississippi River. Inland Real Estate Exchange
Corporation is a subsidiary of Inland Real Estate Investment Corporation. Inland
Real Estate Exchange Corporation provides replacement properties for people
wishing to complete an IRS Section 1031 real estate exchange. Our advisor
receives fees based on the book value of the properties under management.
Specific conflicts of interest between us and our affiliates include:
- WE MAY ACQUIRE PROPERTIES FROM AFFILIATES OF OUR SPONSOR IN
TRANSACTIONS IN WHICH THE PRICE WILL NOT BE THE RESULT OF ARM'S
LENGTH NEGOTIATIONS. The prices we pay to affiliates of our sponsor
for our properties will be equal to the prices paid by them, plus
the costs incurred by them relating to the acquisition and financing
of the properties. These prices will not be the subject of arm's
length negotiations, which could mean that the acquisitions may be
on terms less favorable to us than those negotiated in an
arm's-length transaction. The result of these transactions could
cause us to pay more for particular properties than we would have in
an arm's length transaction and therefore, adversely effect our cash
flow and our ability to pay your distributions.
- WE MAY PURCHASE REAL PROPERTIES FROM PERSONS WITH WHOM OUR ADVISOR
OR ITS AFFILIATES HAVE PRIOR BUSINESS RELATIONSHIPS AND OUR
INTERESTS IN THESE BUSINESS RELATIONSHIPS MAY BE DIFFERENT FROM THE
INTERESTS OF OUR ADVISOR OR ITS AFFILIATES IN THESE BUSINESS
RELATIONSHIPS. We may purchase properties from third parties who
have sold properties in the past, or who may sell properties in the
future, to our advisor or its
19
<Page>
affiliates. If we purchase properties from these third parties, our
advisor will experience a conflict between our current interests and
its interest in preserving any ongoing business relationship with
these sellers. This could result in our advisor or its affiliates
recommending properties that may be in the best interest of the
third party seller, but not our best interest. This could adversely
impact our portfolio by causing us to invest in properties that are
not necessarily in our best interest.
- OUR ADVISOR AND ITS AFFILIATES RECEIVE COMMISSIONS, FEES AND OTHER
COMPENSATION BASED UPON OUR INVESTMENTS AND THEREFORE OUR ADVISOR
AND ITS AFFILIATES MAY RECOMMEND THAT WE MAKE INVESTMENTS IN ORDER
TO INCREASE THEIR COMPENSATION. Our advisor and its affiliates
receive commissions, fees and other compensation based upon our
investments. They benefit by us retaining ownership of our assets
and leveraging our assets, while you may be better served by sale or
disposition or not leveraging the assets. In addition, our advisor's
ability to receive fees and reimbursements depends on our continued
investment in properties and in other assets which generate fees.
Our advisor received fees based on the book value of the properties
under management. Our property manager receives fees based on the
income from properties under management. Therefore, our advisor
and/or property manager may recommend that we purchase properties
that generate fees for our advisor and property manager, but are not
necessarily the most suitable investment for our portfolio. In
addition, our affiliates, who receive fees, including our advisor,
may recommend that we acquire properties, which may result in our
incurring substantive amounts of indebtedness. Therefore, the
interest of our advisor and its affiliates in receiving fees may
conflict with our ability to earn income and may result in our
incurring substantive amounts of indebtedness. The resolution of
this conflict of interest may adversely impact our cash flow and our
ability to pay your distributions.
- OUR ADVISOR MAY HAVE CONFLICTING FIDUCIARY OBLIGATIONS IF WE ACQUIRE
PROPERTIES WITH ITS AFFILIATES. Our advisor may cause us to acquire
an interest in a property through a joint venture with its
affiliates. In these circumstances, our advisor will have a
fiduciary duty to both us and its affiliates participating in the
joint venture. The resolution of this conflict of interest may cause
the advisor to sacrifice our best interest in favor of the seller of
the property and therefore, we may enter into a transaction that is
not in our best interest. The resolution of this conflict of
interest may negatively impact our financial performance.
- THERE IS COMPETITION FOR THE TIME AND SERVICES OF OUR ADVISOR AND
OUR ADVISOR MAY NOT DEDICATE THE TIME NECESSARY TO MANAGER OUR
BUSINESS. We rely on our advisor and its affiliates for our daily
operation and the management of our assets. Our officers and other
personnel of our advisor and its affiliates have conflicts in
allocating their management time, services and functions among the
real estate investment programs they currently service and any
future real estate investment programs or other business ventures
which they may organize or serve. Those personnel could take actions
that are more favorable to other entities than to us. The resolution
of conflicts in favor of other entities could have a negative impact
on our financial performance.
- INLAND SECURITIES CORPORATION IS PARTICIPATING AS MANAGING DEALER IN
THE SALE OF THE SHARES. Inland Securities Corporation is our
managing dealer of this offering and is affiliated with The Inland
Group. Our managing dealer is entitled to selling commissions,
reimbursement for marketing and due diligence expenses, and the
receipt of warrants. Our managing dealer may be subject to a
conflict of interest arising out of
20
<Page>
its participation in this offering and its affiliation with The
Inland Group in performing its "due diligence" obligations which
arise under the Securities Act of 1933. The resolution of this
conflict of interest could have a negative impact on our financial
performance.
- WE MAY ACQUIRE THE BUSINESS OF OUR ADVISOR AND OUR PROPERTY MANAGER
WITHOUT FURTHER ACTION BY OUR STOCKHOLDERS. During the term of our
agreements with our advisor and our property manager, we have the
option to acquire or consolidate the business conducted by them
without any consent of our stockholders, our advisor or our property
manager. We may elect to exercise this right at any time after
August 20, 2008. This unfettered discretion could cause us to take
action that otherwise we would not be able to do and therefore,
could have a negative impact on our financial performance.
- WE DO NOT HAVE ARM'S-LENGTH AGREEMENTS, WHICH COULD CONTAIN TERMS
WHICH ARE NOT IN OUR BEST INTEREST. As we have noted, our agreements
and arrangements with our advisor or any of its affiliates,
including those relating to compensation, are not the result of
arm's length negotiations. These agreements may contain terms that
our not in our best interest and would not otherwise be applicable
if we entered into arm's-length agreements. See "Conflicts of
Interest" for a discussion of various conflicts of interest.
WE CANNOT PREDICT THE AMOUNTS OF COMPENSATION TO BE PAID TO OUR ADVISOR AND
OUR OTHER AFFILIATES. Because the fees that we will pay to our advisor and our
other affiliates are based on the level of our business activity, it is not
possible to predict the amounts of compensation that we will be required to pay
these entities. In addition, because key employees of our affiliates are given
broad discretion to determine when to consummate a transaction, we rely on these
key persons to dictate the level of our business activity. Fees paid to our
affiliates will reduce funds available for distribution. Because we cannot
predict the amount of fees due to these affiliates, we cannot predict how
precisely such fees will impact our distributions.
THE MANAGING DEALER HAS NOT MADE AN INDEPENDENT REVIEW OF US OR THE
PROSPECTUS. The managing dealer, Inland Securities Corporation, is one of our
affiliates and will not make an independent review of us or the offering.
Accordingly, you do not have the benefit of an independent review of the terms
of this offering. Further, the due diligence investigation of us by the managing
dealer, also an affiliate, cannot be considered to be an independent review and,
therefore, may not be as meaningful as a review conducted by an unaffiliated
broker-dealer or investment banker. In addition, a substantial portion of the
proceeds of the offering will be paid to the managing dealer for managing the
offering, including cash selling commissions, a marketing contribution and a due
diligence expense allowance.
OUR RIGHTS AND THE RIGHTS OF OUR STOCKHOLDERS TO TAKE ACTION AGAINST OUR
DIRECTORS AND OFFICERS AND THE ADVISOR ARE LIMITED. Maryland law provides that a
director has no liability in the capacity as a director if he performs his
duties in good faith, in a manner he reasonably believes to be in our best
interests, and with the care that an ordinary prudent person in a like position
would use under similar circumstances. Maryland law also provides that an act by
a director of a Maryland corporation is presumed to satisfy the standards of the
preceding sentence. Additionally, our articles of incorporation limit the
liability of our directors and officers to us and to our stockholders for
monetary damages to the maximum extent permitted under Maryland law. Our
articles of incorporation, in the case of our directors, officers, employees and
agents, and the advisory agreement, in the case of the advisor, require us to
indemnify our directors, officers, employees and agents and the advisor for
actions taken by them in good faith and without negligence or misconduct.
Moreover, we have entered into separate indemnification agreements with each of
our directors and some of our executive officers. As a result, we and our
stockholders may have more limited rights against our directors, officers,
employees and agents, and the advisor than might otherwise exist under common
law. In addition, we may be obligated to fund
21
<Page>
the defense costs incurred by our directors, officers, employees and agents or
the advisor in some cases. See "Limitation of Liability and Indemnification of
Directors, Officers and Our Advisors."
THE BUSINESS OF OUR ADVISOR AND OUR PROPERTY MANAGER MAY BE ACQUIRED BY US
WITHOUT FURTHER ACTION OF OUR STOCKHOLDERS. During the term of our agreements
with our advisor and our property manager, we have the option to cause the
business conducted by our advisor and/or our property manager (including all of
their assets) to be acquired by or consolidated into us, without any consent of
our stockholders, our advisor or our property manager or their respective board
of directors or stockholders or shareholders in certain instances. We may elect
to exercise this right as soon as any time after five years from the date of
this prospectus. Our decision to exercise this right will be determined by a
vote of a majority of our directors not otherwise interested in the transaction
(including a majority of our independent directors). Our advisor and our
property manager and/or their respective stockholders and shareholders will
receive in connection with such an acquisition and in exchange for the transfer
of all of the stock or assets of our advisor and/or our property manager, as the
case may be, and for terminating their contractual relationships with us and the
release or waiver of all their fees payable under the provisions of those
contractual arrangements until their stated termination, but not paid, a
determinable number of our shares. We will be obligated to pay any fees accrued
under such contractual arrangements for services rendered through the closing of
such acquisitions. In the event such an acquisition transaction is structured as
a purchase of assets by us or a share exchange in which we are the acquiring
corporation, our articles of incorporation and Maryland law will permit us to
enter into and to consummate such a transaction without obtaining the approval
of our stockholders. We do not presently intend to seek such stockholder
approval if it is not then required by Maryland law or our articles of
incorporation. Any such transaction will occur, if at all, only if our board of
directors obtains a fairness opinion from a recognized financial advisor or
institution providing valuation services to the effect that the consideration to
be paid therefore is fair, from a financial point of view, to our stockholders.
As a result, our stockholders will not have a right to vote on a decision to
acquire the advisor or property manager and such transaction could dilute your
holdings.
YOUR PERCENTAGE OF OWNERSHIP MAY BECOME DILUTED IF WE ISSUE NEW SHARES OF
STOCK. Stockholders have no rights to buy additional shares of stock in the
event we issue new shares of stock, known as preemptive rights. We may issue
common stock, convertible debt or preferred stock in a subsequent public
offering or a private placement, upon exercise of options, or to sellers of
properties we directly or indirectly acquire instead of, or in addition to, cash
consideration. Investors purchasing common stock in this offering who do not
participate in any future stock issues will experience dilution in the
percentage of the issued and outstanding stock they own. Your investment will
not be diluted as a result of any future stock issues if we sell any
subsequently issued common stock for cash or property having a value of not less
than $10 per share. Options to purchase common stock to be issued to independent
directors under our independent director stock option plan, and/or convertible
securities, if any, likely will be exercised or converted at a time when we seek
to obtain needed capital through a new offering of our securities and on terms
more favorable than those provided by the offered securities. As long as options
on convertible securities remain unexercised or unconverted, the terms on which
we could raise additional capital may be adversely affected, increasing the
likelihood of your ownership percentage being diluted.
THERE ARE INHERENT RISKS WITH REAL ESTATE INVESTMENTS. All real property
investments are subject to some degree of risk. Equity real estate investments
cannot be quickly converted to cash. This limits our ability to promptly vary
our portfolio in response to changing economic, financial and investment
conditions. Real property investments are also subject to adverse changes in
general economic conditions or local conditions which reduce the demand for
rental space. Other factors also affect real estate values, including:
22
<Page>
- possible federal, state or local regulations and controls affecting
rents, prices of goods, fuel and energy consumption and prices,
water and environmental restrictions;
- increasing labor and material costs; and
- the attractiveness of the property to tenants in the neighborhood.
The yields available from equity investments in real estate depend in large
part on the amount of rental income earned, as well as property operating
expenses and other costs we incur. If our properties do not generate revenues
sufficient to meet operating expenses, we may have to borrow amounts to cover
fixed costs, and our cash available for distributions may be adversely affected.
Prior investment programs of our sponsor experienced mortgage defaults and
restructuring of debt. The principal real estate related adverse effects
experienced by prior investment programs sponsored by The Inland Group and its
affiliates were mortgage defaults and restructuring of debt.
ADVERSE ECONOMIC CONDITIONS IN OUR PRIMARY GEOGRAPHIC REGION AND IN THE
MARKET FOR RETAIL SPACE COULD REDUCE OUR INCOME AND DISTRIBUTIONS TO YOU. Our
properties will be located mainly in states west of the Mississippi River in the
United States. Our properties will primarily be used as retail establishments,
principally multi-tenant shopping centers. The economic performance of our
properties could be affected by changes in local economic conditions. Our
performance is therefore linked to economic conditions in this region and in the
market for retail space generally. Therefore, to the extent that there are
adverse economic conditions in this region and in the market for retail space
generally that impact the market rents for retail space, such conditions could
result in a reduction of our income and cash available for distributions and
thus affect the amount of distributions we can make to you.
In addition, we intend to predominantly own and operate grocery and
discount anchored retail centers. To the extent that the investing public has a
negative perception of the retail sector, the value of our common stock may be
negatively impacted, thereby resulting in the shares trading at a discount below
the inherent value of our assets as a whole.
RISING EXPENSES COULD REDUCE CASH FLOW AND FUNDS AVAILABLE FOR FUTURE
ACQUISITIONS. Our properties and any properties we buy in the future, are and
will be subject to operating risks common to real estate in general, any or all
of which may negatively affect us. If any property is not fully occupied or if
rents are being paid in an amount that is insufficient to cover operating
expenses, we could be required to expend funds with respect to that property for
operating expenses. The properties will be subject to increases in tax rates,
utility costs, operating expenses, insurance costs, repairs and maintenance and
administrative expenses.
While some of our properties may be leased on a triple-net-lease basis or
require the tenants to pay a portion of such expenses, renewals of leases or
future leases may not be negotiated on that basis, in which event we will have
to pay those costs. If we are unable to lease properties on a triple-net-lease
basis or on a basis requiring the tenants to pay all or some of such expenses,
or if tenants fail to pay required tax, utility and other impositions, we could
be required to pay those costs which could adversely affect funds available for
future acquisitions or cash available for distributions.
IF OUR TENANTS ARE UNABLE TO MAKE RENTAL PAYMENTS, IF THEIR RENTAL PAYMENTS
ARE REDUCED, OR IF THEY TERMINATE A LEASE, OUR FINANCIAL CONDITION AND ABILITY
TO PAY DISTRIBUTIONS WILL BE ADVERSELY AFFECTED. We are subject to the risk that
tenants, as well as lease guarantors, if any, may be unable to make their lease
payments or may decline to extend a lease upon its expiration. A default by a
tenant, the failure of a guarantor to fulfill its obligations or other premature
termination of a lease, or a tenant's
23
<Page>
election not to extend a lease upon its expiration, could have an adverse effect
on our financial condition and our ability to pay distributions.
OUR FINANCIAL CONDITION AND ABILITY TO MAKE DISTRIBUTIONS MAY BE ADVERSELY
AFFECTED BY THE BANKRUPTCY OR INSOLVENCY, A DOWNTURN IN THE BUSINESS, OR A LEASE
TERMINATION OF A TENANT THAT OCCUPIES A LARGE AREA OF THE RETAIL CENTER OR AN
ANCHOR TENANT. Generally, any tenant occupying a large portion of the gross
leasable area of a retail center, a tenant of any of the triple-net single-user
retail properties outside the primary geographical area of investment, commonly
referred to as an anchor tenant, or a tenant that is an anchor tenant at more
than one retail center, may become insolvent, may suffer a downturn in business,
or may decide not to renew its lease. Any of these events would result in a
reduction or cessation in rental payments to us and would adversely affect our
financial condition. A lease termination by an anchor tenant could result in
lease terminations or reductions in rent by other tenants whose leases permit
cancellation or rent reduction if an anchor tenant's lease is terminated. In
certain properties where there are large tenants, other tenants may require that
if certain large tenants or "shadow" tenants discontinue operations, a right of
termination or reduced rent may exist. In such event, we may be unable to
re-lease the vacated space. Similarly, the leases of some anchor tenants may
permit the anchor tenant to transfer its lease to another retailer. The transfer
to a new anchor tenant could cause customer traffic in the retail center to
decrease and thereby reduce the income generated by that retail center. A
transfer lease to a new anchor tenant could also allow other tenants to make
reduced rental payments or to terminate their leases at the retail center. If we
are unable to re-lease the vacated space to a new anchor tenant, we may incur
additional expenses in order to re-model the space to be able to re-lease the
space to more than one tenant.
IF A TENANT CLAIMS BANKRUPTCY, WE MAY BE UNABLE TO COLLECT BALANCES DUE
UNDER RELEVANT LEASES. Any or all of the tenants, or a guarantor of a tenant's
lease obligations, could be subject to a bankruptcy proceeding pursuant to Title
11 of the bankruptcy laws of the United States. Such a bankruptcy filing would
bar all efforts by us to collect pre-bankruptcy debts from these entities or
their properties, unless we receive an enabling order from the bankruptcy court.
Post-bankruptcy debts would be paid currently. If a lease is assumed, all
pre-bankruptcy balances owing under it must be paid in full. If a lease is
rejected by a tenant in bankruptcy, we would have a general unsecured claim for
damages. If a lease is rejected, it is unlikely we would receive any payments
from the tenant because our claim is capped at the rent reserved under the
lease, without acceleration, for the greater of one year or 15% of the remaining
term of the lease, but not greater than three years, plus rent already due but
unpaid. This claim could be paid only in the event funds were available, and
then only in the same percentage as that realized on other unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to collect past
due balances under the relevant leases, and could ultimately preclude full
collection of these sums. Such an event could cause a decrease or cessation of
rental payments which would mean a reduction in our cash flow and the amount
available for distributions to you. In the event of a bankruptcy, we cannot
assure you that the tenant or its trustee will assume our lease. If a given
lease, or guaranty of a lease, is not assumed, our cash flow and the amounts
available for distributions to you may be adversely affected.
WE MAY INCUR ADDITIONAL COSTS IN ACQUIRING OR RE-LEASING RETAIL PROPERTIES.
Some of the properties we may acquire may be designed or built primarily for a
particular tenant or a specific type of use. If a tenant fails to renew its
lease or defaults on its lease obligations, we may not be able to readily market
the property to a new tenant without substantial capital improvements or
remodeling, which may adversely affect our results of operation and financial
condition.
OUR PROPERTIES WILL BE SUBJECT TO COMPETITION FOR TENANTS AND CUSTOMERS. We
intend to locate our properties in developed areas. Therefore, there are and
will undoubtedly be numerous other retail
24
<Page>
properties within the market area of each of our properties which will compete
with our properties and which will compete with us for tenants. The number of
competitive properties could have a material effect on our ability to rent space
at our properties and the amount of rents charged. We could be adversely
affected if additional competitive properties are built in locations competitive
with our properties, causing increased competition for customer traffic and
creditworthy tenants. This could result in decreased cash flow from tenants and
may require us to make capital improvements to properties which we would not
have otherwise made, thus affecting cash available for distributions, and the
amount available for distributions to you.
OUR PROPERTIES WILL FACE COMPETITION WHICH MAY AFFECT TENANTS' ABILITY TO
PAY RENT AND THE AMOUNT OF RENT PAID TO US AND IN TURN AFFECT THE CASH AVAILABLE
FOR DISTRIBUTIONS AND THE AMOUNT OF DISTRIBUTIONS. Each of our properties will
be subject to competition from similar retail centers within their respective
market areas. Other retail centers within the market area of our properties will
compete with our properties for customers affecting their cash flows and thus
affecting their ability to pay rent. In addition, some of our tenant rent
payments may be based on the amount of sales revenue generated by them. If these
tenants experience competition, the amount of their rent may decrease and our
cash flow will decrease.
WE MAY BE RESTRICTED FROM RE-LEASING SPACE. In many cases, tenant leases
will contain provisions giving the tenant the exclusive right to sell particular
types of merchandise or provide specific types of services within the particular
retail center, or limit the ability of other tenants to sell such merchandise or
provide such services. When re-leasing space after a vacancy is required, these
provisions may limit the number and types of prospective tenants for the vacant
space. The failure to re-lease or to re-lease on satisfactory terms could result
in a reduction of net income, funds from operations and cash available for
distributions and, thus affect the amount of distributions to you.
WE MAY BE UNABLE TO SELL A PROPERTY IF OR WHEN WE DECIDE TO DO SO. The real
estate market is affected by many factors, such as general economic conditions,
availability of financing, interest rates and other factors, including supply
and demand, that are beyond our control. We cannot predict whether we will be
able to sell any property for the price or on the terms set by us, or whether
any price or other terms offered by a prospective purchaser would be acceptable
to us. We cannot predict the length of time needed to find a willing purchaser
and to close the sale of a property.
We may be required to expend funds to correct defects or to make
improvements before a property can be sold. We cannot assure you that we will
have funds available to correct such defects or to make such improvements.
In acquiring a property, we may agree to restrictions that prohibit the
sale of that property for a period of time or impose other restrictions, such as
a limitation on the amount of debt that can be placed or repaid on that
property. These provisions would restrict our ability to sell a property.
IF WE SUFFER LOSSES THAT ARE NOT COVERED BY INSURANCE OR THAT ARE IN EXCESS
OF INSURANCE COVERAGE, WE COULD LOSE INVESTED CAPITAL AND ANTICIPATED PROFITS.
Each tenant is responsible for insuring its goods and premises and, in some
circumstances, may be required to reimburse us for a share of the cost of
acquiring comprehensive insurance for the property, including casualty,
liability, fire and extended coverage customarily obtained for similar
properties in amounts which our advisor determines are sufficient to cover
reasonably foreseeable losses. Tenants of single-user properties leased on a
triple-net-lease basis typically are required to pay all insurance costs
associated with those properties. Material losses may occur in excess of
insurance proceeds with respect to any property as insurance may not have
sufficient resources to fund the losses. However, there are types of losses,
generally of a catastrophic nature, such as losses due to wars, acts of
terrorism, earthquakes, floods, hurricanes, pollution or
25
<Page>
environmental matters, which are either uninsurable or not economically
insurable, or may be insured subject to limitations, such as large deductibles
or copayments. Insurance risks associated with potential terrorism acts could
sharply increase the premium we pay for coverage against property and casualty
claims. Additionally, mortgage lenders in some cases have begun to insist that
specific coverage against terrorism be purchased by commercial property owners
as a condition for providing mortgage loans. It is uncertain whether such
insurance policies will be available, or available at reasonable cost, which
could inhibit our ability to finance or refinance our potential properties. In
such instances, we may be required to provide other financial support, either
through financial assurances or self-insurance, to cover potential losses. We
cannot assure you that will have adequate coverage for such losses. The
Terrorism Risk Insurance Act of 2002 is designed for a sharing of terrorism
losses between insurance companies and the federal government. We cannot be
certain how this act will impact us or what additional cost to us, if any, could
result. If such an event occurred to, or caused the destruction of, one or more
of our properties, we could lose both our invested capital and anticipated
profits from such property.
TERRORIST ATTACKS, SUCH AS THE ATTACKS THAT OCCURRED IN NEW YORK AND
WASHINGTON, D.C. ON SEPTEMBER 11, 2001, AND OTHER ACTS OF VIOLENCE OR WAR MAY
AFFECT THE MARKETS IN WHICH WE OPERATE, OUR OPERATIONS AND OUR PROFITABILITY.
Terrorist attacks may negatively affect our operations and your investment in
our common shares. We cannot assure you that there will not be further terrorist
attacks against the United States or United States businesses. Properties we may
acquire may be located in areas that may be susceptible to attack, which may
make these properties more likely to be viewed as terrorist targets than
similar, less recognizable properties. These attacks or armed conflicts may
directly impact the value of our properties through damage, destruction, loss or
increased security costs. We may obtain terrorism insurance as required by our
lenders. The terrorism insurance that we obtain may not be sufficient to cover
loss for damages to our properties as a result of terrorist attacks. In
addition, certain losses resulting from these types of events are uninsurable
and others would not be covered by our current terrorism insurance. Additional
terrorism insurance may not be available at a reasonable price or at all.
The United States' armed conflict in Iraq could have a further impact on
our tenants. The consequences of any armed conflict are unpredictable, and we
may not be able to foresee events that could have an adverse effect on our
business or your investment.
More generally, any of these events could result in increased volatility in
or damage to the United States and worldwide financial markets and economy. They
also could result in a continuation of the current economic uncertainty in the
United States or abroad. Our revenues will be dependent upon payment of rent by
retailers, which may be particularly vulnerable to uncertainty in the local
economy. Adverse economic conditions could affect the ability of our tenants to
pay rent, which could have a material adverse effect on our operating results
and financial condition, as well as our ability to pay distributions to
stockholders.
REAL ESTATE RELATED TAXES MAY INCREASE AND IF THESE INCREASES ARE NOT
PASSED ON TO TENANTS, OUR INCOME WILL BE REDUCED. Some local real property tax
assessors may seek to reassess some of our properties as a result of our
acquisition of the property. Generally, from time to time our property taxes
increase as property values or assessment rates change or for other reasons
deemed relevant by the assessors. An increase in the assessed valuation of a
property for real estate tax purposes will result in an increase in the related
real estate taxes on that property. Although some tenant leases may permit us to
pass through such tax increases to the tenants for payment, there is no
assurance that renewal leases or future leases will be negotiated on the same
basis. Increases not passed through to tenants will adversely affect our income,
cash available for distributions, and the amount of distributions to you.
REVENUE FROM OUR PROPERTIES DEPENDS ON THE AMOUNT OF OUR TENANTS' RETAIL
REVENUE, MAKING US VULNERABLE TO GENERAL ECONOMIC DOWNTURNS AND OTHER CONDITIONS
AFFECTING THE RETAIL INDUSTRY. Some of
26
<Page>
our leases may provide for base rent plus contractual base rent increases. Some
of our leases may also include a percentage rent clause for additional rent
above the base amount based upon a specified percentage of the sales our tenants
generate.
Under those leases which contain percentage rent clauses, our revenue from
tenants may increase as the sales of our tenants increase. Generally, retailers
face declining revenues during downturns in the economy. As a result, the
portion of our revenue which we derive from percentage rent leases could decline
upon a general economic downturn.
THE COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS AND OTHER GOVERNMENTAL LAWS
AND REGULATIONS MAY ADVERSELY AFFECT OUR INCOME AND THE CASH AVAILABLE FOR ANY
DISTRIBUTIONS. All real property and the operations conducted on real property
are subject to federal, state and local laws and regulations relating to
environmental protection and human health and safety. These laws and regulations
generally govern wastewater discharges, air emissions, the operation and removal
of underground and above-ground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials, and the
remediation of contamination associated with disposals. Some of these laws and
regulations may impose joint and several liability on tenants, owners or
operators for the costs of investigation or remediation of contaminated
properties, regardless of fault or the legality of the original disposal. Under
various federal, state and local laws, ordinances and regulations, a current or
previous owner, developer or operator of real estate may be liable for the costs
of removal or remediation of hazardous or toxic substances at, on, under, or in
its property. The costs of removal or remediation could be substantial. In
addition, the presence of such substances, or the failure to properly remediate
such substances, may adversely affect our ability to sell or rent such property
or to use such property as collateral for future borrowing.
Some of these laws and regulations have been amended so as to require
compliance with new or more stringent standards as of future dates. Compliance
with new or more stringent laws or regulations, stricter interpretation of
existing laws or the future discovery of environmental contamination may require
material expenditures by us. We cannot assure that future laws, ordinances or
regulations will not impose any material environmental liability, or that the
current environmental condition of our properties will not be affected by the
operations of the tenants, by the existing condition of the land, by operations
in the vicinity of the properties, such as the presence of underground storage
tanks, or by the activities of unrelated third parties.
These laws typically allow liens to be placed on the affected property. In
addition, there are various local, state and federal fire, health, life-safety
and similar regulations which we may be required to comply with, and be subject
to liability in the form of fines or damages for noncompliance.
State and federal laws in this area are constantly evolving, and we intend
to monitor these laws and take commercially reasonable steps to protect
ourselves from the impact of these laws, including obtaining environmental
assessments of each property acquired. We cannot assure that such assessments
will reveal all environmental liabilities or that a prior owner of a property
did not create a material environmental condition not known to us. We cannot
predict what other environmental legislation or regulations will be enacted in
the future, how existing or future laws or regulations will be administered or
interpreted, or what environmental conditions may be found to exist in the
future. We cannot assure that our business, assets, results of operations,
liquidity or financial condition will not be adversely affected by these laws,
which may adversely affect cash available for distributions, and the amount of
distributions to you.
OUR COSTS ASSOCIATED WITH COMPLYING WITH THE AMERICANS WITH DISABILITIES
ACT MAY AFFECT CASH AVAILABLE FOR DISTRIBUTIONS. Our properties will be subject
to the Americans with Disabilities Act of 1990.
27
<Page>
Under the Disabilities Act, all places of public accommodation are required to
comply with federal requirements related to access and use by disabled persons.
The Disabilities Act has separate compliance requirements for "public
accommodations" and "commercial facilities" that generally requires that
buildings and services, including restaurants and retail stores, be made
accessible and available to people with disabilities. The Disabilities Act's
requirements could require removal of access barriers and could result in the
imposition of injunctive relief, monetary penalties, or, in some cases, an award
of damages. We will attempt to acquire properties which comply with the
Disabilities Act or place the burden on the seller or other third party, such as
a tenant, to ensure compliance with the Disabilities Act. However, we cannot
assure that we will be able to acquire properties or allocate responsibilities
in this manner. If we cannot, our funds used for Disabilities Act compliance may
affect cash available for distributions and the amount of distributions to you.
IF A SALE OR LEASEBACK TRANSACTION IS RECHARACTERIZED, OUR FINANCIAL
CONDITION COULD BE ADVERSELY AFFECTED. We may enter into sale and leaseback
transactions, where we would purchase a property and then lease the same
property back to the person from whom we purchased it. In the event of the
bankruptcy of a tenant, a transaction structured as a sale and leaseback may be
recharacterized as either a financing or a joint venture, either of which
outcomes could adversely affect our business.
If the sale and leaseback were recharacterized as a financing, we might not
be considered the owner of the property, and as a result would have the status
of a creditor in relation to the tenant. In that event, we would no longer have
the right to sell or encumber our ownership interest in the property. Instead,
we would have a claim against the tenant for the amounts owed under the lease,
with the claim arguably secured by the property. The tenant/debtor might have
the ability to propose a plan restructuring the term, interest rate and
amortization schedule of its outstanding balance. If confirmed by the bankruptcy
court, we could be bound by the new terms, and prevented from foreclosing our
lien on the property. These outcomes could adversely affect our cash flow and
the amount available for distributions to you.
If the sale and leaseback were recharacterized as a joint venture, we and
our lessee could be treated as co-venturers with regard to the property. As a
result, we could be held liable, under some circumstances, for debts incurred by
the lessee relating to the property. The imposition of liability on us could
adversely affect our cash flow and the amount available for distributions to our
stockholders.
WE MAY INCUR ADDITIONAL COSTS IN ACQUIRING NEWLY CONSTRUCTED PROPERTIES
WHICH MAY ADVERSELY AFFECT CASH AVAILABLE FOR DISTRIBUTIONS TO YOU. We intend to
primarily acquire existing or newly constructed properties. We may purchase
properties that are subject to completion of construction and development. The
builder's failure to perform may result in tenants terminating leases. These
actions may increase our costs or necessitate legal action by us to rescind our
purchase of a property, to compel performance, or to sue for damages. Any such
legal action may result in increased costs to us.
OUR INVESTMENTS IN UNIMPROVED REAL PROPERTY MAY RESULT IN ADDITIONAL COST
TO US TO COMPLY WITH RE-ZONING RESTRICTIONS OR ENVIRONMENTAL REGULATIONS. We may
invest up to 10% of our assets in unimproved real property. Investments in
unimproved properties are subject to the risks of real estate investments in
general. The are also subject to risks and uncertainties associated with
re-zoning the land for higher use or development and environmental concerns of
governmental entities and/or community groups. We do not intend to invest in any
unimproved property which is not intended to be developed.
CONSTRUCTION AND DEVELOPMENT ACTIVITIES WILL EXPOSE US TO RISKS SUCH AS
COST OVERRUNS, CARRYING COSTS OF PROJECTS UNDER CONSTRUCTION OR DEVELOPMENT,
AVAILABILITY AND COSTS OF MATERIALS AND LABOR, WEATHER CONDITIONS AND GOVERNMENT
REGULATION. Should we elect to engage in construction and development
activities, in accordance with current pronouncements of the Internal Revenue
Service, we
28
<Page>
intend to have our employees only perform oversight and review functions. These
functions may include selecting sites, reviewing construction and tenant
improvement design proposals, negotiating and contracting for feasibility
studies, supervising compliance with local, state or federal laws and
regulations, negotiating contracts, oversight of construction, accounting and
obtaining financing. We will retain an independent general contractor to perform
the actual physical construction work on tenant improvements or the installation
of heating ventilation and air conditioning systems. These activities will
expose us to risks inherent in construction and development, including cost
overruns, carrying costs of projects under construction or development,
availability and costs of materials and labor, adverse weather conditions and
governmental regulation.
WE MAY ACQUIRE OR FINANCE PROPERTIES WITH LOCK-OUT PROVISIONS WHICH MAY
PROHIBIT US FROM SELLING A PROPERTY, OR MAY REQUIRE US TO MAINTAIN SPECIFIED
DEBT LEVELS FOR A PERIOD OF YEARS ON SOME PROPERTIES. Lock out provisions could
materially restrict us from selling or otherwise disposing of or refinancing
properties. These provisions would affect our ability to turn our investments
into cash and thus affect cash available for distributions to you. Lock out
provisions may prohibit us from reducing the outstanding indebtedness with
respect to any properties, refinancing such indebtedness on a nonrecourse basis
at maturity, or increasing the amount of indebtedness with respect to such
properties.
Lock out provisions could impair our ability to take actions during the
lock-out period that would otherwise be in the best interests of our
stockholders and, therefore, may have an adverse impact on the value of the
shares, relative to the value that would result if the lock-out provisions did
not exist. In particular, lock out provisions could preclude us from
participating in major transactions that could result in a disposition of our
assets or a change in control even though that disposition or change in control
might be in the best interests of our stockholders.
YOUR INVESTMENT HAS VARIOUS FEDERAL INCOME TAX RISKS. Although the
provisions of the Internal Revenue Code relevant to your investment are
generally described in the section of the prospectus titled "Federal Income Tax
Considerations," we strongly urge you to consult your own tax advisor concerning
the effects of federal, state and local income tax law on an investment and on
your individual tax situation.
IF WE FAIL TO QUALIFY AS A REIT OR TO MAINTAIN OUR REIT STATUS, OUR
DIVIDENDS WILL NOT BE DEDUCTIBLE TO US, AND OUR INCOME WILL BE SUBJECT TO
TAXATION. We intend to qualify as a REIT under the Internal Revenue Code of
1986, as amended, which will afford us significant tax advantages. The
requirements for this qualification, however, are complex. If we fail to meet
these requirements, our dividends will not be deductible to us and we will have
to pay a corporate level tax on our income. This would substantially reduce our
cash available to pay distributions and your yield on your investment. In
addition, tax liability might cause us to borrow funds, liquidate some of our
investments or take other steps which could negatively affect our operating
results. Moreover, if our REIT status is terminated because of our failure to
meet a technical REIT test, we would be disqualified from electing treatment as
a REIT for the four taxable years following the year in which REIT status is
lost.
YOU MAY HAVE TAX LIABILITY ON DISTRIBUTIONS YOU ELECT TO REINVEST IN COMMON
STOCK. If you participate in our distribution reinvestment program, you will be
deemed to have received, and for income tax purposes will be taxed on, the
amount reinvested in common stock. As a result, unless you are a tax-exempt
entity, you may have to use funds from other sources to pay your tax liability
on the value of the common stock received.
THE OPINION OF DUANE MORRIS LLP REGARDING OUR STATUS AS A REIT DOES NOT
GUARANTEE OUR ABILITY TO REMAIN A REIT. Our legal counsel, Duane Morris LLP,
will render its opinion upon commencement of this offering that we will qualify
as a REIT, based upon our representations as to the
29
<Page>
manner in which we will be owned, invest in assets, and operate, among other
things. Our qualification as a REIT depends upon our ability to meet, through
investments, actual operating results, distributions, and satisfaction of
specific stockholder rules, the various tests imposed by the Internal Revenue
Code. Duane Morris LLP will not review these operating results or compliance
with the qualification standards. This means that we cannot assure you that we
will satisfy the REIT requirements in the future. Also, this opinion represents
Duane Morris LLP's legal judgment based on the law in effect as of the date of
this prospectus and is not binding on the Internal Revenue Service, and could be
subject to modification or withdrawal based on future legislative, judicial or
administrative changes to the federal income tax laws, any of which could be
applied retroactively
EVEN REITS ARE SUBJECT TO FEDERAL AND STATE INCOME TAXES. Even if we
qualify and maintain our status as a REIT, we may become subject to federal
income taxes and related state taxes. For example, if we have net income from a
"prohibited transaction," such income will be subject to a 100% tax. We may not
be able to make sufficient distributions to avoid excise taxes applicable to
REITS. We may also decide to retain income we earn from the sale or other
disposition of our property and pay income tax directly on such income. In that
event, our stockholders would be treated as if they earned that income and paid
the tax on it directly. However, stockholders that are tax-exempt, such as
charities or qualified pension plans, would have no benefit from their deemed
payment of such tax liability. In addition, we may also be subject to state and
local taxes on our income or property, either directly or at the level of the
operating partnership or at the level of the other companies through which we
indirectly own our assets. We cannot assure you that we will be able to continue
to satisfy the REIT requirements.
IN VIEW OF THE COMPLEXITY OF THE TAX ASPECTS OF THE OFFERING, PARTICULARLY
IN LIGHT OF THE FACT THAT SOME OF THE TAX ASPECTS OF THE OFFERING WILL NOT BE
THE SAME FOR ALL INVESTORS, PROSPECTIVE INVESTORS ARE STRONGLY ADVISED TO
CONSULT THEIR TAX ADVISORS WITH SPECIFIC REFERENCE TO THEIR OWN TAX SITUATION
PRIOR TO AN INVESTMENT IN SHARES OF OUR COMMON STOCK.
AN INVESTMENT IN OUR COMMON STOCK MAY NOT BE SUITABLE FOR EVERY EMPLOYEE
BENEFIT PLAN. When considering an investment in our common stock, an individual
with investment discretion over assets of any pension plan, profit-sharing plan,
retirement plan, IRA or other employee benefit plan covered by ERISA should
consider whether the investment satisfies the fiduciary requirements of ERISA
and other applicable laws. In particular, attention should be paid to the
diversification requirements of Section 404(a)(1)(C) of ERISA in light of all
the facts and circumstances, including the portion of the plan's portfolio of
which the investment will be a part. All plan investors should also consider
whether the investment is prudent and meets plan liquidity requirements as there
may be only a limited market in which to sell or otherwise dispose of our common
stock, and whether the investment is permissible under the plan's governing
instrument. We have not, and will not, evaluate whether an investment in our
common stock is suitable for any particular plan. Rather, we will accept
entities as stockholders if an entity otherwise meets the suitability standards.
THE ANNUAL STATEMENT OF VALUE THAT WE WILL BE SENDING TO STOCKHOLDERS
SUBJECT TO ERISA AND TO CERTAIN OTHER PLAN STOCKHOLDERS IS ONLY AN ESTIMATE AND
MAY NOT REFLECT THE ACTUAL VALUE OF OUR SHARES. The annual statement of value
will report the value of each common stock based as of the close of our fiscal
year. No independent appraisals will be obtained and the value will be based
upon an estimated amount we determine would be received if our properties and
other assets were sold as of the close of our fiscal year and if such proceeds,
together with our other funds, were distributed pursuant to a liquidation.
However, the net asset value of each share of common stock will be deemed to be
$10 during this offering and for the first three years following the termination
of this offering. Because this is only an estimate, we may subsequently revise
any annual valuation that is provided. We cannot assure that:
30
<Page>
- a value included in the annual statement could actually be realized
by us or by our stockholders upon liquidation;
- stockholders could realize that value if they were to attempt to
sell their common stock; or
- an annual statement of value would comply with any reporting and
disclosure or annual valuation requirements under ERISA or other
applicable law. We will stop providing annual statements of value if
the common stock becomes listed for trading on a national stock
exchange or included for quotation on a national market system.
31
<Page>
CAUTIONING NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements that reflect
management's expectations and projections about our future results, performance,
prospects and opportunities. We have attempted to identify these forward-looking
statements by using words such as "may," "will," "expects," "anticipates,"
"believes," "intends," "expects," "estimates," "could" or similar expressions.
These forward-looking statements are based on information currently available to
us and are subject to a number of known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by these forward-looking statements. These factors include,
among other things, and are detailed on the previous pages:
- our common stock is not currently listed or traded on an exchange
and cannot be readily sold;
- we have no operating history nor established financing sources;
- we have identified only one property to be purchased with the
proceeds of this offering;
- if we raise the minimum amount, we will not have sufficient
resources to acquire the identified property. We need to raise in
excess of $26 million to acquire this property;
- although we anticipate that aggregate borrowings will not exceed 55%
of the combined fair market value of our properties, our charter
imposes a limitation on our borrowings of less than 300% of net
assets and there are risks associated with a high amount of
leverage;
- we have no ownership in our advisor and the advisor is owned by our
sponsor or their affiliates;
- our advisor and its affiliates will receive substantial fees,
including participation in proceeds from the sales, refinancing or
liquidation of our assets;
- our advisor, property manager and two of our directors are subject
to conflicts of interest as a result of their affiliation with The
Inland Group, including conflicts of interest relating to:
- the negotiation of the terms of the advisors and property management
agreements;
- the allocation of their time between us and their other business
ventures;
- decisions whether to acquire and dispose of properties;
- the purchase and sale of properties to or from the advisor and our
affiliates; and
- the allocation of investment opportunities between us and their
other business ventures.
- the management fee structure could result in our advisor
recommending riskier or more speculative investments;
- we may make distributions that include a return of principal for
federal tax purposes;
32
<Page>
- we may fail to qualify as a REIT;
- there are limits on ownership, transferability and redemption of
shares;
- our investment policies and strategies may be changed without
stockholder consent;
- our investments will lack geographic diversification;
- we will not be able to meet our business objectives if we only
acquire one single net leased property; and
- risks that incentive structure of fees payable to our advisor and
its affiliates may encourage our advisor to make investments that
have greater risks to generate higher fees.
You should not place undue reliance on any forward-looking statements.
Except as otherwise required by federal securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, changed circumstances or any
other reason after the date of this prospectus.
33
<Page>
HOW WE OPERATE
We intend to operate as a REIT for federal and state income tax purposes.
Our sponsor is Inland Real Estate Investment Corporation. Our sponsor was
instrumental in our organization.
We contract with Inland Western Retail Real Estate Advisory Services, Inc.
for its services as our advisor. Our advisor has the responsibility for our
day-to-day operations and the management of our assets.
In addition to the services of our advisor, we contract with Inland Western
Management Corp. for their services as our property manager. Inland Western
Management Corp. provides the day-to-day property management services for all of
our properties.
Our sponsor, Inland Real Estate Investment Corporation, is owned by The
Inland Group, Inc. Our advisor Inland Western Retail Real Estate Advisory
Services, Inc., is owned by our sponsor, and thus is indirectly controlled by
The Inland Group. In addition, our property manager, Inland Western Management
Corp. is owned by individuals who are affiliates of the Inland Group.
The Inland Group, together with its subsidiaries and affiliates, is a
fully-integrated group of legally and financially separate companies that have
been engaged in diverse facets of real estate for over 35 years providing the
following and other related services:
Property management Leasing
Marketing Acquisition
Disposition Development
Redevelopment Syndication
Renovation Construction
Finance Other related services
The following organizational chart depicts the services that affiliates or
our sponsor will render to us and our organizational structure.
34
<Page>
ORGANIZATIONAL CHART
<Table>
----------- ---------- ----------- ----------
Daniel L. Robert H. G. Joseph Robert D.
Goodwin* Baum* Cosenza* Parks*
----------- ---------- ----------- ----------
|| || || ||
============================================================================
||
-----------------------
THE INLAND GROUP, INC.*
-----------------------
||
================================================================================================================
|| || || || |
- --------------- ------------------- ------------------- ------------------- |
The Inland The Inland Property Inland Real Inland Real |
Services Group, Management Estate Investment Estate Transaction |
Inc. Group, Inc. Corporation Group, Inc. |
(our sponsor) |
- --------------- ------------------- ------------------- ------------------- |
| | || | |
| | ========================================= | |
| | || || || | |
| | ------------- --------------------- ------------------ | ----------------------
| | Inland Inland Western Retail Inland Partnership | Inland Mortgage
- --------------- ------------------ Securities Real Estate Advisory Property Sales | Investment Corporation
Inland Risk and Inland Western Corporation Services, Inc. Corporation |
Insurance Management Corp. (our advisor) |
Management (property manager) ------------- --------------------- ------------------ | ----------------------
Services, Inc. | | | |
- --------------- ------------------ | | | |
| | | | ============================== ================
| | | | || || || || ||
| | | | ------------- ----------- ----------- ----------- ---------------
| | | | Inland Real Inland Real Inland Real Inland Inland Mortgage
--------- | | | Estate Sales, Estate Estate Mortgage Servicing
Insurance | | | Inc. Development Acquisitions, Corporation Corporation
Services | | | Corporation Inc.
--------- | | | ------------- ----------- ----------- ----------- ---------------
| | | | | | | | |
| | | | | | | | |
| | | | -------------- | | | |
| | | | Real Estate | | | |
| | | | Sales Services | | | |
| | | | -------------- | | | |
| | | | | | | | |
| | | | | | | | |
| -------------------- ---------- --------------- | ------------------ ----------- --------- -------------
| Property Management Securities Organization, | Construction and Property Mortgage Mortgage Loan
| and Related Services Sales Advisory | Development Acquisition Brokerage Servicing
| and Real Estate | Services Services Services
| Services |
| -------------------- ---------- --------------- | ------------------ ----------- --------- -------------
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
- -----------------------------------------------------------------------------------------------------------------------------------
Inland Western Retail Real Estate Trust, Inc.
We will be principally owned by public investors. Ownership is represented by shares of our common stock
- -----------------------------------------------------------------------------------------------------------------------------------
</Table>
Solid lines indicate 100% ownership. Broken lines indicate service.
* The four indicated individuals control The Inland Group, Inc. and own
substantially all of its stock.
35
<Page>
CONFLICTS OF INTEREST
We are subject to conflicts of interest arising out of our relationship
with our sponsor, our advisor and their affiliates. All of our agreements and
arrangements with our advisor and its affiliates, including those relating to
compensation, are not the result of arm's length negotiations. Some of the
conflicts inherent in our transactions with our advisor and its affiliates, and
the limitations on our advisor adopted to address these conflicts, are described
below. Our advisor and its affiliates will try to balance our interests with
their own. However, to the extent that our advisor or its affiliates take
actions that are more favorable to other entities than to us, these actions
could have a negative impact on our financial performance and, consequently, on
distributions to you and the value of our stock. In addition, our directors and
officers and security holders may engage for their own account in business
activities of the types conducted or to be conducted by us and our subsidiaries.
THERE MAY BE CONFLICTING INVESTMENT OPPORTUNITIES AMONG AFFILIATES OF OUR
ADVISOR AND THE INLAND GROUP. Affiliates of our advisor and The Inland Group
have sponsored multiple previous investment programs. Our sponsor may also
sponsor other programs which may have investment objectives similar to ours.
Therefore, our sponsor, our advisor and their affiliates could face conflicts of
interest in determining which investment programs will have the first
opportunity to acquire real properties and other assets as they become
available.
In order to address this situation, we have an agreement with our advisor,
some of its affiliates, and Inland Retail Real Estate Trust, Inc., another REIT
sponsored by our sponsor. This agreement gives us the right to purchase property
in our primary geographic area of investment, which includes the states west of
the Mississippi River, placed under contract by our advisor or any of its
affiliates, if we are able to close the purchase within 60 days. Similarly,
Inland Retail Real Estate Trust, Inc. has the first opportunity to purchase
properties in its primary geographical area of investment, which is located in
states east of the Mississippi.
IN THE SITUATION INVOLVING SINGLE USER NET LEASED RETAIL PROPERTY LOCATED
ANYWHERE WITHIN THE UNITED STATES, AND BOTH OF US HAVE FUNDS AVAILABLE TO MAKE
THE PURCHASE, THE PROSPECTIVE PROPERTY WILL FIRST BE OFFERED TO INLAND RETAIL
REAL ESTATE TRUST, INC. IF INLAND REAL ESTATE TRUST, INC. DOES NOT PURCHASE THE
PROSPECTIVE PROPERTY, IT WILL THEN BE OFFERED TO US.
Factors which may be considered in connection with evaluating the
suitability of the prospective property or other asset for investment by a
particular investment program include:
- the effect of the acquisition on the diversification of each
program's portfolio;
- the amount of funds available for investment;
- cash flow; and
- the estimated income tax effects of the purchase and subsequent
disposition.
We currently focus on purchase of properties in the states west of the
Mississippi River which is outside Inland Retail Real Estate Trust Inc.'s
primary geographic area of investment. However, if any conflicts do arise, they
will be resolved as provided in the agreement with our advisor discussed above.
We currently have identified one property for purchase located in Phoenix,
Arizona. Neither The Inland Group nor any of its affiliates owns or has any
interest in properties adjacent to this property.
36
<Page>
All actions taken by our advisor or its affiliates which present potential
conflicts with us will be APPROVED BY A MAJORITY OF OUR INDEPENDENT DIRECTORS.
WE MAY ACQUIRE PROPERTIES FROM AFFILIATES OF OUR SPONSOR. The prices we pay
to affiliates of our sponsor for these properties will be equal to the prices
paid by them, plus the costs incurred by them relating to the acquisition and
financing of the properties. These prices will not be the subject of arm's
length negotiations, which could mean that the acquisitions may be on terms less
favorable to us than those negotiated in an arm's-length transaction. However,
our articles of incorporation provide that the purchase price of any property
acquired from an affiliate may not exceed its fair market value as determined by
a competent independent appraiser. In addition, the price must be approved by a
majority of our directors who have no financial interest in the transaction. If
the price to us exceeds the cost paid by our affiliate, there must be
substantial justification for the excess cost.
WE MAY PURCHASE REAL PROPERTIES FROM PERSONS WITH WHOM AFFILIATES OF OUR
ADVISOR HAVE PRIOR BUSINESS RELATIONSHIPS. We may purchase properties from third
parties who have sold properties in the past, or who may sell properties in the
future, to our advisor or its affiliates. If we purchase properties from these
third parties, our advisor will experience a conflict between our current
interests and its interest in preserving any ongoing business relationship with
these sellers. Nevertheless, our advisor has a fiduciary obligation to us.
PROPERTY MANAGEMENT SERVICES ARE BEING PROVIDED BY A COMPANY OWNED
PRINCIPALLY BY AFFILIATES OF THE INLAND GROUP. Our property manager, which is
owned principally by individuals who are our affiliates, provides property
management services to us pursuant to management services agreements which we
can terminate only in the event of gross negligence or willful misconduct on the
part of the property manager. However, our property management services
agreement provides that we pay our property manager a monthly management fee of
no greater than 90% of the fee which would be payable to an unrelated third
party providing such services. In addition, the advisor and the property manager
believe that the property manager has sufficient personnel and other required
resources to discharge all responsibilities to us.
OUR ADVISOR AND ITS AFFILIATES RECEIVE COMMISSIONS, FEES AND OTHER
COMPENSATION BASED UPON OUR INVESTMENTS. We believe that the compensation we
will pay to our advisor and its affiliates is no more than what we would pay for
similar services performed by independent firms. Some compensation is payable
whether or not there is cash available to make distributions to our
stockholders. To the extent this occurs, our advisor and its affiliates benefit
from us retaining ownership of our assets and leveraging our assets, while our
stockholders may be better served by sale or disposition or not leveraging the
assets. In addition, the advisor's ability to receive fees and reimbursements
depends on our continued investment in properties and in other assets which
generate fees. Our advisor received fees based on the book value of the
properties under management. Our property manager receives fees based on the
income from properties under management. Therefore, our advisor and/or property
manager may recommend that we purchase properties that generate fees for our
advisor and property manager, but are not necessarily the most suitable
investment for our portfolio. In addition, our affiliates, who receive fees,
including our advisor, may recommend that we acquire properties, which may
result in our incurring substantive amounts of indebtedness. Therefore, the
interest of the advisor and its affiliates in receiving fees may conflict with
the interest of our stockholders in earning income on their investment in our
common stock. Our advisor and its affiliates recognize that they have a
fiduciary duty to us and our stockholders, and have represented to us that their
actions and decisions will be made in the manner most favorable to us and our
stockholders.
While we will not make loans to our advisor or its affiliates, we may
borrow money from them for various purposes, including funding working capital
requirements. If we do, the terms, such as the
37
<Page>
interest rate, security, fees and other charges, will be at least as favorable
to us as those which would be charged by unaffiliated lending institutions in
the same locality on comparable loans. Any money borrowed from an affiliate of
The Inland Group is expected to be repaid within 180 days.
Our advisor and its affiliates may do business with others who do business
with us, although presently there are no instances of this. However, our advisor
or its affiliates may not receive rebates or participate in any reciprocal
business arrangements which would have the effect of circumventing our agreement
with our advisor.
OUR ADVISOR MAY HAVE CONFLICTING FIDUCIARY OBLIGATIONS IF WE ACQUIRE
PROPERTIES WITH ITS AFFILIATES. Our advisor may cause us to acquire an interest
in a property through a joint venture with its affiliates. In these
circumstances, our advisor will have a fiduciary duty to both us and its
affiliates participating in the joint venture. In order to minimize the conflict
between these fiduciary duties, the advisory agreement provides guidelines for
investments in joint ventures with affiliates. In addition, our articles of
incorporation require a majority of our disinterested directors to determine
that the transaction is fair and reasonable to us and is on terms and conditions
no less favorable than from unaffiliated third parties entering into the
venture.
THERE IS COMPETITION FOR THE TIME AND SERVICES OF OUR ADVISOR. We rely on
our advisor and its affiliates for our daily operation and the management of our
assets. Personnel of our advisor and its affiliates have conflicts in allocating
their management time, services and functions among the real estate investment
programs they currently service and any future real estate investment programs
or other business ventures which they may organize or serve. Our advisor and its
affiliates believe they have enough staff to perform their responsibilities in
connection with all of the real estate programs and other business ventures in
which they are involved.
INLAND SECURITIES CORPORATION IS PARTICIPATING AS MANAGING DEALER IN THE
SALE OF THE SHARES. Inland Securities Corporation is the managing dealer of the
offering and is affiliated with The Inland Group. The managing dealer is
entitled to selling commissions, reimbursement for marketing and due diligence
expenses, and the receipt of warrants. The managing dealer may be subject to a
conflict of interest arising out of its participation in this offering and its
affiliation with The Inland Group in performing its "due diligence" obligations
which arise under the Securities Act of 1933. However, the managing dealer
believes it has and will continue to properly perform these "due diligence"
activities.
WE MAY ACQUIRE THE BUSINESS OF OUR ADVISOR AND OUR PROPERTY MANAGER WITHOUT
FURTHER ACTION BY OUR STOCKHOLDERS. During the term of our agreements with our
advisor and our property manager, we have the option to acquire or consolidate
the business conducted by them without any consent of our stockholders, our
advisor or our property manager. We may elect to exercise this right at any time
after August 20, 2008. Before this date, we need the consent of the advisor and
the property manager to exercise this right. Our decision to exercise this right
will be determined by a vote of a majority of our disinterested directors. Our
advisor and our property manager and their shareholders will receive shares of
our common stock in the acquisition. The transaction will occur, if at all, only
if the board of directors obtains a fairness opinion from a recognized financial
valuation service provider to the effect that the consideration to be paid is
fair, from a financial point of view, to our stockholders. We will be obligated
to pay any fees accrued under any contractual arrangements we have with the
advisor and/or the property manager for services rendered through the closing of
such acquisitions.
WE DO NOT HAVE ARM'S-LENGTH AGREEMENTS. As we have noted, our agreements
and arrangements with our advisor or any of its affiliates, including those
relating to compensation, are not the result of arm's length negotiations, but
we believe these agreements and arrangements approximate the terms of arm's
length transactions.
38
<Page>
COMPENSATION TABLE
The compensation arrangements between us and our advisor, The Inland Group
and its affiliates, were not determined by arm's-length negotiations. See
"Conflicts of Interest." The following table discloses the compensation which we
may pay our advisor and its affiliates. In those instances in which there are
maximum amounts or ceilings on the compensation which may be received, our
advisor and its affiliates may not recover any excess amounts for those services
by reclassifying them under a different compensation or fee category.
We define net income as total revenues less expenses other than additions
to reserves for depreciation or bad debts or other similar non-cash reserves.
When we use the term "net income" for purposes of calculating some expenses and
fees, it excludes the gain from the sale of our assets. This definition of net
income is prescribed by the Statement of Policy Regarding REITs adopted by the
North American Securities Administrators Association, Inc., or NASAA; but it is
not in accordance with generally accepted accounting principles in the United
States, because depreciation and other non-cash reserves are not deducted in
determining net income under the NASAA REIT Statement. Excluding depreciation
will result in not reimbursing our Advisor for a non-cash expenditure and not
excluding the gain from the sale of our assets could result in greater net
income on which the 25% reimbursement to our Advisor is allowed.
NONSUBORDINATED PAYMENTS
The following aggregate amounts of compensation, allowances and fees we may
pay to our advisor and its affiliates are not subordinated to the returns on net
investments that we are required to pay to our stockholders.
<Table>
<Caption>
TYPE OF COMPENSATION AND ESTIMATED MAXIMUM
RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ---------------------------------- ---------------------------------------------- ---------------------------------
OFFERING STAGE
Selling commissions payable to the We will pay a selling commission of 7.5% of The actual amount depends upon
managing dealer and dealers the sale price for each share (and reallow the amount of shares sold. We
designated by the managing dealers 7%), subject to reduction for special sales will not pay selling commissions
referred to as soliciting under the circumstances as described in the if the minimum offering is not
dealers. Neither the managing "Plan of Distribution - Compensation - We Will sold. If only the minimum
dealer, the soliciting dealers, Pay For the Sale of Our Shares." offering is sold and there are
nor our officers or directors will no special sales, a total of
be permitted to purchase shares of We will permit the managing dealer and its $150,000 in selling commissions
our stock in order to meet the respective officers and employees and certain will be paid. A total of
minimum thresholds. of its affiliates to purchase shares net of $187,500,000 in selling
sales commissions and the marketing commissions will be paid if the
contribution and due diligence expense maximum offering is sold and
allowance or for $8.95 per share. there are no special sales.
Also, soliciting dealers and their
respective officers and employees and
certain of their respective affiliates who
request and are entitled to purchase shares
net of selling commissions may make an
initial purchase of shares net of sales
commissions or for $9.30 per share;
however, any subsequent purchases of shares
by any such persons are limited to a
maximum discount of 5%.
</Table>
39
<Page>
<Table>
<Caption>
TYPE OF COMPENSATION AND ESTIMATED MAXIMUM
RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ---------------------------------- ---------------------------------------------- ---------------------------------
Marketing contribution and We will pay an amount equal to 2.5 of the The actual amount depends on the
due diligence expense allowance gross offering proceeds to the managing dealer, number of shares. If there are
paid to the managing dealer all or a portion of which may be passed on to no special sales, approximately
and soliciting dealers. soliciting dealers, in lieu of reimbursement the following amounts will be
of specific expenses associated with marketing. paid for the marketing
We may pay an additional 0.5 of the gross contribution and the due
offering proceeds to the managing dealer, which diligence expense allowance:
will be passed on to the soliciting dealers,
for due diligence expenses. We will not pay - $60,000 if we sell the minimum
the marketing contribution and due diligence number of shares; or
expense allowance in connection with any - $75,000,000 if we sell the
special sales, except those receiving volume maximum number of shares.
discounts and those described in "Plan of
Distribution - Volume Discounts."
Other expenses of issuance and We expect to incur the following expenses in All amounts other than the
distribution connection with this offering: Securities and Exchange
Commission registration fee and
Securities and Exchange the NASD filing fee are
Commission registration estimates. The actual amounts
fee $ 217,621 of these expenses cannot be
NASD filing fee $ 30,500 determined at the present time.
Printing and mailing We estimate the total amount of
expenses $ 3,500,000 the issuance and distribution
Blue Sky fees and expenses to be approximately
expenses $ 136,000 $14,684,121.
Legal fees and
expenses $ 650,000
Accounting fees and
expenses $ 650,000
Advertising and sales
literature $ 5,000,000
Due diligence $ 3,000,000
Transfer Agent fees $ 800,000
Data processing fees $ 500,000
Bank fees and other
administrative
expenses $ 200,000
We will reimburse our sponsor for actual costs Expenses of approximately
incurred in connection with the offering on $691,911 have been advanced by
our behalf. However, if the aggregate of all our sponsor through June 30,
offering expenses, including selling 2003 in connection with this
commissions, the marketing contribution and offering. We may reimburse for
due diligence expense allowance, exceeds 15% offering expenses advanced:
of the gross offering proceeds, or if the
aggregate of all offering expenses, excluding - $90,000 if we sell the minimum
the selling expenses, exceeds 5.5% of the offering based on the 15%
gross offering proceeds, our advisor or its limitation; or
affiliates will promptly pay the excess and we - $14,684,000 if we sell the
will have no liability for these expenses at maximum offering.
any time afterward.
If the offering is not
successful, then our sponsor
will be solely responsible for
the organization and offering
expenses to the
</Table>
40
<Page>
<Table>
<Caption>
TYPE OF COMPENSATION AND ESTIMATED MAXIMUM
RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ---------------------------------------- ---------------------------------------- ---------------------------------
extent it has
not been reimbursed.
<Caption>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ---------------------------------------- ---------------------------------------- ---------------------------------
ACQUISITION STAGE
Acquisition expenses paid to our We will pay an amount, estimated to be We may pay the following
advisor's affiliates, Inland Real Estate up to 0.5% of the total of (1) the gross amounts for the reimbursement
Acquisitions, Inc., The Inland Real offering proceeds from the sale of of acquisition expenses:
Estate Group, Inc. and Inland Western 250,000,000 shares, (2) the gross
Management Corp. proceeds from the sale of up to - no more than $10,000 if
20,000,000 shares pursuant to the the minimum number of
distribution reinvestment programs. The shares are sold; or
acquisition expenses for any particular - no more than $13,450,000
property will not exceed 6% of the gross if the maximum number of
purchase price of the property. shares are sold and all
of the 20,000,000 shares
However, if we request additional are sold pursuant to the
services, the compensation will be distribution reinvestment
provided on separate agreed-upon terms program.
and the rate will be approved by a However, the actual amounts
majority of disinterested directors, cannot be determined at the
including a majority of the present time.
disinterested independent directors, as
fair and reasonable for us.
Interest expenses paid to our advisor We may borrow money from our advisor and The actual amounts are
and Inland Mortgage Corporation in its affiliates in order to acquire dependent on actual
connection with loans. properties. In such instances, we will borrowings. Therefore, these
pay our advisor and its affiliates amounts cannot be determined
interest, at prevailing market rates. at the present time.
<Caption>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ---------------------------------------- ---------------------------------------- ---------------------------------
OPERATIONAL STAGE
Property management fee paid We will pay a monthly fee of 4.5% of The actual amounts are dependent
to our property manager, the gross income from the properties. upon results of operations and,
Inland Western Management We will also pay a monthly fee for any therefore, cannot be determined at the
Corp. We will pay the fee extra services equal to no more than present time. If we acquire the businesses
for services in connection 90% of that which would be payable to of our advisor and/or our property manager,
with the rental, leasing, an unrelated party providing the the property management fees will cease.
operation and management services. The property manager may
of the properties. subcontract its duties for a fee that may
be less than the fee provided for in the
management services agreements.
Advisor asset management fee. We will We will pay our advisor an asset The actual amounts are
pay the fee for services in connection management fee after our stockholders dependent upon results of
with our day-to-day operations, have first received a 6% annual return. operations and, therefore,
including making strategic decisions, cannot be determined at the
performing day-to-day operations that present time.
include accounting, investment advisory
services, risk
</Table>
41
<Page>
<Table>
management services and
tax reduction services and providing
other services as our board deems
appropriate.
<Caption>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ---------------------------------------- ---------------------------------------- ---------------------------------
OPERATIONAL STAGE
Reimbursable expenses to our advisor. We will reimburse some expenses of the The actual amounts are
These may include costs of goods and advisor. The compensation and dependent upon results of
services, administrative services and reimbursements to our advisor will be operations and, therefore,
non-supervisory services performed approved by a majority of our directors cannot be determined at the
directly for us by independent parties. and a majority of our independent present time.
directors as fair and reasonable for us.
<Caption>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ---------------------------------------- ---------------------------------------- ---------------------------------
LIQUIDATION STAGE
Property disposition fee payable to our We may pay a property disposition fee to The actual amounts to be
advisor's affiliates, Inland Real Estate our advisor and its affiliates if we received depend upon the sale
Sales, Inc. and Inland Partnership sell any of our real property in an price of our properties and,
Property Sales Corp. amount equal to the lesser of: therefore, cannot be
determined at the present
1. 3% of the contract sales price of time. If we acquire the
the property; or advisor, the property
disposition fee will cease.
2. 50% of the customary commission
which would be paid to a third
party broker for the sale of a
comparable property.
The amount paid, when added to the
sums paid to unaffiliated parties,
will not exceed either the customary
commission or an amount equal to 6%
of the contracted for sales price.
Payment of such fees will be made
only if the advisor provides a
substantial service in connection
with the sale of the property. See
"Management -- Our Advisory
Agreement."
</Table>
SUBORDINATED PAYMENTS
We may pay the following additional fees to our advisor after returns on
net investment have been paid to the stockholders:
<Table>
<Caption>
TYPE OF COMPENSATION AND ESTIMATED MAXIMUM
RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ---------------------------------------- ---------------------------------------- --------------------------------
OPERATIONAL STAGE
Advisor asset management fee payable We pay an annual advisor asset The actual amounts to be
to our advisor. management fee of not more than 1% of received depend upon the sale
our average assets. Our average assets price of our properties and,
means the average of the total book therefore, cannot be
value of our real estate assets plus the determined at the present
total value of our loans receivables
secured by real estate, before reserves
for depreciation
</Table>
42
<Page>
<Table>
or bad debts or other similar non-cash time. If we acquire the
reserves. We will compute our average advisor, the property
assets by taking the average of these disposition fee will cease.
values at the end of each month during
the quarter for which we are calculating
the fee. The fee is payable quarterly in
an amount equal to1/4of 1% of average
assets as of the last day of the
immediately preceding quarter. For any
year in which we qualify as a REIT, our
advisor must reimburse us for the
following amounts if any:
(1) the amounts by which our total
operating expenses, the sum of the
advisor asset management fee plus
other operating expenses, paid
during the previous fiscal year
exceed the greater of:
- 2% of our average assets for that
fiscal year, or
- 25% of our net income for that
fiscal year.
(2) an amount, which will not exceed the
advisor asset management fee for
that year, equal to any difference
between the total amount of
distributions to stockholders for
that year and the 6% annual return
on the net investment of
stockholders.
Items such as organization and offering
expenses, property expenses, interest
payments, taxes, non-cash expenditures,
the incentive advisory fee and
acquisition expenses are excluded from
the definition of total operating
expenses.
See "Management -- Our Advisory
Agreement" for an explanation of
circumstances where the excess amount
specified in clause (1) may not need to
be reimbursed.
<Caption>
TYPE OF COMPENSATION AND ESTIMATED MAXIMUM
RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ---------------------------------------- ---------------------------------------- --------------------------------
LIQUIDATION STAGE
Incentive advisory fee payable to We will pay to the advisor an amount to The actual amounts to be
our advisor. equal 15% of the net proceeds from the received depend upon the sale
sale of a property after the price of our properties and,
stockholders have first received: therefore, cannot be
determined at the present
(1) a cumulative non-compounded time. If we acquire or
return equal to 10% a year on their consolidate with the business
net investment; and conducted by our advisor, the
incentive advisory fee will
(2) their net investment. terminate.
</Table>
43
<Page>
COMPENSATION TO OFFICERS AND DIRECTORS
We expect to pay the following to our directors (as our officers are not
paid directly by us):
<Table>
<Caption>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ---------------------------------------- ---------------------------------------- ---------------------------------
Director fees Independent directors receive an We will pay the five
annual fee of $5,000 and a fee of $500 independent directors $25,000
for attending each meeting of the in the aggregate, plus fees for
board or one of its committees in attending meetings. The actual
person and $350 for attending a amounts to be received for
meeting via the telephone. Our meetings depends upon the
officers who are also our directors do number of meetings and their
not receive director fees. attendance and, therefore,
cannot be determined at the
present time.
Stock options to independent directors Each independent director receives This form of compensation is
not paid in cash.
- an initial option to purchase
3,000 shares of common stock at
a price of $8.95 per share,
when they become an independent
director, subject to some
conditions; and
- each year on the date of the
stockholders' annual meeting, an
additional option to purchase 500
shares of common stock at an
exercise price equal to the then
fair market value per share. For
additional information on this
option plan, see "Management--
Independent Director Stock Option
Plan."
</Table>
44
<Page>
ESTIMATED USE OF PROCEEDS
The amounts listed in the table below represent our current estimates
concerning the use of the offering proceeds. Since these are estimates, they may
not accurately reflect the actual receipt or application of the offering
proceeds. This first scenario assumes we sell the minimum number of 200,000
shares of common stock in this offering. The second scenario assumes:
- we sell the maximum of 250,000,000 shares in this offering at $10
per share; and
- we sell the maximum of 20,000,000 shares in our distribution
reinvestment program at $9.50 per share.
Under both scenarios we have not given effect to any special sales or
volume discounts which could reduce selling commissions.
<Table>
<Caption>
MAXIMUM OFFERING
(INCLUDING SHARES SOLD UNDER THE
MINIMUM OFFERING DISTRIBUTION REINVESTMENT
200,000 SHARES PROGRAM)
----------------------- --------------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------- ------- ---------------- -------
Gross offering proceeds............................... $ 2,000,000 100.0% $ 2,690,000,000 100.00%
------------- ------ ---------------- -------
Less expenses:
Selling commission................................. 150,000 7.5% 187,500,000 6.97%
Marketing contribution and due diligence expense
allowance......................................... 60,000 3.0% 75,000,000 2.79%
Organization and offering expenses................. 90,000 4.5% 14,684,000 0.55%
------------- ------ ---------------- -------
Total public offering expenses..................... 300,000 15.0% 277,184,000 10.30%
------------- ------ ---------------- -------
Gross amount available for investment................. 1,700,000 85.0% 2,412,816,000 89.70%
Less: acquisition expenses........................ 10,000 0.5% 13,450,000 0.50%
Less: working capital reserve..................... 20,000 1.0% 26,900,000 1.00%
------------- ------ ---------------- -------
Net cash portion of gross offering proceeds available
for the purchase of properties.................... $ 1,670,000 83.5% $ 2,372,466,000 88.20%
============= ====== ================ =======
</Table>
45
<Page>
PRIOR PERFORMANCE OF OUR AFFILIATES
PRIOR INVESTMENT PROGRAMS
During the 10-year period ending June 30, 2003, The Inland Group and its
affiliates have sponsored two other REITs, one other public real estate equity
program, one private real estate equity program, four private placement mortgage
and note programs and ten real estate exchange private placements, which
altogether have raised more than $2,340,000,000 from over 64,000 investors.
During that period, the public real estate equity programs raised over
$32,000,000 from over 2,000 investors; the private real estate equity program
raised $2,275,000 from 80 investors; and the private placement mortgage and note
programs raised $15,831,000 from 373 investors. In addition, Inland Real Estate
Corporation and Inland Retail Real Estate Trust, Inc., the other REITs, have
raised over $2,245,000,000 from over 61,000 investors. Inland Real Estate
Corporation and Inland Retail Real Estate Trust, Inc. have investment objectives
and policies similar to ours and have invested principally in shopping centers
that provide sales of convenience goods and personal services to neighboring
communities in the Midwest and Southeast areas. However, Inland Real Estate
Corporation is now a self-administered REIT and is no longer affiliated with The
Inland Group. Our investment objectives and policies are similar to those of
several of the other prior investment programs sponsored by our affiliates which
have owned and operated retail properties. However, the vast majority of the
other investment programs sponsored by our affiliates were dissimilar from our
operation in that the prior programs owned apartment properties, pre-development
land and whole or partial interests in mortgage loans.
The information in this section and in the Prior Performance Tables
included in this supplement as APPENDIX A shows relevant summary information
concerning real estate programs sponsored by our affiliates. The purpose is to
provide information on the prior performance of these programs so that you may
evaluate the experience of the affiliated companies in sponsoring similar
programs. The following discussion is intended to briefly summarize the
objectives and performance of the prior programs and to disclose any material
adverse business developments sustained by them. Past performance is not
necessarily indicative of future performance.
SUMMARY INFORMATION
The table below provides summarized information concerning prior programs
sponsored by our affiliates for the 10-year period ending June 30, 2003, and is
qualified in its entirety by reference to the introductory discussion above and
the detailed information appearing in the Prior Performance Tables in Appendix A
of the prospectus. YOU SHOULD NOT CONSTRUE INCLUSION OF THE SUCCEEDING TABLES AS
IMPLYING IN ANY MANNER THAT WE WILL HAVE RESULTS COMPARABLE TO THOSE REFLECTED
IN THE TABLES BECAUSE THE YIELD AND CASH AVAILABLE AND OTHER FACTORS COULD BE
SUBSTANTIALLY DIFFERENT FOR OUR PROPERTIES. YOU SHOULD NOTE THAT BY ACQUIRING
OUR SHARES, YOU WILL NOT BE ACQUIRING ANY INTERESTS IN ANY PRIOR PROGRAMS.
46
<Page>
<Table>
<Caption>
PRIOR PRIVATE INLAND REAL
INLAND RETAIL INLAND REAL REAL ESTATE ESTATE
REAL ESTATE ESTATE PRIOR PUBLIC EQUITY AND EXCHANGE
TRUST, INC. CORPORATION REAL ESTATE MORTGAGE PRIVATE
REIT REIT EQUITY AND NOTE PLACEMENT
PROGRAM AS OF PROGRAM AS OF PROGRAMS AS OF PROGRAMS AS OF OFFERINGS AS OF
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2003(2) 2003 2003 2003
---------------- ------------- --------------- -------------- ---------------
Number of programs sponsored 1 1 1 5 10
Aggregate amount raised from investors $ 1,567,679,000 677,544,000 32,399,000 18,106,000 45,225,000
Approximate aggregate number of investors 42,000 19,000 2,600 453 81
Number of properties purchased 149 138 18 7 10
Aggregate cost of properties(1) $ 2,010,000,000 1,221,000,000 25,945,000 1,951,930 105,881,000
Number of mortgages/notes 0 0 0 365 0
Principal amount of mortgages/notes $ 0 0 0 15,831,000 0
Principal of properties (based on cost)
that were:
Commercial--
Retail 92.00% 85.00% 0.00% 0.00% 36.30%
Single-user retail net-lease 8.00% 15.00% 0.00% 0.00% 12.30%
Nursing homes 0.00% 0.00% 0.00% 0.00% 0.00%
Offices 0.00% 0.00% 0.00% 0.00% 51.40%
Industrial 0.00% 0.00% 0.00% 0.00% 0.00%
Health clubs 0.00% 0.00% 0.00% 0.00% 0.00%
Mini-storage 0.00% 0.00% 0.00% 0.00% 0.00%
Total commercial 100.00% 100.00% 0.00% 0.00% 100.00%
Multi-family residential 0.00% 0.00% 0.00% 0.00% 0.00%
Land 0.00% 0.00% 100.00% 100.00% 0.00%
Percentage of properties (based on cost)
that were:
Newly constructed (within a year of
acquisition) 58.00% 33.00% 0.00% 0.00% 44.20%
Existing construction 42.00% 67.00% 0.00% 0.00% 55.80%
Number of properties sold (3) 0 3 13 6 0
Number of properties exchanged 0 0 0 0 0
Number of mortgages/notes repaid 0 0 0 0 0
</Table>
47
<Page>
(1) Includes purchase price and acquisition fees and expenses.
(2) On July 1, 2000, the prior REIT program, Inland Real Estate
Corporation, became a separate, self-managed entity.
(3) Number of properties sold in whole or in part.
Of the programs included in the above table, Inland Real Estate Corporation
and Inland Retail Real Estate Trust, Inc. have investment objectives similar to
ours. Inland Real Estate Corporation and Inland Retail Real Estate Trust, Inc.
represent approximately 96% of the aggregate amount raised from investors,
approximately 94% of the aggregate number of investors, approximately 88% of the
properties purchased, and approximately 96% of the aggregate cost of the
properties.
During the three years prior to June 30, 2003, Inland Real Estate
Corporation purchased 20 commercial properties and Inland Retail Real Estate
Trust, Inc. purchased 190 commercial properties. Upon written request, you may
obtain, without charge, a copy of Table VI filed with the Securities and
Exchange Commission in Part II of our registration statement. The table provides
more information about these acquisitions.
PUBLICLY REGISTERED REITS
INLAND REAL ESTATE CORPORATION. On October 14, 1994, Inland Real Estate
Corporation commenced an initial public offering of 5,000,000 shares of common
stock at $10 per share. As of July 24, 1996, it had received subscriptions for a
total of 5,000,000 shares, thereby completing the initial offering. On July 24,
1996, it commenced an offering of an additional 10,000,000 shares of common
stock at $10 per share. As of July 10, 1997, it had received subscriptions for a
total of 10,000,000 shares, thereby completing its second offering. On July 14,
1997, Inland Real Estate Corporation commenced a third offering of an additional
20,000,000 shares of common stock at $10 per share. As of March 19, 1998, Inland
Real Estate Corporation had received subscriptions for a total of 20,000,000
shares, thereby completing the third offering. On April 7, 1998, Inland Real
Estate Corporation commenced a fourth offering of an additional 25,000,000
shares at $11 per share. Inland Real Estate Corporation elected to terminate the
fourth offering as of December 31, 1998, after receiving subscriptions for a
total of 16,642,397 shares. In addition, as of June 30, 2003, Inland Real Estate
Corporation issued 11,183,998 shares of common stock through its distribution
reinvestment program. As of June 30, 2003, Inland Real Estate Corporation
repurchased 4,224,200 shares of common stock through its share repurchase
program for an aggregate amount of $39,186,150. As a result, Inland Real Estate
Corporation's gross offering proceeds totaled approximately $677,544,000 for all
of such offerings, as of June 30, 2003. Inland Real Estate Corporation's
objective is to purchase shopping centers that provide convenience goods,
personal services, wearing apparel and hardware and appliances located within an
approximate 400-mile radius of its headquarters in Oak Brook, Illinois, and to
provide, at a minimum, cash distributions on a quarterly basis and a hedge
against inflation through capital appreciation. It may also acquire single-user
retail properties throughout the United States. As of June 30, 2003, the
properties owned by Inland Real Estate Corporation were generating sufficient
cash flow to cover operating expenses plus pay an annual cash distribution of
$0.94 per share paid monthly.
As of June 30, 2003, Inland Real Estate Corporation financed approximately
$662,190,000 on 122 of its 135 properties. Inland Real Estate Corporation's 135
properties, a total investment of approximately $1,221,000,000 at June 30, 2003,
were purchased with proceeds received from the above described offerings of
shares of its common stock and financings. From December 31, 1995 through June
30, 2003, distributions have totaled $288,226,283, of which $219,146,208 was
ordinary income
48
<Page>
distribution from operating cash flow, $68,705,489 was return of capital for
federal income tax purposes from operating cash flow and $374,586 from capital
gain distributions.
Through June 30, 2003, distributions were as follows:
<Table>
<Caption>
Total Ordinary Return of Capital Gain
Distribution Income Capital * Distribution
------------------------------------------------------------------
1995 $ 736,627 694,213 42,414 -
1996 3,704,943 3,093,525 611,418 -
1997 13,127,597 9,739,233 3,388,364 -
1998 35,443,213 27,015,143 8,428,070 -
1999 48,379,621 35,640,732 12,738,889 -
2000 52,964,010 40,445,730 12,518,280 -
2001 58,791,604 45,754,604 12,662,414 374,586
2002 60,090,685 41,775,045 18,315,640 -
2003 14,987,983 14,987,983 - -
------------------------------------------------------------------
$ 288,226,283 219,146,208 68,705,489 374,586
==================================================================
</Table>
* Represents a return of capital for federal income tax purposes.
On July 1, 2000, Inland Real Estate Corporation became a self-administered
REIT by completing its acquisition of Inland Real Estate Advisory Service, Inc.,
its advisor, and Inland Commercial Property Management, Inc., its property
manager. The acquisition was accomplished by merging its advisor and its
property manager into two wholly owned subsidiaries of Inland Real Estate
Corporation. As a result of the merger, Inland Real Estate Corporation issued to
our sponsor, the sole shareholder of the advisor, and The Inland Property
Management Group, Inc., the sole shareholder of its property manager, an
aggregate of 6,181,818 shares of Inland Real Estate Corporation's common stock
at $11 per share, or approximately 9.008% of its common stock.
INLAND RETAIL REAL ESTATE TRUST, INC. On February 11, 1999, Inland Retail
Real Estate Trust, Inc. commenced an initial public offering of 50,000,000
shares of common stock at $10 per share. As of January 31, 2001, it had sold
13,687,349 shares in its first offering resulting in gross proceeds of
$136,454,948. In addition, it received $200,000 from its advisor for 20,000
shares. As of January 31, 2001, the first offering terminated. Inland Retail
Real Estate Trust, Inc. commenced a second offering on February 1, 2001. As of
August 29, 2002, it had sold 50,000,000 shares in its second offering resulting
in gross proceeds of $497,842,917, thereby completing the second offering.
Inland Retail Real Estate Trust, Inc. commenced a third offering on June 7,
2002. As of June 30, 2003, it had sold 90,001,968 shares in its third offering,
resulting in gross proceeds of $898,427,316. An additional 4,261,636 shares had
been sold pursuant to Inland Retail Real Estate Trust, Inc.'s distribution
reinvestment program as of June 30, 2003, for which it has received additional
net proceeds of $40,485,542. As of March 31, 2003, Inland Retail Real Estate
Trust, Inc. has repurchased 590,611 shares through its share repurchase program
resulting in disbursements totaling $5,532,127. As a result, Inland Retail Real
Estate Trust, Inc.'s net offering proceeds from all offerings total
approximately $1,567,678,596 as of June 30, 2003, including amounts raised
through its distribution reinvestment program, net of shares repurchased through
its share repurchase program.
49
<Page>
Inland Retail Real Estate Trust, Inc.'s objective is to purchase shopping
centers east of the Mississippi River in addition to single-user retail
properties in locations throughout the United States, and to provide regular
cash distributions and a hedge against inflation through capital appreciation.
As of June 30, 2003, the properties owned by Inland Retail Real Estate Trust,
Inc. were generating sufficient cash flow to cover operating expenses plus pay
an annual cash distribution of $.83 per share per annum paid monthly. Through
June 30, 2003, distributions totaled $111,949,044. Through June 30, 2003,
distributions were as follows:
<Table>
<Caption>
Total Ordinary Return of
Distribution Income Capital*
---------------------------------------------------
1999 $ 1,396,861 $ 318,484 $ 1,078,377
2000 6,615,454 3,612,577 3,002,877
2001 17,491,342 10,538,534 6,952,808
2002 58,061,491 36,387,136 21,674,355
2003 28,383,896 23,383,896 -
---------------------------------------------------
$ 111,949,044 $ 79,240,627 $ 32,708,417
===================================================
</Table>
*Represents a return of capital for federal income tax purposes.
As of June 30, 2003, Inland Retail Real Estate Trust, Inc. had acquired 149
properties and had seven parcels under development for a total investment of
approximately $2,010,000,000. These properties were purchased with proceeds
received from the above described offerings of shares of its common stock and
financings. As of June 30, 2003, Inland Retail Real Estate Trust, Inc. financed
approximately $862,845,000 on its properties.
PUBLICLY REGISTERED LIMITED PARTNERSHIPS
INLAND CAPITAL FUND, L.P. - The offering period for this fund began
December 13, 1991 and ended August 23, 1993. The objectives were to invest in
pre-development land on an all-cash basis and realize appreciation of such land
upon resale.
Inland Capital Fund raised $32,399,282 from 2,683 investors and purchased,
with the net proceeds available for investment, 18 land parcels, one of which
included a house and several outbuildings, for an aggregate purchase price of
$25,945,989. As of June 30, 2003, this fund has had multiple sales transactions
involving the house and portions of thirteen parcels which generated
approximately $26,097,000 in net sales proceeds, including notes receivable of
approximately $1,359,000. Its cost basis in the land parcels sold was
approximately $12,788,000 resulting in a gain, net of selling expenses and
commissions, of approximately $13,309,000 for financial reporting purposes.
In the opinion of Inland Real Estate Investment Corporation, the
partnership is currently meeting its investment objectives and has, through
completed sales transactions, realized significant capital appreciation on the
assets sold. Cash distributions to limited partners through June 30, 2003
totaled $22,335,763, all from the sale of land parcels.
PRIVATE PARTNERSHIPS
Since our inception and through June 30, 2003, including the programs
described below under " - Private Placement Real Estate Equity Program," and " -
Private Placement Note and Mortgage Program" in this section, our affiliates
have sponsored 514 private placement limited partnerships which have raised
50
<Page>
more than $524,201,000 from approximately 17,000 investors and invested in
properties for an aggregate price of more than $1 billion in cash and notes. Of
the 522 properties purchased, 93% have been in Illinois. Approximately 90% of
the funds were invested in apartment buildings, 6% in shopping centers, 2% in
office buildings and 2% in other properties. Including sales to affiliates, 320
partnerships have sold their original property investments. Officers and
employees of our sponsor and its affiliates invested more than $17,000,000 in
these private placement limited partnerships.
From January 1, 1993 through June 30, 2003, investors in The Inland Group
private partnerships have received total distributions in excess of
$276,668,000, consisting of cash flow from partnership operations, interest
earnings, sales and refinancing proceeds and cash received during the course of
property exchanges.
Following a proposal by the former corporate general partner, which was an
affiliate of The Inland Group, investors in 301 private partnerships voted in
1990 to make our sponsor the corporate general partner for those partnerships.
Beginning in December 1993 and continuing into the first quarter of 1994,
investors in 101 private limited partnerships for which our sponsor is the
general partner received letters from it informing them of the possible
opportunity to sell the 66 apartment properties owned by those partnerships to a
to-be-formed REIT in which affiliates of our sponsor would receive stock and
cash and the limited partners would receive cash. The underwriters of this
apartment REIT subsequently advised our sponsor to sell to a third party its
management and general partner's interests in those remaining limited
partnerships not selling their apartment properties to the apartment REIT. Those
not selling their apartment properties constituted approximately 30% of the
Inland-sponsored limited partnerships owning apartment buildings. The
prospective third-party buyers of our sponsor's interests in the remaining
partnerships, however, would make no assurance to support those partnerships
financially. As a result, in a March 1994 letter, our sponsor informed investors
of its decision not to go forward with the formation of the apartment REIT.
Following this decision, two investors filed a complaint in April 1994 in
the Circuit Court of Cook County, Illinois, Chancery Division, purportedly on
behalf of a class of other unnamed investors, alleging that our sponsor had
breached its fiduciary responsibility to those investors whose partnerships
would have sold apartment properties to the apartment REIT. The complaint sought
an accounting of information regarding the apartment REIT matter, an unspecified
amount of damages and the removal of our sponsor as general partner of the
partnerships that would have participated in the sale of properties. In August
1994, the court granted our sponsor's motion to dismiss, finding that the
plaintiffs lacked standing to bring the case individually. The plaintiffs were
granted leave to file an amended complaint. Thereafter, in August 1994, six
investors filed an amended complaint, purportedly on behalf of a class of other
investors, and derivatively on behalf of six limited partnerships of which our
sponsor is the general partner. The derivative counts sought damages from our
sponsor for alleged breach of fiduciary duty and breach of contract, and assert
a right to an accounting. Our sponsor filed a motion to dismiss in response to
the amended complaint. The suit was dismissed in March 1995 with prejudice. The
plaintiffs filed an appeal in April 1996. After the parties briefed the issue,
arguments were heard by the Appellate Court in February 1997. In September 1997,
the Appellate Court affirmed the trial court decision in favor of our sponsor.
Inland Real Estate Investment Corporation is the general partner of 27
private limited partnerships and one public limited partnership that own
interests in 15 buildings that are net leased to Kmart. The 14 Kmarts owned by
the private limited partnerships are all cross collateralized. Relating to the
Kmart bankruptcy, the status of the 15 is as follows:
51
<Page>
- CATEGORY 1 - The leases of nine (9) of the Kmarts are current and have
been accepted by Kmart under their Chapter 11 reorganization plan.
- CATEGORY 2 - Kmart assigned its designation rights in one lease to
Kohl's; the lease was amended and extended for Kohl's by IREIC, the
general partner on behalf of the owners and lender; and Kohl's began
paying rent February 12, 2003.
- CATEGORY 3 - Under Kmart's Chapter 11 reorganization plan and upon
emergence from bankruptcy on April 22, 2003, Kmart has rejected the
remaining 4 property leases; one of which is subject to a ground lease
to Kimco. Kmart will cease paying rent as of May 1, 2003. The general
partner's, IREIC's, plans for these properties include, but are not
limited to the following: 1) renegotiation of the loan encumbering the
property; 2) re-tenanting the facility; 3) sale of the asset; or 4)
deed in lieu of foreclosure. While it is too early to predict an
outcome, the limited partners that own these Kmarts could lose their
properties in foreclosure.
- CATEGORY 4 - Under Kmart's Chapter 11 reorganization, Kmart rejected
the lease for the property owned by the public limited partnership and
ceased paying rent as of June 29, 2002. The general partner plans to
re-tenant this facility.
PRIVATE PLACEMENT REAL ESTATE EQUITY PROGRAM
WISCONSIN CAPITAL LAND FUND, L.P., an Illinois limited partnership, was
formed in October 1992. The objectives were to invest in pre-development land in
the Madison, Wisconsin area on an all-cash basis and realize appreciation of the
land upon resale. The offering period for units in this privately offered
partnership began in October 1992 and ended on June 14, 1993 with the maximum
amount, $2,275,000, raised from 88 investors. This fund bought seven parcels of
land in the Madison, Wisconsin area with the proceeds of the offering.
On October 1, 1997, Parcel 6 located in Windsor, Wisconsin, was sold for
$566,597 which is equal to 191% of the original parcel capital. Investors
received a $375,000 distribution from this sale.
On March 19, 1998, the fund sold parcels 3 and 7 for a total of $2,150,000,
of which $1,900,000 was distributed to investors.
On January 5, 1999, parcels 1 and 4 were sold for $1,325,000 and investors
received a $1,137,500 distribution.
The fund has sold all 63 of the improved lots in Parcel 5 in the Village of
Mt. Horeb for total gross sale proceeds of $2,361,750. Through June 30, 2003,
$562,500 from lot sales has been distributed to investors.
Through June 30, 2003, investors have received $1,747 for every $1,000
invested or a total of $3,975,000 in distributions. As of June 30, 2003, there
were 88 investors in this partnership. The partnership has one remaining asset
consisting of 60.876 acres in the Madison, Wisconsin area.
Our dealer manager received sales commission equal to 9% of the offering
proceeds from which a selling commission of 8% was re-allowed to soliciting
dealers. In addition, 0.5% of the offering proceeds were re-allowed to
soliciting dealers as reimbursement for due diligence expenses. Additionally,
3.3% of the offering proceeds were used to reimburse the general partner, Inland
Real Estate Investment Corporation, and its affiliates for out-of-pocked
expenses associated with the offering and acquisition of the land parcels.
52
<Page>
During the operating phase of the partnership, the general partner will
receive an asset management fee paid annually, equal to 1% of the original cost
of the partnership of the parcels. In addition, the general partner and its
affiliates will be reimbursed for direct expenses relating to the administration
of the partnership and its assets, subject to certain limitations.
An affiliate of the general partner will participate in real estate
brokerage commissions as each parcel is sold, but such commissions will be
subordinated to the return of that portion of the limited partners' original
investment attributable to that parcel plus a 6% per annum, non-compounded
cumulative return on parcel capital.
The general partner may share in the net proceeds from the sale of the
parcels, but such share of sales proceeds will be subordinated, to the return of
the limited partners' original capital and receipt of a 15% per annum,
non-compounded cumulative return. The sharing arrangement of net sale proceeds
after the 15% cumulative return will be 65% to the limited partners and 35% to
the general partner.
PRIVATE PLACEMENT NOTE AND MORTGAGE PROGRAM
9% MONTHLY CASH FUND, L.P., an Illinois limited partnership offering
investments in promissory notes to accredited investors, was sponsored by our
sponsor in February 1993. The offering period for this program began February 1,
1993 and ended on May 17, 1993, when the maximum amount of $4,000,000 was raised
from 78 investors. The partnership issued notes maturing August 1, 1999 and
providing a 9% annual return. This fund invested in loans made to an affiliate
of our sponsor secured by collateral assignments of third party mortgage loans
owned by the affiliate. Our sponsor guarantees the return of capital to
noteholders and the 9% annual return. Cash distributions through September 30,
1999 totaled $6,291,146, of which $2,291,146 was interest earnings and
$4,000,000 was a return of capital. This partnership was completed in August
1999.
9% MONTHLY CASH FUND II, L.P., was an Illinois limited partnership offering
investments in promissory notes to accredited investors, with investment
objectives identical to those of 9% Monthly Cash Fund, L.P. Our sponsor
sponsored it in April 1993. The offering period for this program began April 5,
1993 and ended July 23, 1993, with the maximum amount of $4,000,000 raised from
82 investors. The partnership issued notes maturing February 1, 2000 that
provided a 9% annual return. The partnership invested in a loan made to an
affiliate or our sponsor secured by collateral assignments of third-party
mortgage loans owned by the affiliate. Our sponsor guarantees the return of
capital to noteholders and the 9% annual return. Cash distributions through
March 31, 2000 totaled $6,417,653, of which $2,417,653 was interest earnings and
$4,000,000 was a return of capital. This partnership was completed in February
2000. All fees and expenses including sales commission and due diligence expense
to our dealer-manager equal to 9.5% (of which 8% was re-allowed to soliciting
dealers as sales commission and up to 0.5% as reimbursable due diligence
expenses) and the costs of the memorandum, tax consulting and advise (which were
anticipated to be approximately $30,000 were absorbed by the sponsor, Inland
Real Estate Investment Corporation, and were not paid from the proceeds of the
offering.
IMC NOTE ISSUE #2 1993, offering investments in promissory notes was
sponsored by Inland Mortgage Corporation, an Illinois corporation and an
affiliate of our sponsor, in July 1993. The offering period for this program
began August 25, 1993 and closed on June 13, 1994 after raising $6,800,000.
Inland Mortgage Corporation issued notes maturing December 31, 2003, providing
for interest at the rate of 8% per annum with 100% return of principal
guaranteed by our sponsor. Proceeds of the offering have been used to invest in
a mortgage loan secured by an apartment property in Manchester, New Hampshire,
owned by an affiliate of our sponsor. Investors may also receive additional
income dependent on the future sale of the property. Inland Mortgage Corporation
made an initial distribution to investors of escrow interest totaling $13,685 in
November 1993. Cash distributions through June 30, 2003 totaled
53
<Page>
$5,010,810, of which $4,991,344 was interest earnings and $19,456 was subsidy
income from our sponsor pursuant to the guarantee for that program. As of June
30, 2003, there were 169 noteholders. All fees and expenses incurred in
connection with the offer and sale of the Notes - including sales commission and
due diligence expense to dealer-manager, Inland Securities Corporation, equal to
8.5% (of which 6.5% was re-allowed to soliciting dealers as sales commissions,
0.5% as a marketing fee, and up to 0.5% as reimbursable due diligence expenses)
and the costs of the memorandum, tax counseling and advise (which were
anticipated to be approximately $41,000), as well as other costs associated with
the refinancing of the property (such as title, surveys, appraisals, recording
charges, etc.) were advanced by the sponsor (IREIC) and were not paid from the
proceeds of the offering.
INLAND CONDOMINIUM FINANCING FUND, L.P., an Illinois limited partnership
offering investment in promissory notes, was sponsored by our sponsor in
December 1993. The offering period for this program began December 15, 1993 and
closed on June 30, 1994. This partnership offered notes in the principal amount
of $1,031,000 maturing July 1, 2001, with interest at the rate of 10% per annum
and 100% return of principal guaranteed by our sponsor. The proceeds of the
offering were used to make unsecured loans to limited partnerships which are
affiliates of our sponsor, for the purposes of paying expenses relating to the
conversion of apartment properties owned by those partnerships to condominiums,
and conducting condominium unit sales and other partnership expenses. Cash
distributions began in March 1994. Distributions through November 17, 1997
totaled $1,411,617, of which $380,617 was interest earnings and $1,031,000 was a
return of capital. There were 36 investors in this partnership. This partnership
was completed in 1997. All fees and expenses incurred in connection with the
offering - including sales commission and due diligence expense to
dealer-manager, Inland Securities Corporation, equal to 8.5% (of which 6.5% was
re-allowed to soliciting dealers as sales commissions, 0.5% as a marketing fee
and up to 0.5% as reimbursable due diligence expenses) and the costs of the
memorandum, tax counseling and advice (which were anticipated to be
approximately $45,000), as well as other costs associated with the funding of
the conversion loans were advanced by the sponsor (IREIC) and were not paid from
the proceeds of the offering.
1031 EXCHANGE PRIVATE PLACEMENT OFFERING PROGRAM
In March of 2001, Inland Real Estate Exchange Corporation (IREX) was
established as a subsidiary of Inland Real Estate Investment Corporation. The
objective of IREX is to provide replacement properties for people wishing to
complete an IRS Section 1031 real estate exchange. Through June 30, 2003, IREX
offered the sale of ten properties with a total property value of $105,810,559.
LANDINGS OF SARASOTA DBT. Inland Southern Acquisitions, Inc., a Delaware
corporation and an affiliate of IREX acquired the Landings, a multi-tenant
shopping center located in Sarasota, Florida in December 1997 for $9,800,000. In
August 2001, Inland Southern Acquisitions, Inc. contributed 100% of its interest
in the property into Landings of Sarasota DBT, a Delaware business trust,
refinanced the property with a loan of $8,000,000 from Parkway Bank & Trust Co.,
an Illinois banking corporation, and began offering all of its beneficial
interests in the trust to certain qualified persons in need of replacement
properties to complete a 1031 tax-deferred exchange. The total price was
$12,000,000, which consisted of $8,000,000 in debt assumption and $4,000,000 in
equity investment. $200,000 of the offering proceeds were allocated to a
property reserve account. The offering was completed in May 2002 when the
maximum offering amount was raised. The private placement memorandum projected a
first year annualized cash on cash return of 8.00%. Through June 30, 2003, cash
distributions to the owners totaled $400,905, based on the actual holding period
of each individual investor. As of June 30, 2003, there were nine investors in
this trust.
54
<Page>
SENTRY OFFICE BUILDING, DBT, a Delaware business trust, purchased a newly
constructed, single-tenant office building in Davenport, Iowa in December 2001
from Ryan Companies US Inc., a Minnesota corporation. The trust financed its
acquisition of the property with a $7,500,000 first mortgage loan from Parkway
Bank & Trust Co., an Illinois banking corporation. In January 2002, Sentry
Office Building Corporation, a Delaware corporation and the initial beneficiary
of the trust, began offering all of its beneficial interests in the trust to
certain qualified persons in need of replacement properties to complete a 1031
tax-deferred exchange. The total price was $11,000,000, which consisted of
$7,500,000 in debt assumption and $3,500,000 in equity investment. $100,000 of
the proceeds obtained from the new owners was allocated to a property reserve
account. The offering was completed in April 2002 when the maximum offering
amount was raised. The private placement memorandum projected a first-year
annualized cash on cash return of 8.20%. Through June 30, 2003, cash
distributions to the owners totaled $286,847, based on the actual holding period
of each individual investor. As of June 30, 2003, there were six investors in
this trust.
PETS BOWIE DELAWARE BUSINESS TRUST purchased a single-tenant retail
building leased to PETsMART in Bowie, Maryland in October 2001 from PETsMART,
Inc. and Wells Fargo Bank Northwest, N.A. The trust initially financed its
acquisition of the property with a temporary loan of $2,625,305 from Parkway
Bank & Trust Co., an Illinois banking corporation, and then replaced this loan
with a permanent loan of $1,300,000 with the same lender. In May 2002, Pets
Bowie Delaware Business Trust began offering all of its beneficial interests to
certain qualified persons in need of replacement properties to complete a 1031
tax-deferred exchange. The total price was $3,900,000, which consisted of
$1,300,000 in debt assumption and $2,600,000 in equity investment. $90,000 of
the proceeds obtained from the new owners was allocated to a property reserve
account. The offering was completed in July 2002 when the maximum offering
amount was raised. The private placement memorandum projected a first year
annualized cash on cash return of 8.89%. Through June 30, 2003, cash
distributions to the owners totaled $173,508, based on the actual holding period
of each individual investor. As of June 30, 2003, there were seven investors in
this trust.
1031 CHATTANOOGA DBT, a Delaware business trust, acquired a retail property
currently leased to Eckerd in Chattanooga, Tennessee in May 2002. The trust
financed the property with a loan of $1,500,000 from Parkway Bank & Trust Co.,
an Illinois banking corporation. In July 2002, 1031 Chattanooga, L.L.C., the
initial beneficiary of 1031 Chattanooga DBT, began offering all of the
beneficial interests of the trust to certain qualified persons in need of
replacement properties to complete a 1031 tax-deferred exchange. The total price
was $3,400,000, which consisted of $1,500,000 in debt assumption and $1,900,000
in equity investment. As of June 30, 2003, the offering is still in process,
with 95.1295% ($1,807,460) of the capital raised. The private placement
memorandum projected a first-year annualized cash on cash return of 8.26%.
Through June 30, 2003, cash distributions to the owners totaled $121,636, based
on the actual holding period of each individual investor. As of June 30, 2003,
there were ten investors in this trust.
LANSING SHOPPING CENTER, DBT purchased a newly constructed, multi-tenant
retail shopping center in Lansing, Illinois in June 2002 from LaSalle Bank
National Association, as trustee under trust agreement dated May 22, 2001 and
known as Trust No. 127294. The Trust financed its acquisition of the property
with a $5,900,000 first mortgage loan from Parkway Bank & Trust Co., an Illinois
banking corporation. In August 2002, Lansing Shopping Center, L.L.C., a Delaware
limited liability company and the initial beneficiary of Lansing Shopping
Center, DBT, began offering all of the beneficial interests of the trust to
certain qualified persons in need of replacement properties to complete a 1031
tax-deferred exchange. The total price was $10,900,000, which consisted of
$5,900,000 in debt assumption and $5,000,000 in equity investment. $80,000 of
the proceeds obtained from the new owners was allocated to a property reserve
account. The private placement memorandum projected a first year annualized cash
on cash return of 8.47%. Through June 30, 2003, cash distributions to the owners
totaled $210,340, based on
55
<Page>
the actual holding period of each individual investor. As of June 30, 2003,
there were five investors in this trust.
INLAND 220 CELEBRATION PLACE DELAWARE BUSINESS TRUST purchased a
single-tenant office building currently leased to Disney in Celebration, Osceola
County, Florida, in June 2002 from Walt Disney World Co., a Florida corporation.
The trust financed its acquisition of the property with an $18,000,000 first
mortgage loan from Bank of America, N.A., a national banking association. In
September 2002, Inland 220 Celebration Place, L.L.C., a Delaware limited
liability company and the initial beneficiary of Inland 220 Celebration Place
Delaware Business Trust, began offering all of the beneficial interests of the
trust to certain qualified persons in need of replacement properties to complete
a 1031 tax-deferred exchange. The total price was $33,800,000, which consisted
of $18,000,000 in debt assumption and $15,800,000 in equity investment. $50,000
of the proceeds obtained from the new owners was allocated to a property reserve
account. As of June 30, 2003, the offering is still in process, with 86.3581%
($13,644,578) of the capital raised. The private placement memorandum projected
a first year annualized cash on cash return of 8.08%. Through June 30, 2003,
cash distributions to the owners totaled $532,515, based on the actual holding
period of each individual investor. As of June 30, 2003, there were 29 investors
in this trust.
TAUNTON CIRCUIT DELAWARE BUSINESS TRUST acquired a retail property
currently leased to Circuit City in Taunton, Massachusetts in July 2002. The
Trust financed the property with a first mortgage of $2,800,000 from MB
Financial Bank. In September 2002, Inland Taunton Circuit, L.L.C., the initial
beneficiary of Taunton Circuit Delaware Business Trust, offered all of its
interest in the trust to a qualified person in need of a replacement property to
complete a 1031 tax-deferred exchange. The total price was $6,550,000, which
consisted of $2,800,000 in debt assumption and $3,750,000 in equity investment.
The offering was completed in September 2002. The private placement memorandum
projected a first-year annualized cash on cash return of 8.31%. Through June 30,
2003, cash distributions to the owner totaled $133,000. As of June 30, 2003,
there was one investor in this trust.
BROADWAY COMMONS DELAWARE BUSINESS TRUST acquired a multi-tenant retail
center located in Rochester, Minnesota, in July 2002. The Trust financed the
property with a first mortgage of $8,850,000 from Parkway Bank & Trust Co., an
Illinois banking corporation. In October 2002, Broadway Commons, L.L.C., the
initial beneficiary of Broadway Commons Delaware Business Trust, began offering
all of its beneficial interests in the trust to certain qualified persons in
need of replacement properties to complete a 1031 tax-deferred exchange. The
total price was $17,250,000, which consisted of $8,850,000 in debt assumption
and $8,400,000 in equity investment. $100,000 of the offering proceeds obtained
from the new owners was allocated to a property reserve account. The private
placement memorandum projected an initial annualized cash on cash return of
8.14%. Through June 30, 2003, cash distributions to the owners totaled $279,625,
based on the actual holding period of each individual owner. As of June 30,
2003, there were 12 investors in this trust.
BELL PLAZA 1031, LLC. Rehab Associates XIII, Inc., an Illinois corporation
and an affiliate of IREX acquired Bell Plaza, a multi-tenant shopping center in
Oak Lawn, IL on August 28, 1998 for $1,675,000. In October 2002, Rehab
Associates XIII contributed 100% of its interest in the property into Bell Plaza
1031, LLC, a Delaware single member limited liability company, and then offered
all of its membership interests in Bell Plaza, LLC to North Forsyth Associates,
a North Carolina general partnership, which was in need of a replacement
property to complete a 1031 tax-deferred exchange. The total price was
$4,030,000, which consisted of $3,140,000 in debt assumption and $890,000 in
equity investment. $25,000 of the proceeds obtained by the new owner was
allocated to a property reserve account. The offering was completed in November
2002. The private placement memorandum projected a first-year annualized cash on
cash return of 14.30%, calculated based on the total original investment of
56
<Page>
$890,000. Through June 30, 2003, cash distributions to the owner totaled
$20,113. As of June 30, 2003, there was one investor in this limited liability
company.
INLAND 210 CELEBRATION PLACE DELAWARE BUSINESS TRUST purchased a
single-tenant office building, currently leased in Celebration, Osceola County,
Florida, in June 2002 from Walt Disney World Co., a Florida corporation. The
trust financed its acquisition of the property with a $5,700,000 first mortgage
loan from Bear Stearns Commercial Mortgage, Inc. In January 2003, Inland 210
Celebration Place Delaware Business Trust sold its fee simple interest in 210
Celebration Place to Old Bridge Park Celebration, LLC, a Delaware limited
liability company, which was in need of a replacement property to complete a
1031 tax-deferred exchange. The total price was $12,000,000, which consisted of
$5,700,000 in debt assumption and $6,300,000 in equity investment. Through June
30, 2003, cash flow to the new owner totaled $116,609. As of June 30, 2003,
there was one investor in this trust.
57
<Page>
The following summary table describes the fees and expenses incurred by
each of our entities in our 1031 Exchange Private Placement Offering Project.
<Table>
<Caption>
1031 Lansing Inland 220
Landings of Sentry Office Pets Bowie Chattanooga Shopping Celebration
Sarasota DBT Building DBT DBT DBT Center, DBT Place DBT
- ------------------------------------------------------------------------------------------------------------------------------------
Commissions & Fees(1) Up to 8.5% Up to 8.5% Up to 8.5% Up to 8.5% Up to 8.5% Up to 8.5%
- ------------------------------------------------------------------------------------------------------------------------------------
SELLING COMMISSION TO 3RD PARTY 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
REPS
- ------------------------------------------------------------------------------------------------------------------------------------
DUE DILIGENCE FEE 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------------------------
MARKETING EXPENSES 1.00% 1.50% 1.50% 1.50% 1.50% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
OFFERING & ORGANIZATION 1.00% 0.50% 0.50% 0.50% 0.50% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage Broker Fee (IMC)(2) 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition Fee & Carrying Costs(3)
- ------------------------------------------------------------------------------------------------------------------------------------
ACQUISITION FEE N/A 0.71% 0.77% 0.90% 0.88% 1.18%
- ------------------------------------------------------------------------------------------------------------------------------------
BRIDGE FINANCING FEES N/A NA 1.49% 0.50% 0.20% 0.10%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Load(4) 11.25%-12.75% 14.23% 13.68% 14.39% 13.68% 13.23%
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Management Fees(5) NA 0.75% 1.00% 0.56% 0.55% 0.52%
- ------------------------------------------------------------------------------------------------------------------------------------
Property Management Fees(6) 4.5% 5.0% Paid by 5.0% 5.0% 4.5%
Asset Mgr.
- ------------------------------------------------------------------------------------------------------------------------------------
Backend Sales Commission 3.5% 3.5% 3.5% 3.5% 3.5% N/A
- ------------------------------------------------------------------------------------------------------------------------------------
<Caption>
Taunton Broadway Inland 210
Circuit Commons Bell Plaza Celebration
DBT DBT 1031, LLC Place DBT
- -------------------------------------------------------------------------------------------------------------
Commissions & Fees(1) Up to 8.0% Up to 8.77% Up to 9.19% Up to 7.72%
- -------------------------------------------------------------------------------------------------------------
SELLING COMMISSION TO 3RD PARTY 6.00% 6.00% 6.00% 3.81%
REPS
- -------------------------------------------------------------------------------------------------------------
DUE DILIGENCE FEE 0.50% 0.50% 0.50% 0.00%
- -------------------------------------------------------------------------------------------------------------
MARKETING EXPENSES 1.00% 1.00% 1.00% 0.50%
- -------------------------------------------------------------------------------------------------------------
OFFERING & ORGANIZATION 0.50% 1.27% 1.69% 0.96%
- -------------------------------------------------------------------------------------------------------------
Mortgage Broker Fee (IMC)(2) 0.61% 0.50% 0.50% 0.50%
- -------------------------------------------------------------------------------------------------------------
Acquisition Fee & Carrying Cost(3)
- -------------------------------------------------------------------------------------------------------------
ACQUISITION FEE 0.69% 0.75% NA 0.89%
- -------------------------------------------------------------------------------------------------------------
BRIDGE FINANCING FEES 0.07% 0.23% NA 0.23%
- -------------------------------------------------------------------------------------------------------------
Total Load(4) 11.89% 12.98% 23.02% 10.52%
- -------------------------------------------------------------------------------------------------------------
Asset Management Fees(5) 0.57% NA 0.53% 0.53%
- -------------------------------------------------------------------------------------------------------------
Property Management Fees(6) 4.0% 5.0% 5.0% 4.5%
- -------------------------------------------------------------------------------------------------------------
Backend Sales Commission N/A NA 3.5% NA
- -------------------------------------------------------------------------------------------------------------
</Table>
- ----------
(1) Commissions and fees are calculated as a percentage of the equity
portion of each deal.
(2) The Mortgage Broker Fee is calculated as a percentage of the debt
portion of each deal.
(3) Acquisition & Carrying Costs are calculated as a percentage of the real
estate acquisition price.
(4) The Total Load is calculated as a percentage of the equity portion of
each deal. The Total Load includes the Commissions & Fees, Mortgage Broker Fee,
Acquisition Fee & Carrying Costs, as well as any other non-affiliated third
party expenses.
(5) Asset Management Fees are calculated as a percentage of the value of
the assets under management. However, for The Landings and Broadway Commons,
which are both Master Lease deals, the Master Tenant Income is the residual cash
flow from the Property after payment of the Master Lease Rent.
(6) Property Management Fees are calculated as a percentage of Gross Income
from the property.
58
<Page>
SUMMARY TABLES
The following summary tables describe information concerning the prior
programs discussed above through June 30, 2003.
Affiliates of The Inland Group formed Inland Capital Fund, L.P. and
Wisconsin Capital Land Fund, L.P. as pure capital appreciation investments. No
current return from rents or interest was contemplated or available because
capital was invested in non-income producing vacant land parcels. Limited
partners receive distributions on an irregular basis, only as a result of a sale
of the vacant land parcels. These distributions consist of both the return of
the invested capital amount allocated to the purchase of the parcel or parcels
sold plus the profit on the involved parcels as measured by the sale price, net
of costs of the sale, minus the fully loaded purchase price, or allocated
capital. The method of measuring return on investment to date is on a sold
parcel by parcel basis as follows:
59
<Page>
<Table>
<Caption>
Return on Investment Return on Investment
- -------------------------------------------------------------------------------------------------------------------
FULLY LOADED
NET SALES PURCHASE PRICE
PRICES OF (ALLOCATED CAPITAL NET PROFITS ON GROSS RETURN % (NET
PARCELS OF PARCELS SOLD TO PARCELS SOLD TO PROFIT/ALLOCATED
FUND SOLD TO DATE LESS DATE) = DATE CAPITAL)
- -------------------------------------------------------------------------------------------------------------------
Inland Capital
Fund, L.P. 29,097,000 12,788,000 13,309,000 104%
Wisconsin Land
Fund, L.P. 4,137,818 2,120,803 2,017,015 95%
<Caption>
Return on Investment
-------------------------------------------
AVERAGE ANNUAL
RETURN ON
ALLOCATED CAPITAL
(GROSS RETURN %/AVERAGE AVERAGE NUMBER
NUMBER OF YEARS OF OF YEARS OF
FUND CAPITAL INVESTED) CAPITAL INVESTED
- -------------------------------------------------------------
Inland Capital
Fund, L.P. 9.67% 10.75
Wisconsin Land
Fund, L.P. 9.27% 10.25
</Table>
CUMULATIVE DISTRIBUTIONS TO LIMITED PARTNERS
<Table>
<Caption>
RETURN ON
RETURN OF RETURN ON INVESTMENT PER
CAPITAL RAISED TOTAL = INVESTMENT + INVESTMENT YEAR
- ----------------------------------------------------------------------------------------------------------------------------
Employee Appreciation Fund, L.P.* 400,000 502,198 400,000 102,198 10.00%
Inland Condominium Financing Fund, L.P. 1,031,000 1,411,617 1,031,000 380,617 10.00%
9% Monthly Cash Fund, L.P. 4,000,000 6,291,146 4,000,000 2,291,146 9.00%
9% Monthly Cash Fund II, L.P. 4,000,000 6,417,653 4,000,000 2,417,653 9.00%
IMC Note Issue #2 1993 6,800,000 5,010,810 0 5,010,810 8.00%
</Table>
* Returns of Capital prior to Final Distribution.
60
<Page>
MANAGEMENT
INLAND AFFILIATED COMPANIES
The Inland Group, Inc. was started by a group of Chicago schoolteachers in
1967, and incorporated the following year. The founders of The Inland Group and
its affiliates are still centered in the Chicago metropolitan area. Over the
past 35 years, The Inland Group and its affiliates have experienced significant
growth and now make up a fully-integrated group of legally and financially
separate companies that have been engaged in diverse facets of real estate
providing property management, leasing, marketing, acquisition, disposition,
development, redevelopment, renovation, construction, finance, investment
products, and other related services. The Inland Real Estate Group of Companies
(sometimes referred to as "Inland") represents the marketing name for these
separate legal entities that are either subsidiaries of the same entity,
affiliates of each other, share some common ownership or were previously
sponsored by Inland Real Estate Investment Corporation. Inland in the aggregate
was ranked by Crain's Chicago Business in April 2003 as the 33rd largest
privately held company headquartered in the Chicago area. Among the affiliates
of Inland is one of the largest property management firm in Illinois and one of
the largest commercial real estate and mortgage banking firms in the Midwest.
As of June 30, 2003 Inland and its affiliates have more than 800 employees,
own properties in 39 states, and have managed assets in excess of $5 billion.
The senior management includes executives of The Inland Group and its
affiliates. Our management personnel have substantial experience in a full range
of real estate services. Our top seven senior executives have an average of over
25 years experience in the real estate industry.
Our advisor and managing dealer are affiliates of Inland. The relevant
skills and experience of each of the Inland affiliated companies, developed over
the course of more than 35 years in business, primarily in the Chicago
metropolitan area, are available to us in the conduct of our business.
As of June 30, 2003, our sponsor, Inland Real Estate Investment
Corporation, is the general partner of limited partnerships which own in excess
of 5,800 acres of pre-development land in the Chicago area, as well as
16,871,522 square feet of real property in Chicago and nationwide.
Inland developed expertise in real estate financing as it bought and sold
properties over the years. Inland Mortgage Corporation was incorporated in 1977.
As of June 30, 2003 Inland Mortgage Corporation has originated more than $6
billion in financing including loans to third parties and affiliated entities.
Inland Mortgage Investment Corporation and Inland Mortgage Servicing
Corporation were incorporated in 1990, delineating the functions and duties
associated with financing. As of June 30, 2003, Inland Mortgage Investment
Corporation owned a $73,947,500 loan portfolio, and Inland Mortgage Servicing
Corporation serviced a loan portfolio of 503 loans exceeding $2,117,699,700.
The Inland Property Management companies are responsible for collecting
rent, and leasing and maintaining the rental properties they manage.
As of June 30, 2003 Inland Property Management companies manage 42,982,552
million square feet of commercial properties in 39 states. A substantial portion
of the portfolio, approximately 10.8 million square feet, consists of properties
leased on a triple-net lease basis to creditworthy tenants. This means that the
tenant operates and maintains the property and pays rent that is net of taxes,
insurance, and
61
<Page>
operating expenses. They also manage more than 11,000 multi-family units that
are principally located in the Chicago metropolitan area.
Inland Western Management Corporation, our management company, was
incorporated in January 2003 to segregate responsibility for management of our
properties from Inland Property Management companies' growing management
portfolio of retail properties. Our property management company will be
responsible for collecting rent, leasing, and maintaining the retail properties
it will manage. These properties are primarily intended to be our properties in
our primary geographical area of investment. Our property management company is
owned primarily by individuals who are affiliates of Inland.
Inland Real Estate Acquisitions, Inc., another company affiliated with
Inland, has extensive experience in acquiring real estate for investment. Over
the years, it and its affiliates have acquired more than 1,100 properties.
Inland Real Estate Development Corporation, an affiliate of Inland, has
expertise in rezoning and developing real estate for industrial, residential,
and commercial use. It has constructed more than 3,000 single family and
multi-family units and developed over one million square feet of commercial
space. As of June 30, 2003, Inland Real Estate Development Corporation had more
than 5,000 acres of prime land available for development.
Inland Real Estate Sales, Inc., another affiliate of Inland, is one of the
largest "mid-market" commercial brokerage specialists in the Midwest. In the
last three years it has completed more than $175 million in commercial real
estate sales. Inland Real Estate Sales, Inc. has been involved in the sale of
more than 40,000 multi-family units and over 10 million square feet of
commercial property.
See also "Prior Performance of our Affiliates" and APPENDIX A - "Prior
Performance Tables" for information concerning over $1.6 billion raised from
over 42,000 investors in connection with two other REITs, one other public real
estate equity program, one private real estate equity program and five private
placement mortgage and note programs and nine real estate exchange private
placement offerings sponsored by The Inland Group affiliated companies during
the 10-year period ending September 30, 2002, and the prior performance of those
programs. During the last 35 years, more than 10,000 investors were in the
Inland Group's 231 completed equity programs as of June 23, 2003. None of these
investors lost their initial invested capital.
The following sets forth information with respect to the directors and
principal executive officers of The Inland Group:
<Table>
<Caption>
NAME AGE* POSITION AND OFFICE WITH THE INLAND GROUP
- ---- ---- -----------------------------------------
Daniel L. Goodwin 59 Chairman, president and director
Robert H. Baum 59 Vice chairman, executive vice president - general
counsel and director
G. Joseph Cosenza 59 Vice chairman and director
Robert D. Parks 59 Director
</Table>
62
<Page>
- ----------
*As of January 1, 2003
Messrs. Goodwin, Baum, Cosenza and Parks were the founders of Inland.
DANIEL L. GOODWIN, is a founding and controlling stockholder of and the
Chairman of the Board and Chief Executive Officer of The Inland Group, Inc. Mr.
Goodwin also serves as a director or officer of entities wholly owned or
controlled by The Inland Group. In addition, Mr. Goodwin is the Chairman of the
Board and Chief Executive Officer of Inland Mortgage Investment Corporation and
Chairman and Chief Executive Officer of Inland Bancorp, a bank holding company.
He also oversees numerous stock market investment portfolios and is the advisor
for Inland Mutual Fund Trust, a publicly traded mutual fund.
HOUSING. Mr. Goodwin is a member of the National Association of Realtors,
the Illinois Association of Realtors and the Northern Illinois Commercial
Association of Realtors. He is also the author of a nationally recognized real
estate reference book for the management of residential properties. Mr. Goodwin
serves on the Board of the Illinois State Affordable Housing Trust Fund. He
served as an advisor for the Office of Housing Coordination Services of the
State of Illinois, and as a member of the Seniors Housing Committee of the
National Multi-Housing Council. He has served as Chairman of the DuPage County
Affordable Housing Task Force. Mr. Goodwin also serves as Chairman of New
Directions Affordable Housing Corporation.
EDUCATION. Mr. Goodwin obtained his Bachelor's and Master's Degrees from
Illinois State universities. Following graduation, he taught for five years in
the Chicago Public Schools. More recently, Mr. Goodwin has served as a member of
the Board of Governors of Illinois State Colleges and Universities. He is Vice
Chairman of the Board of Trustees of Benedictine University, Vice Chairman of
the Board of Trustees of Springfield College and Chairman of the Board of
Trustees of Northeastern Illinois University.
ROBERT H. BAUM has been with The Inland Group and has affiliates since 1968
and is one of the four original principals. Mr. Baum is vice chairman and
executive vice president-general counsel of The Inland Group. In his capacity as
general counsel, Mr. Baum is responsible for the supervision of the legal
activities of The Inland Group and its affiliates. This responsibility includes
the supervision of The Inland Group Law Department and serving as liaison with
outside counsel. Mr. Baum has served as a member of the North American
Securities Administrators Association Real Estate Advisory Committee and as a
member of the Securities Advisory Committee to the Secretary of State of
Illinois. He is a member of the American Corporation Counsel Association and has
also been a guest lecturer for the Illinois State Bar Association. Mr. Baum has
been admitted to practice before the Supreme Court of the United States, as well
as the bars of several federal courts of appeals and federal district courts and
the State of Illinois. He is also an Illinois licensed real estate broker. He
has served as a director of American National Bank of DuPage and currently
serves as a director of Inland Bancorp Holding Company and of Westbank. Mr. Baum
also is a member of the Governing Council of Wellness House, a charitable
organization that provides emotional support for cancer patients and their
families.
G. JOSEPH COSENZA has been with The Inland Group and its affiliates since
1968 and is one of the four original principals. Mr. Cosenza is a director and
vice chairman of The Inland Group and oversees, coordinates and directs The
Inland Group organization's many enterprises. In addition, Mr. Cosenza
immediately supervises a staff of 16 persons who engage in property
acquisitions. Mr. Cosenza has been a consultant to other real estate entities
and lending institutions on property appraisal methods.
63
<Page>
Mr. Cosenza received his B.A. Degree from Northeastern Illinois University
and his Masters Degree from Northern Illinois University. From 1967 to 1968, he
taught in the La Grange Illinois School District and, from 1968 to 1972, he
served as assistant principal and taught in the Wheeling, Illinois School
District. Mr. Cosenza has been a licensed real estate broker since 1968 and an
active member of various national and local real estate associations, including
the National Association of Realtors and the Urban Land Institute.
Mr. Cosenza has also been chairman of the board of American National Bank
of DuPage and has served on the board of directors of Continental Bank of
Oakbrook Terrace. He was the chairman and is presently a director of Westbank in
Westchester, Hillside and Lombard, Illinois.
ROBERT D. PARKS has been a director of The Inland Group since 1968 and is
one of the four original principals. He has been our chairman, chief executive
officer, and an affiliated director since our formation. He is chairman of our
sponsor and a director of our managing dealer. Mr. Parks is president, chief
executive officer and a director of Inland Real Estate Corporation. He is a
director of Inland Real Estate Advisory Services, Inc., Inland Investment
Advisors, Inc., Partnership Ownership Corp., Inland Southern Acquisitions, Inc.
and Inland Southeast Investment Corp. He is chairman, chief executive officer
and director of Inland Retail Real Estate Trust, Inc. and a trustee of Inland
Mutual Fund Trust, Inc.
Mr. Parks is responsible for the ongoing administration of existing
investment programs, corporate budgeting and administration for our sponsor. He
oversees and coordinates the marketing of all investments and investor
relations.
Prior to joining Inland, Mr. Parks was a school teacher in Chicago's public
schools. He received his B.A. Degree from Northeastern Illinois University and
his M.A. Degree from the University of Chicago. He is a registered Direct
Participation Program Limited Principal with the National Association of
Securities Dealers, Inc. He is also a member of the Real Estate Investment
Association, the Financial Planning Association, the Foundation for Financial
Planning, as well as a member of the National Association of Real Estate
Investment Trusts, Inc.
OUR GENERAL MANAGEMENT
We operate under the direction of our board of directors. Our board is
responsible for our business and management. Our board sets our policies and
strategies. Our advisor is responsible for the day-to-day management of our
affairs and the implementation of the policies of our board. Inland Western
Management Corp. is responsible for managing, maintaining and leasing the
individual properties. Inland Real Estate Acquisitions, Inc. is responsible for
acquiring properties. Inland Risk and Insurance Management Services, Inc., an
affiliate of The Inland Group, Inc., is responsible for providing insurance
coverage on the properties. Inland Mortgage Corporation, Inland Mortgage
Servicing Corporation and Inland Mortgage Investment Corporation are responsible
for the purchase, sales and servicing of mortgages. See "Compensation Table" for
a description for the fees paid to our affiliates.
64
<Page>
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to our directors
and executive officers:
<Table>
<Caption>
NAME AGE POSITION AND OFFICE WITH US
------- ----- -------------------------------------------
Robert D. Parks........................ 59 Chairman, chief executive officer and
affiliated director
Roberta S. Matlin...................... 58 Vice president-- administration
Scott W. Wilton........................ 42 Secretary
Kelly E. Tucek......................... 40 Treasurer
Brenda G. Gujral....................... 60 Affiliated director
Frank A. Catalano, Jr.................. 41 Independent director
Kenneth H. Beard....................... 63 Independent director
Paul R. Gauvreau ...................... 63 Independent director
Gerald M. Gorski ...................... 60 Independent director
Barbara A. Murphy...................... 65 Independent director
</Table>
- ----------
*As of January 1, 2003
ROBERTA S. MATLIN has been our vice president of administration since our
formation. Ms. Matlin joined Inland in 1984 as director of investor
administration and currently serves as senior vice president of investments of
our sponsor, directing its day-to-day internal operations. Ms. Matlin is a
director of our sponsor and of our managing dealer. Since 1998, she has been
vice president of administration of Inland Retail Real Estate Trust and was vice
president of administration of Inland Real Estate Corporation from 1995 until
2000. She is president and a director of Inland Investment Advisors, Inc. and
Intervest Southern Real Estate Corporation, and a trustee and executive vice
president of Inland Mutual Fund Trust. Prior to joining Inland, she worked for
the Chicago Region of the Social Security Administration of the United States
Department of Health and Human Services. Ms. Matlin is a graduate of the
University of Illinois. She holds Series 7, 22, 24, 39, 63 and 65 licenses from
the National Association of Securities Dealers, Inc.
SCOTT W. WILTON has been our secretary since our formation. Mr. Wilton
joined The Inland Group in January 1995. He is assistant vice president of The
Inland Real Estate Group, Inc. and assistant counsel with The Inland Real Estate
Group law department. In 1998, Mr. Wilton became secretary of Inland Retail Real
Estate Trust, Inc. and Inland Retail Real Estate Advisory Services, Inc. In
2001, he became the Secretary of Inland Real Estate Exchange corporation. Mr.
Wilton is involved in all aspects of The Inland Group's business, including real
estate acquisitions and financing, securities law and corporate governance
matters, leasing and tenant matters, and litigation management. He received B.S.
degrees in economics and history from the University of Illinois at Champaign
1982 and his law degree from Loyola University of Chicago, Illinois 1985. Prior
to joining The Inland Group, Mr. Wilton worked for the Chicago law firm of
Williams, Rutstein, Goldfarb, Sibrava and Midura, Ltd., specializing in real
estate and corporate transactions and litigation.
KELLY E. TUCEK has been our treasurer since our formation. Ms. Tucek joined
The Inland Group in 1989 and is an Assistant Vice President of Inland Real
Estate Investment Corporation. As of August 1996, Ms. Tucek is responsible for
the Investment Accounting Department, which includes all public partnership
accounting functions along with quarterly and annual SEC filings. Prior to
joining Inland, Ms. Tucek was on the audit staff of Coopers and Lybrand since
1984. She received her B.A. Degree in Accounting and Computer Science from North
Central College.
65
<Page>
BRENDA G. GUJRAL, an affiliated director, is president, chief operating
officer and a director of Inland Real Estate Investment Corporation, the parent
company of our advisor. She is also president, chief operating officer and a
director of our managing dealer. Mrs. Gujral is also a director of Inland
Investment Advisors, Inc., an investment advisor.
Mrs. Gujral has overall responsibility for the operations of Inland Real
Estate Investment Corporation, including the distribution of checks to over
50,000 investors, the review of periodic communications to those investors, the
filing of quarterly and annual reports for Inland Real Estate Investment
Corporation-sponsored publicly registered investment programs with the
Securities and Exchange Commission, compliance with other Securities and
Exchange Commission and National Association of Securities Dealers securities
regulations both for Inland Real Estate Investment Corporation and Inland
Securities Corporation, review of asset management activities and marketing and
communications with the independent broker-dealer firms selling current and
prior Inland Real Estate Investment Corporation sponsored investment programs.
She works with internal and outside legal counsel in structuring Inland Real
Estate Investment Corporation's investment programs and in connection with the
preparation of its offering documents and registering the related securities
with the Securities and Exchange Commission and state securities commissions.
Mrs. Gujral has been with the Inland organization for 22 years, becoming an
officer in 1982. Prior to joining the Inland organization, she worked for the
Land Use Planning Commission establishing an office in Portland, Oregon to
implement land use legislation for that state.
She is a graduate of California State University. She holds Series 7, 22,
39 and 63 licenses from the National Association of Securities Dealers and is a
member of The National Association of Real Estate Investment Trusts. Ms. Gujral
is also a member of the Financial Planning Association, the Foundation for
Financial Planning and the National Association for Female Executives.
FRANK A. CATALANO, JR. has served as president of Catalano & Associates
since 1999. Catalano & Associates is a real estate company that includes
brokerage, property management and rehabilitation and leasing of office
buildings. Mr. Catalano's experience also includes mortgage banking. Since 2002,
he has been a vice president of First Home Mortgage Company. Prior to that, Mr.
Catalano was a regional manager at Flagstar Bank. He also was president and
chief executive officer of CCS Mortgage, Inc. from 1995 through 2000, when
Flagstar Bank acquired it.
Mr. Catalano is a member of the Elmhurst, IL Chamber of Commerce and as
past chairman of the board, he is also a member of the Elmhurst Jaycees,
Elmhurst Hospital Board of Governors, Elmhurst Kiwanis and is currently the
President of Elmhurst Historical Museum Commission. Mr. Catalano holds a
mortgage broker's license.
KENNETH H. BEARD was president and chief executive officer of Exelon
Services, an energy services company from 1999-2002, where he had responsibility
for financial performance including being accountable for creating business
strategy, growing the business through acquisition, integrating acquired
companies and developing infrastructure for the combined acquired businesses.
Exelon Services is a subsidiary of Exelon Corporation, a New York Stock Exchange
listed company. Prior to that position, from 1974 to 1999, Mr. Beard was the
founder, president and chief executive officer of Midwest Mechanical, Inc., a
heating, ventilation and air conditioning company providing innovative and cost
effective construction services and solutions for commercial, industrial, and
institutional facilities. From 1964 to 1974 Mr. Beard was employed at The Trane
Company, a manufacturer of heating, ventilating and air conditioning equipment
having positions in sales, sales management and general management.
66
<Page>
Mr. Beard holds a MBA and BSCE from the University of Kentucky and is a
licensed mechanical engineer. He is on the board of directors of the Wellness
House in Hinsdale, Illinois, a cancer support organization, and Harris Bank -
Hinsdale, serves on the Dean's Advisory Council of the University of Kentucky,
School of Engineering, and is a past member of the Oak Brook, Illinois Plan
Commission (1981-1991).
PAUL R. GAUVREAU is the retired chief financial officer, financial vice
president and treasurer of Pittway Corporation, New York Stock exchange listed
manufacturer and distributor of professional burglar and fire alarm systems and
equipment from 1966 until its sale to Honeywell, Inc. in 2001. He was president
of Pittway's non-operating real estate and leasing subsidiaries through 2001. He
was a financial consultant to Honeywell, Inc.; Genesis Cable, L.L.C.; ADUSA,
Inc. He was a director and audit committee member of Cylink Corporation, a
Nasdaq Stock Market listed manufacturer of voice and data security products from
1998 until its merger with Safenet, Inc. in February 2003. Prior to 1995, he was
a director and acting chief financial officer instrumental in 1996 Cylink
initial public offering.
Mr. Gauvreau holds a MBA from the University of Chicago an a BSC from
Loyola University of Chicago. He is on the Board of Trustees and Vice Chairman
of the Finance Committee of Benedictine University, Lisle, Illinois; a member of
the Board of Trustees of the Chaddick Institute of DePaul University, Chicago,
Illinois; and a member of the board of directors and treasurer of the Children's
Brittle Bone Foundation, Pleasant Prairie, Wisconsin.
GERALD M. GORSKI is a partner in the law firm of Gorski and Good, Wheaton
Illinois. Mr. Gorski's practice is limited to governmental law. His firm
represents numerous units of local government in Illinois and Mr. Gorski has
served as a Special Assistant State's Attorney and Special Assistant Attorney
General in Illinois. He received a Bachelor of Arts degree from North Central
College with majors in Political Science and Economics and a Juris Doctor degree
from DePaul University Law School where he was placed on the Deans Honor List.
Mr. Gorski serves as the Vice-Chairman of the Board of Commissioners for the
DuPage Airport Authority. He has written numerous articles on various legal
issues facing Illinois municipalities; has been a speaker at a number of
municipal law conferences and is a member of the Illinois Bar Association, the
Institute for Local Government Law and the International Municipal Lawyers
Association.
BARBARA A. MURPHY is the Chairwoman of the DuPage Republican Party. Ms.
Murphy is also a member of Illinois Motor Vehicle Review Board and a member of
Matrimonial Fee Arbitration Board. Ms. Murphy is a Milton Township Trustee and a
committeeman for Milton Township Republican Central Committee. Ms. Murphy
previously served as State Central Committeewoman for the Sixth Congressional
District and has also served on the DuPage Civic Center Authority Board, the
DuPage County Domestic Violence Task Force, and the Illinois Toll Highway
Advisory Committee. Ms. Murphy is a founding member of the Family Shelter
Service Board. As an active volunteer for Central DuPage Hospital, she acted as
the "surgery hostess" (cared for families while a family member was undergoing
surgery). Ms. Murphy was a department manager and buyer for J.W. Robinson's and
Bloomingdale's and the co-owner of Daffy Down Dilly Gift Shop.
COMMITTEES OF OUR BOARD OF DIRECTORS
Our bylaws provide that our board may establish such committees as the
board believes appropriate. The board will appoint the members of the committee
in the board's discretion. Our bylaws require that a majority of the members of
each committee of our board is to be comprised of independent directors.
67
<Page>
AUDIT COMMITTEE. Our bylaws provide for our board to designate an audit
committee consisting of at least three independent directors and for all
committee members to be independent directors. Our board will designate three of
the independent directors as the members of the audit committee. The audit
committee makes recommendations concerning the engagement of independent public
accountants, reviews the plans and results of the audit engagement with the
independent public accountants, approves professional services provided by, and
the independence of, the independent public accountants, considers the range of
audit and non-audit fees and consults with the independent public accountants
regarding the adequacy of our internal accounting controls.
EXECUTIVE COMMITTEE. Our board may establish an executive committee
consisting of three directors, including two independent directors. The
executive committee would likely exercise all powers of the board in the
management of the business and affairs of our company, except for those which
require actions by all of the directors or by the independent directors under
our articles of incorporation or bylaws or under applicable law.
MANAGEMENT AND DISCLOSURE COMMITTEE. Our board may establish a management
disclosure committee to assist in reviewing our disclosures, controls and
procedures. The committee may include our directors and directors and officers
of our advisor.
EXECUTIVE COMPENSATION COMMITTEE. Our board may establish an executive
compensation committee consisting of three directors, including two independent
directors, to establish compensation policies and programs for our executive
officers. The executive compensation committee will exercise all powers of our
board in connection with establishing and implementing compensation matters,
including incentive compensation and benefit plans.
COMPENSATION OF DIRECTORS AND OFFICERS
We pay our independent directors an annual fee of $5,000 plus $500 for each
in person meeting and $350 for each meeting of the board or a committee of the
board attended by telephone, and reimbursement of their out-of-pocket expenses
incurred. Our two other directors, Robert D. Parks and Brenda G. Gujral, do not
receive any fees or other remuneration for serving as directors.
EXECUTIVE COMPENSATION
We have no employees and our executive officers will not receive any
compensation from us for their services as such officers. Our executive officers
are officers of one or more of our affiliates, and are compensated by those
entities, in part, for their services rendered to us.
INDEPENDENT DIRECTOR STOCK OPTION PLAN
We have an independent director stock option plan under which non-employee
directors, as defined under Rule 16b-3 of the Securities Exchange Act of 1934,
are eligible to participate.
We have authorized and reserved a total of 75,000 shares of our common
stock for issuance under our independent director stock option plan. The number
and type of shares which could be issued under the plan may be adjusted if we
are the surviving entity after a reorganization or merger or if our stock
splits, is consolidated or we are recapitalized. If this occurs, the exercise
price of the options will be correspondingly adjusted.
The independent director stock option plan provides for the grant of
non-qualified stock options to purchase 3,000 shares to each independent
director upon his or her appointment if they meet the
68
<Page>
conditions in the plan. The plan also provides for subsequent grants of options
to purchase 500 shares on the date of each annual stockholder's meeting to each
independent director then in office. However, options may not be granted at any
time when the grant, along with the grants to be made at the same time to other
independent directors, would exceed 10% of our issued and outstanding shares. We
have granted options to purchase 3,000 shares at $8.95 per share to each of our
three independent directors. The option price for subsequent options will be
equal to the fair market value of a share on the last business day preceding the
annual meeting of stockholders. The option price will be fixed at $8.95 per
share until the earlier of the termination of this offering or two years after
the commencement of this offering.
One-third of the options granted following an individual initially becoming
an independent director are exercisable beginning on the date of their grant,
one-third will first become exercisable on the first anniversary of the date of
their grant, and the remaining one-third will first become exercisable on the
second anniversary of the date of their grant. All other options granted under
the independent director stock option plan will become fully exercisable on the
second anniversary of their date of grant.
Options granted under the independent director stock option plan are
exercisable until the first to occur of
- the tenth anniversary of the date of grant,
- the removal for cause of the independent director as an independent
director, or
- three months following the date the independent director ceases to
be an independent director for any other reason except death or
disability.
The options may be exercised by payment of cash or through the delivery of
common stock. They are generally exercisable in the case of death or disability
for a period of one year after death or the disabling event, provided that the
death or disabling event occurs while the person is an independent director.
However, if the option is exercised within the first six months after it becomes
exercisable, any shares issued pursuant to such exercise may not be sold until
the six month anniversary of the date of the grant of the option.
Notwithstanding any other provisions of the independent director stock option
plan to the contrary, no option issued pursuant thereto may be exercised if such
exercise would jeopardize our status as a REIT under the Internal Revenue Code.
No option may be sold, pledged, assigned or transferred by an independent
director in any manner otherwise than by will or by the laws of descent or
distribution.
Upon our dissolution, liquidation, reorganization, merger or consolidation
as a result of which we are not the surviving corporation, or upon sale of all
or substantially all of our property, the independent director stock option plan
will terminate, and any outstanding unexercised options will terminate and be
forfeited. However, holders of options may exercise any options that are
otherwise exercisable immediately prior to the dissolution, liquidation,
consolidation or merger. Additionally, our board may provide for any or all of
the following alternatives:
- for the assumption by the successor corporation of the options
previously granted or the substitution by the corporation for the
options covering the stock of the successor corporation, or a parent
or subsidiary thereof, with appropriate adjustments as to the number
and kind of shares and exercise prices;
69
<Page>
- for the continuance of the independent director stock option plan by
such successor corporation in which event the independent director
stock option plan and the options will continue in the manner and
under the terms so provided; or
- for the payment in cash or common stock in lieu of and in complete
satisfaction of the options.
OUR ADVISOR
Our advisor, Inland Western Retail Real Estate Advisory Services, Inc., is
an Illinois corporation and a wholly owned subsidiary of our sponsor. The
following table sets forth information regarding the executive officers and
directors of our advisor, all of whom have held their positions and offices
since its formation in 1998. The biographies of Messrs. Parks, Cosenza, and
Goodwin are set forth above under "-- Inland Affiliated Companies" and the
biography of Mr. Wilton is set forth under "-- Our Directors and Executive
Officers."
70
<Page>
<Table>
<Caption>
NAME AGE POSITION AND OFFICE WITH OUR ADVISOR
---- --- --------------------------------------------
Daniel L. Goodwin................... 59 Director
Robert D. Parks..................... 59 Director and president
G. Joseph Cosenza................... 59 Director
Brenda G. Gujral.................... 60 Vice president
Catherine L. Lynch.................. 44 Treasurer
Scott W. Wilton..................... 42 Secretary
</Table>
- ----------
*As of January 1, 2003
CATHERINE L. LYNCH joined the Inland organization in 1989 and is the
treasurer/secretary of our sponsor. Ms. Lynch is responsible for managing the
corporate accounting department of our sponsor. Ms. Lynch is also the
treasurer/secretary and a director of the dealer manager and treasurer of Inland
Retail Real Estate Advisory Services and Inland Investment Advisors, Inc. Prior
to joining the Inland organization, Ms. Lynch worked in the field of public
accounting for KPMG Peat Marwick LLP since 1980. She received her B.S. Degree in
Accounting from Illinois State University. Ms. Lynch is a certified public
accountant and a member of the American Institute of Certified Public
Accountants and the Illinois CPA Society. She is registered with the National
Association of Securities Dealers, Inc. as a financial operations principal.
OUR ADVISORY AGREEMENT
DUTIES OF OUR ADVISOR. Under the terms of our advisory agreement, our
advisor, generally has responsibility for our day-to-day operations. This
includes the following:
- administering our bookkeeping and accounting functions,
- serving as our consultant in connection with policy decisions to be
made by our board, managing our properties or causing them to be
managed by another party, and
- rendering other services as our board deems appropriate.
Our advisor is subject to the supervision of its board and has only such
functions as are delegated to it by its board.
TERM OF THE ADVISORY AGREEMENT. The advisory agreement has an initial term
of three years and is renewable for successive one-year terms upon the mutual
consent of the parties. It may be terminated by either party, by mutual consent
of the parties or by a majority of the independent directors or the advisor, as
the case may be, upon 60 days' written notice. If the advisory agreement is
terminated, the advisor must cooperate with us and take all reasonable steps
requested by our board to assist it in making an orderly transition of the
advisory function. Our board shall determine that any successor advisor
possesses sufficient qualifications to perform the advisory function for us
and justify the compensation provided for in its contract with us.
COMPENSATION TO ADVISOR. The advisory agreement provides for the advisor to
be paid:
- an advisor asset management fee after the stockholders have first
received a 6% annual return; and
- a property disposition fee; and
71
<Page>
- an incentive advisory fee from the net proceeds of a sale of a
property after the stockholders have first received a 10% cumulative
return and a return of their net investment.
If the advisor or its affiliates perform services that are outside of the
scope of the advisory agreement, we will compensate them at rates and in amounts
agreed upon by the advisor and the independent directors.
The advisor bears the expenses it incurs in connection with performing its
duties under the advisory agreement. These include:
- employee expenses;
- travel and other expenses of its directors, officers and employees;
- rent;
- telephone;
- equipment expenses to the extent they relate to the office
maintained by both us and the advisor; and
- miscellaneous administrative expenses incurred in supervising,
monitoring and inspecting real property or our other investments or
relating to its performance under the advisory agreement. The
advisor is reimbursed for the cost to it and its affiliates of goods
and services used for and by us and obtained from unaffiliated
parties. It is also reimbursed for related administrative services.
We bear our own expenses for functions the advisor is not required
to perform under the advisory agreement. These generally include
capital raising and financing activities, corporate governance
matters and other activities not directly related to our properties.
REIMBURSEMENT BY ADVISOR. For any year in which we qualify as a REIT, our
advisor must reimburse us for the amounts, if any:
- by which our total operating expenses paid during the previous
fiscal year exceed the greater of
- 2% of our average assets for that fiscal year or
- 25% of our net income, before any additions to or allowance for
reserves for depreciation, amortization or bad debts or other
similar low-cash reserves before any gain from the sale of our
assets, for that fiscal year;
- PLUS an amount, so long as it does not exceed the amount of the
advisor asset management fee for that year, equal to any deficit
between the total amount of distributions to stockholders for such
fiscal year and the current return. Current return refers to a
cumulative, non-compounded return, equal to 6% per annum on net
investment.
72
<Page>
The advisor is also obligated to pay organization and offering expenses in
excess of specified levels. See "Compensation Table" for a description of the
fees and reimbursements to which the advisor is entitled. Provided however, only
so much of the excess specified in the first bullet point above will be required
to be reimbursed as the board, including a majority of the independent
directors, determines should justifiably be reimbursed in light of such
unanticipated, unusual or non-recurring factors which may have occurred within
60 days after the end of the quarter for which the excess occurred. In this
event, the stockholders will be sent a written disclosure and explanation of the
factors the independent directors considered in arriving at the conclusion that
the higher total operating expenses were justified.
BUSINESS COMBINATION BETWEEN US AND THE ADVISOR. Many REITs that are listed
on a national stock exchange or included for quotation on a national market
system are considered self-administered, because their employees perform all
significant management functions. In contrast, those that are not
self-administered, like us, typically engage a third-party, such as our advisor,
to perform management functions on its behalf. If for any reason the independent
directors determine that we should become self-administered, the advisory
agreement permits the business conducted by the advisor, including all of its
assets, to be acquired by or consolidated into us. A similar provision is
included in each management agreement permitting acquisition of the business
conducted by the respective property manager, including all of its assets. Until
August 20, 2008, such a business combination could only take place with our
consent and that of the advisor and property manager. After August 20, 2008, we
could acquire these companies in a business combination without their consent.
If the businesses conducted by the advisor and/or a property manager are
acquired by or consolidated into us, the advisor and/or the property manager
and/or their respective stockholders or members will receive a number of shares
in exchange for terminating their respective management agreements and the
release and waiver of all fees payable under them. We will be obligated to pay
any fees accrued under such contractual arrangements for services rendered
through the closing of the acquisitions.
The number of shares we will issue to the advisor and/or the property
managers, as the case may be, will be determined as follows:
- We will first send an election notice to the advisor and/or the
property manager, as the case may be, of our election to proceed
with such a transaction.
- Next, the net income of the advisor and/or the property manager, as
the case may be, for the calendar monthly period immediately
preceding the calendar month in which the business combination
agreement is signed, as determined by an independent audit conducted
in accordance with generally accepted auditing standards, will be
annualized. The advisor or the property manager will bear the cost
of the audit.
- The annualized net income will then be multiplied by 90% and divided
by our funds from operations per weighted average share. Funds from
operations per weighted average share will be equal to our
annualized funds from operations per weighted average share for the
fiscal quarter immediately preceding the fiscal quarter in which the
business combination agreement is signed, all based upon our
quarterly report delivered to stockholders.
Funds from operations means generally net income in accordance with
generally accepted accounting principles, excluding gains or losses, from debt
restructuring and sales of properties, plus
73
<Page>
depreciation of real property and amortization, and after adjustments for
unconsolidated partnerships and joint ventures.
The resulting quotient will constitute the number of shares to be issued by
us to the advisor or the property manager, or their respective shareholders or
members, as the case may be. Delivery of the shares and the closing of the
transaction to occur within 90 days of delivery after the election notice.
Under some circumstances, this kind of transaction can be entered into and
consummated without seeking specific stockholder approval. See "Conflicts of
Interest." Any transaction like this will occur, if at all, only if our board
obtains a fairness opinion from a recognized financial advisor or institution
providing valuation services to the effect that the consideration to be paid is
fair to the stockholders from a financial point of view. If the advisory
agreement is terminated for any reason other than our acquisition of the
business conducted by the advisor, then all obligations of the advisor and its
affiliates to offer properties to us will also terminate.
LIABILITY AND INDEMNIFICATION OF ADVISOR. Under the advisory agreement, we
are required to indemnify the advisor and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding with respect to the
advisor's acts or omissions. However, this is only a requirement so long as:
- the advisor determined in good faith that the course of conduct
which caused a loss or liability was in our best interest;
- the advisor was acting on behalf of or performing services for us;
- the liability or loss was not the result of misconduct on the part
of the advisor; and
- the indemnification or agreement to hold harmless is recoverable
only out of our net assets and not from the assets of the
stockholders.
We will advance amounts to those entitled to indemnification for legal and
other expenses only if:
- the legal action relates to acts or omissions concerning the
performance of duties or services by the person seeking
indemnification for or on our behalf;
- the legal action is initiated by a third party and a court of
competent jurisdiction specifically approves its advancement; and
- the person seeking indemnification who is receiving the advances
undertakes to repay the advanced funds to us, together with the
applicable legal rate of interest thereon, if such party is found
not to be entitled to indemnification.
Inland Retail Real Estate Trust, Inc. is still offering its securities and
has not fully invested all of its anticipated funds available for investment.
Accordingly, material conflicting investment opportunities between them and us
could be expected. However, we have initially focused our purchase of retail
centers to those west of the Mississippi River, which is outside Inland Retail
Real Estate Trust, Inc.'s primary geographic area of investment. However, if any
conflicts do arise, they will be resolved as provided in the property
acquisition service agreement.
74
<Page>
THE PROPERTY MANAGER AND THE MANAGEMENT AGREEMENT
Our present property manager provides property management services to us
under the terms of the management agreement. The property manager provides
services in connection with the rental, leasing, operation and management of the
properties. Our property manager is a Delaware corporation, owned principally by
individuals who are affiliates of The Inland Group. We have agreed to pay the
property manager a monthly management fee in an amount no greater than 90% of
the fee which would be payable to an unrelated party providing such services,
which fee will initially be 4.5% of gross income, as defined in the management
agreement from the properties managed for the month for which the payment is
made. In addition, we have agreed to compensate the property manager if it
provides us with services other than those specified in the management
agreement. There will be a separate management agreement for each property for
an initial term ending as of December 31 in the year in which the property is
acquired, and each management agreement will be subject to three successive
three-year renewals, unless either party notifies the other in writing of its
intent to terminate between 60 and 90 days prior to the expiration of the
initial or renewal term. We may terminate with 30 days prior written notice in
the event of gross negligence or malfeasance by the property manager. The
property manager may subcontract the required property management services for
less than the management fee provided in the management agreement. See
"Compensation Table -- Nonsubordinated Payments -- Operational Stage." Our
property manager may form additional property management companies as necessary
to manage the properties we acquire, and may approve of the change of management
of a property from one manager to another.
Our property manager, Inland Western Management Corp., conducts its
activities at its principal executive office at 2901 Butterfield Road in Oak
Brook, Illinois.
See "--The Advisory Agreement" above in this section and "Conflicts of
Interest" for a discussion of our option to acquire or consolidate with the
business conducted by the property managers.
The following sets forth information with respect to the executive officers
and directors of the Inland Western Management Corp.
<Table>
<Caption>
POSITION AND OFFICE
WITH INLAND WESTERN
NAME AGE* MANAGEMENT CORP.
---- ---- ----------------------------------
Thomas P. McGuiness................ 46 Chairman, director and chief
executive officer
JoAnn Armenta...................... 29 Senior vice president, director
and secretary
James H. Neubauer.................. 61 Senior vice president and director
Alan F. Kremin..................... 56 Director
Anthony Casaccio................... 47 Director
</Table>
- ----------
*As of January 1, 2003
THOMAS P. MCGUINNESS joined Inland Property Management in 1982 and became
president of Mid-America Management Corporation in July 1990 and chairman in
2001. He is also president of Inland Property Management, Inc. as well as a
director of Inland Commercial Property Management. He
75
<Page>
is chairman and a director of Inland Mid-Atlantic Management Corp. Mr.
McGuinness is a licensed real estate broker; and is past president of the
Chicagoland Apartment Association, and past regional vice president of the
National Apartment Association. He is currently on the board of directors of the
Apartment Building Owners and Managers Association, and is a trustee with the
Service Employees' Local No. 1 Health and Welfare Fund, as well as the Pension
Fund and holds CLS and CSM accreditations from the International Council of
Shopping Centers.
JOANN ARMENTA joined Inland Property Management in 1992 working in
residential management. Ms. Armenta became involved with commercial properties
in 1995 overseeing the management of retail, office and industrial properties.
She has managed a portfolio of retail properties for Inland Commercial Property
Management and was promoted to senior property manager supervising one-half of
the property managers. In 2001, she left Inland Commercial Property Management
and accepted a position as Assistant Vice President for Inland Southern Corp.
Also, she was promoted to Vice President of Inland Mid-Atlantic Management Corp.
Her responsibilities in these positions include being in charge of due diligence
for all retail acquisitions in approximately 15 states. In 2002 alone she was
responsible for all due diligence on approximately 12 million square feet
including the pro formas, site inspections, tenant interviews; engineering
reports and upgrades. She has also been responsible for coordinating the
transition from a property in the due diligence process to the seamless folding
of the property into property operations.
Mrs. Armenta is also the sole training coordinator for Inland Southeast
Property Management Corp., Inland Southern Management Corp., and Inland
Mid-Atlantic Management Corp. for all new property managers and employees. In
addition, she oversees the management of a portfolio of over two million square
feet in the Chicago metropolitan area managing retail, office and light
industrial.
Ms. Armenta holds a CSM accreditation with the International Council of
Shopping Centers.
JAMES H. NEUBAUER joined Inland Property Management in 1978. In 1981, he
was promoted to the position of director of purchasing. Subsequently, in 1983,
he became a regional property manager with responsibility for residential and
retail mixed use properties. In 1984, he became the president of Inland Western
Property Management, responsible for a portfolio of properties in Arizona. From
1985 to 1996, Mr. Neubauer was senior vice president of Mid-America Management
where he was responsible for all rental property operations outside the
Chicagoland metropolitan area, which included New Hampshire, Arizona, Indiana
and Wisconsin. He left Inland Southeast Property Management Corp. as senior vice
president and in May 2002 was promoted to President. He has achieved the
Certified property Manager (CPM) designation. He is also a member of the
International Council of Shopping Centers and is a licensed real estate broker
in Florida. He holds a B.A. degree from the University of Maryland, a M.A.
degree from Ball State University and a M.B.A. degree from Benedictine College.
ALAN F. KREMIN joined The Inland Group in 1982. Mr. Kremin was promoted to
treasurer of The Inland Group, Inland Commercial Property Management, Inc., and
various other Inland Group subsidiaries in March 1991. In his current capacity
as the chief financial officer of The Inland Group, a position he has held since
1991, his responsibilities include preparation of consolidated federal and state
corporate tax returns, cash budgeting for the consolidated group and serving as
a director for various Inland Group subsidiaries, for which he also serves as
treasurer. He is a director of Inland Southeast Property Management Corp., and
in March 2002 he became a director, secretary and treasurer of Inland Southern
Management LLC. Prior to his current position, Mr. Kremin was treasurer of
Inland Real Estate Investment Corporation from 1986 to 1990, when he supervised
the daily operations of its accounting department. That department encompasses
corporate accounting for the general partner of the Inland Real Estate
Investment Corporation-sponsored limited partnership investment programs. Prior
to joining
76
<Page>
The Inland Group, Mr. Kremin served for one year as a controller of CMC Realty
and three years as assistant controller of JMB Realty Corporation. Prior to his
real estate experience, Mr. Kremin worked eight years in public accounting,
including four years at Arthur Young & Company. He received his B.S. degree in
accounting from Loyola University. Mr. Kremin is a certified public accountant,
holds securities and insurance licenses and is a licensed real estate broker.
ANTHONY A. CASACCIO joined Inland in 1984, working for Inland Condo
Association Management. From 1987 to 1991 he was president of Partnership Asset
Sales Corporation, where he was responsible for the disposition of over 20,000
apartment units located in northeast Illinois and nearby states, as well as
non-residential properties leased to nursing homes, health clubs, office,
industrial and shopping center tenants. In 1991 when Inland Real Estate
Development Corporation was formed, Mr. Casaccio became the president and a
director. Still serving in those capacities, Mr. Casaccio is responsible for the
disposition of raw land investment programs for which he is also a senior vice
president of the sponsor, which owns more than 10,000 acres of development land
in Chicago's suburban counties.
In connection with land development, Mr. Casaccio, in addition to the sales
of improved and raw land parcels, oversees land planning activities associated
with readying land for sale, including zoning and annexation, negotiations with
local municipal school, sanitary district and county authorities, submission of
concept plans, preliminary and site amenities, final plats of subdivision; and
completion of infrastructure improvements such as roads, sewer and water lines
stormwater management facilities and site amenities. He is also a director and
the secretary/treasurer of IRED Development Management, Inc.
Mr. Casaccio holds a B.S. degree in accounting from DePaul University. He
is a member of the Realtor Association of the Western Suburbs (IL), the Fox
Valley (IL) Association of Realtors, the Tri-County Board of Realtors, the
National Association of Realtors, the Home Builders Association of Greater
Chicago, the Northern Illinois Home Builders Association and the Urban Land
Institute. He is a licensed real estate broker in the state of Illinois.
INLAND SECURITIES CORPORATION
Inland Securities Corporation, our managing dealer, was formed in 1984. It
is registered under the applicable federal and state securities laws and is
qualified to do business as a securities broker-dealer throughout the United
States. Since its formation, the managing dealer has provided the marketing
function for distribution of the investment products sponsored by our sponsor.
It does not render these services to anyone other than affiliates of The Inland
Group, and it does nor focus its efforts on the retail sale side of the
securities business. It is a member firm of the National Association of
Securities Dealers, Inc.
The following table sets forth information with respect to the directors,
officers and principal employees of Inland Securities Corporation involved in
national sales and marketing activities of Inland Securities Corporation. The
biography of Mr. Parks set forth above under "-Inland Affiliated Companies" in
this section and the biographies of Mrs. Gujral and Ms. Matlin are set forth
above under "-Our Directors and Executive Officers" in this section. The
biography of Ms. Lynch is also set forth above under "--Our Advisor."
77
<Page>
<Table>
<Caption>
POSITION AND OFFICE
NAME AGE* WITH OUR MANAGING DEALER
---- ---- -----------------------------------------------
Brenda G. Gujral.......... 60 President, chief operating officer and director
Roberta S. Matlin......... 58 Vice president and director
Catherine L. Lynch........ 44 Treasurer, secretary and director
Robert D. Parks........... 59 Director
Brian Conlon.............. 44 Executive vice president
R. Martel Day............. 53 Executive vice president - national sales and
marketing
Fred C. Fisher............ 58 Senior vice president
David Bassitt............. 60 Senior vice president
John Cunningham........... 44 Senior vice president
Tomas Giardino............ 28 Vice president
Curtis Shoch.............. 30 Vice president
Shawn Vaughan............. 31 Vice president
Mark Lavery............... 27 Vice president
Ralph 39 Vice president
Rudolph...................
</Table>
- ----------
*As of January 1, 2003
BRIAN M. CONLON joined Inland Securities Corporation as executive vice
president in September 1999. Prior to joining Inland, Mr. Conlon was executive
vice president and chief operating officer of Wells Real Estate Funds, where he
was responsible for overseeing day to day operations of the firm's real estate
investment and capital raising initiatives. Mr. Conlon is a General Securities
Principal, is licensed as a real estate broker in Georgia, and has earned the
Certified Financial Planner and Certified Commercial Investment Member
designations. Mr. Conlon currently serves on the national board of directors for
the Financial Planning Association. Mr. Conlon holds Series 7, 24 and 63
licenses with the National Association of Securities Dealers, Inc.
R. MARTEL DAY is senior vice president-national sales and marketing for
Inland Securities Corporation. He joined Inland Securities Corporation in 1984
as a regional representative in the southeast. Since then, he has served as
regional vice president, senior vice president, and national marketing director.
Mr. Day is currently responsible for expanding Inland Securities Corporation's
selling group and working closely with broker-dealers in the selling group to
maximize sales.
Mr. Day has developed and presented numerous motivational and sales
training workshops over the past 20 years. He graduated with an engineering
degree from the Georgia Institute of Technology. Mr. Day holds General
Securities and Registered Investment Advisor licenses from the National
Association of Securities Dealers, and is an associate member of The National
Association of Real Estate Investment Trusts. He is a director of Inland
Investment Advisors, Inc., an Inland affiliated company.
FRED C. FISHER is a senior vice president of Inland Securities Corporation,
which he joined in 1984. Mr. Fisher began his career with Inland Securities
Corporation as regional vice president for the midwest region. In 1994, he was
promoted to senior vice president. Mr. Fisher received his bachelor's degree
from John Carroll University. Before joining Inland Securities Corporation, he
spent nine years as a regional sales manager for the S.S. Pierce Company. Mr.
Fisher holds Series 7, 22 and 63 licenses with the National Association of
Securities Dealers, Inc.
78
<Page>
DAVID BASSITT joined Inland Securities Corporation as a senior vice
president in March 2001. Prior to joining Inland, Mr. Bassitt was director of
financial services with AEI Fund Management, Inc. and was responsible for
wholesaling public and private net lease real estate investments and 1031
property exchanges to financial planners. Mr. Bassitt received his bachelor's
degree from Ferris State University, and a master's degree from St. Cloud
University. Mr. Bassitt holds Series 6, 7, 22 and 63 licenses with the National
Association of Securities Dealers, Inc.
JOHN CUNNINGHAM is a senior vice president of Inland Securities
Corporation. He joined an affiliate of The Inland Group in January 1995 as a
commercial real estate broker. In March 1997, Mr. Cunningham was hired by Inland
Securities Corporation as a regional representative for the western region, and
he was promoted to a vice president in 1999. In 2002, he became senior vice
president of the western region. Mr. Cunningham graduated from Governors State
University with a B.S. degree in business administration, concentrating in
marketing. Before joining the Inland organization, Mr. Cunningham owned and
operated his own business and developed real estate. He holds Series 7 and
Series 63 licenses with the National Association of Securities Dealers, Inc.
TOMAS GIARDINO joined Inland Securities Corporation as vice president in
September 2000. Prior to joining Inland, Mr. Giardino was the director of mutual
fund sales at SunAmerica Securities, where he was responsible for increasing the
market share of nine focus firms at the broker dealer. Mr. Giardino entered the
securities industry in January 1999. Prior to entering the securities industry,
Mr. Giardino was in the advertising field for four years. Mr. Giardino received
his B.A. in political science from Arizona State University in May 1998. He
holds Series 7, 63 and 65 licenses with the National Association of Securities
Dealers, Inc.
CURTIS SHOCH joined Inland Securities Corporation as vice president in
January 2000. Prior to joining Inland, Mr. Shoch was assistant vice president at
Wells Real Estate Funds, where he was responsible for launching new real estate
investment alternatives in the southeastern United States. Mr. Shoch began his
career in 1994 with Keogler Investment Advisory Services. Mr. Shoch graduated
from Lynchburg College in Lynchburg, Virginia in 1994 with a major in marketing
and an emphasis in finance. He is a Registered Representative as well as a
Registered Investment Advisor. Mr. Shoch holds Series 7, 63 and 65 licenses with
the National Association of Securities Dealers, Inc.
SHAWN VAUGHAN joined Inland Securities Corporation as vice president in
August 2000. Prior to joining Inland, Mr. Vaughan was assistant vice president
at Wells Real Estate Funds, where he was responsible for marketing real estate
investments in the mid-Atlantic region. Mr. Vaughan started his career in
financial services in 1994 on the retail side of the business with a successful
financial planning firm. During this time, he was responsible for handling every
aspect of the financial planning process. Mr. Vaughan holds Series 7 and 63
licenses with the National Association of Securities Dealers, Inc.
MARK LAVERY joined Inland Securities Corporation as a vice president in
April 2001. Prior to joining Inland, Mr. Lavery was with Charles Schwab, where
he was on an active trade team. Mr. Lavery began his career with Investment
Planners. Mr. Lavery graduated from Milliken University in 1997 with a B.S. in
finance. Mr. Lavery holds Series 7 and 66 licenses with the National Association
of Securities Dealers, Inc.
RALPH RUDOLPH joined Inland Securities Corporation in 1995 as a regional
representative for midwest team and was promoted to a vice president in 2000.
Prior to joining Inland, Mr. Rudolph served in the United States Marine Corp.
and worked for another broker-dealer. He is a graduate of Elmhurst College with
a degree in business administration. Mr. Rudolph holds Series 7 and 63 licenses
with the National Association of Securities Dealers, Inc.
79
<Page>
LIMITATION OF LIABILITY AND INDEMNIFICATION OF
DIRECTORS, OFFICERS AND OUR ADVISOR
The laws that we are subject to and our articles of incorporation provide
that our advisor and directors are deemed to be in a fiduciary relationship to
us and our stockholders and that our directors have a fiduciary duty to the
stockholders to supervise our relationship with the advisor.
Maryland law provides that a director has no liability in the capacity as a
director if he performs his duties in good faith, in a manner he reasonably
believes to be in our best interests, and with the care that an ordinary prudent
person in a like position would use under similar circumstances. Maryland law
also provides that an act by a director of a Maryland corporation is presumed to
satisfy the standards of the preceding sentence. Our articles of incorporation
and bylaws provide that the liability of our directors and officers is limited
to the fullest extent permitted by Maryland law and that none of our directors
and officers will be liable to us or to any of our stockholders for money
damages, including for breach of their fiduciary duty to us. As a result, our
directors and officers will not be liable for monetary damages unless:
- the person actually received an improper benefit or profit in money,
property or services; and
- the person is adjudged to be liable based on a finding that the
person's action, or failure to act, was the result of active and
deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding.
Except as described below, our articles of incorporation authorize and
direct us to indemnify and pay or reimburse reasonable expenses to any director,
officer, employee or agent we employ, and the advisor and its affiliates, to the
fullest extent permitted by Maryland law. As long as we qualify as a REIT we
will not indemnify or reimburse the expenses of any director, officer, employee,
agent or the advisor or its affiliates unless:
- the directors have determined, in good faith, that the course of
conduct which caused the loss or liability was in our best
interests;
- the person seeking indemnification was acting on our behalf or
performing services for us;
- the liability or loss was not the result of negligence or misconduct
on the part of the person seeking indemnification, except that if
the person seeking indemnification is or was an independent
director, the liability or loss will not have been the result of
gross negligence or willful misconduct; and
- such indemnification or agreement to be held harmless is recoverable
only out of our net assets and not from the assets of the
stockholders.
As long as we qualify as a REIT, we will not indemnify any director,
officer, employee, agent or the advisor or its affiliates for losses,
liabilities or expenses arising from or out of an alleged violation of federal
or state securities laws unless one or more of the following conditions are met:
- there has been a successful adjudication on the merits of each count
involving alleged securities law violations;
80
<Page>
- the claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction; or
- a court of competent jurisdiction approves a settlement of the
claims and finds that indemnification of the settlement and related
costs should be made, and the court considering the request has been
advised of the position of the Securities and Exchange Commission
and the published position of any state securities regulatory
authority in which our securities were offered and sold as to
indemnification for securities law violations.
We will advance amounts to a person entitled to indemnification for legal
and other expenses and costs incurred as a result of any legal action for which
indemnification is being sought only in accordance with Maryland law and, as
long as we qualify as a REIT, only if all of the following conditions are
satisfied:
- the legal action relates to acts or omissions relating to the
performance of duties or services by the person seeking
indemnification for us or on our behalf;
- the legal action is initiated by a third party who is not a
stockholder or the legal action is initiated by a stockholder acting
in his or her capacity as such and a court of competent jurisdiction
specifically approves advancement; and
- the person seeking indemnification undertakes in writing to repay us
the advanced funds, together with interest at the applicable legal
rate of interest, if the person seeking indemnification is found not
to be entitled to indemnification.
We may purchase and maintain insurance or provide similar protection on
behalf of any director, officer, employee, agent or the advisor or its
affiliates against any liability asserted which was incurred in any such
capacity with us or arising out of such status; provided, however, that we will
not incur the costs of any liability insurance which insures any person against
liability for which he, she or it could not be indemnified under our articles of
incorporation. We may enter into any contract for indemnity and advancement of
expenses with any director, officer, employee or agent as may be determined by
the board and as permitted by law. As of the date of this prospectus, we have
not purchased any insurance on behalf of any person but we intend to.
We have entered into separate indemnification agreements with each of our
directors and some of our executive officers. The indemnification agreements
will require that we indemnify our directors and officers to the fullest extent
permitted by law, and advance to the directors and officers all related
expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. The agreements provide that we also must
indemnify and advance all expenses incurred by directors and officers seeking to
enforce their rights under the indemnification agreements and cover directors
and officers under the our directors' and officers' liability insurance, if any.
Although the indemnification agreements offer substantially the same scope of
coverage afforded by provisions in our articles of incorporation and the bylaws,
they provide greater assurance to directors and officers that indemnification
will be available, because as a contract, it cannot be unilaterally modified by
the board or by the stockholders to eliminate the rights it provides.
We have been advised that, in the opinion of the Securities and Exchange
Commission, any indemnification that applies to liabilities arising under the
Securities Act is contrary to public policy and, therefore, unenforceable.
81
<Page>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of August 15, 2003 regarding
the number and percentage of shares beneficially owned by each director, each
executive officer, all directors and executive officers as a group, and any
person known to us to be the beneficial owner of more than 5% of our outstanding
shares. As of August 15, 2003, we had one stockholder of record. Beneficial
ownership includes outstanding shares and shares which are not outstanding that
any person has the right to acquire within 60 days after the date of this table.
However any such shares which are not outstanding are not deemed to be
outstanding for the purpose of computing the percentage of outstanding shares
beneficially owned by any other person. Except as indicated, the persons named
in the table have sole voting and investing power with respect to all shares
beneficially owned by them.
<Table>
<Caption>
NUMBER OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
- ------------------------------------- ---------------------------- --------------------
Robert D. Parks 20,000(1) 100%
Roberta S. Matlin 0 *
Scott W. Wilton 0 *
Kelly E. Tucek 0 *
Brenda G. Gujral 0 *
Frank A. Catalano, Jr. 1,000(2) *
Kenneth H. Beard 1,000(2) *
Paul R. Gauvreau 1,000(2) *
Gerald M. Gorski 1,000(2) *
Barbara A. Murphy 1,000(2) *
All directors and executive officers
as a group (10 persons) 25,000(1) 100%
</Table>
- ----------
*Less than 1%
(1) Includes 20,000 shares owned by our advisor. Our advisor is a
wholly-owned subsidiary of our sponsor, which is an affiliate of The
Inland Group. Mr. Parks is a control person of The Inland Group and
disclaims beneficial ownership of these shares owned by our advisor.
(2) Includes 1,000 shares issuable upon exercise of options granted to each
independent director under our independent director stock option plan,
to the extent that such options are currently exercisable or will become
exercisable within 60 days after the date of this table.
82
<Page>
OUR STRUCTURE AND FORMATION
We were formed in March 2003 as a Maryland corporation. Our articles of
incorporation and bylaws became operative on March 5, 2003. Our existence is
perpetual.
STRUCTURE
We intend to own all of our assets, either directly or indirectly. Our
advisor contributed $200,000 to us for 20,000 shares of our common stock to form
us. Our advisor has agreed to not sell their initial investment while the
advisor remains our sponsor, but may transfer these shares to its own
affiliates. A REIT may conduct some of its business and hold some of its
interests in properties in "qualified REIT subsidiaries," which must be owned
100% by the REIT or through "taxable REIT subsidiaries" which may be wholly or
partially owned. Although we currently do not intend to have any qualified REIT
subsidiaries, we may in the future decide to conduct some business or hold some
of our interests in properties in qualified REIT subsidiaries.
See "How We Operate - Organizational Chart" for a diagram depicting the
services to be rendered by our affiliates to us, as well as our organizational
structure.
If only the minimum offering of 200,000 shares is sold, such shares will
represent 90.91% of the issued and outstanding shares, and the advisor's 20,000
shares will then represent 9.09% of the issued and outstanding shares. If
250,000,000 of the shares offered by this prospectus are sold, such shares will
represent 99.99% of the issued and outstanding shares, and the advisor's 20,000
shares will then represent only 0.01% of the issued and outstanding shares.
We will form entities to acquire each of the properties to be owned by us.
They will be owned or controlled directly or indirectly by us.
Robert D. Parks, Brenda G. Gujral, Roberta S. Matlin, Daniel L. Goodwin,
Catherine L. Lynch, and Kelly E. Tucek are considered our promoters. Mr. Parks
is our chairman and a director. Ms. Gujral is a director. Ms. Matlin is our vice
president. Ms. Tucek is our treasurer. None of our promoters are employed by us.
Other than Mr. Parks and Ms. Gujral, Ms. Matlin or Ms. Tucek, none of our
promoters are officers or directors of us.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
83
<Page>
SELECTED FINANCIAL DATA
As of the date of this prospectus, we have not yet had any operations.
Therefore, we have not had any income, cash flow, funds from operations, or
funds available for distributions, nor have we declared any distributions or
issued any shares to public investors. We have sold 20,000 shares to the advisor
for an aggregate purchase price of $200,000. See "Management's Discussion and
Analysis of Our Financial Condition," and our financial statements and related
notes thereto appearing elsewhere in this Prospectus.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
84
<Page>
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
Our investment objectives are to:
- make regular distributions to the stockholders, which may be in
amounts which may exceed our taxable income due to the non-cash
nature of depreciation expense and, to such extent, will constitute
a tax-deferred return of capital, but in no event less than 90% of
our taxable income;
- provide a hedge against inflation by entering into leases which
contain clauses for scheduled rent escalations or participation in
the growth of tenant sales, permitting us to increase distributions
and realize capital appreciation; and
- preserve stockholders' capital.
It is our policy to acquire properties primarily for income as distinguished
from primarily for possible capital gain.
DISTRIBUTIONS
Federal income tax law requires that a REIT distribute annually at least
90% of its REIT Taxable Income. See "Federal Income Tax Considerations --
Federal Income Taxation as a REIT." In order to qualify for REIT status we may
be required to make distributions in excess of cash available. For a discussion
of the tax treatment of distributions to you, see "Federal Income Tax
Considerations."
We anticipate that distributions will be paid to our domestic stockholders
on a monthly basis and to our foreign stockholders on a quarterly basis.
Distributions will be at the discretion of the board. Our ability to pay
distributions and the size of these distributions will depend upon a variety of
factors. We cannot assure that distributions will continue to be made or that
any particular level of distributions established in the future, if any, will be
maintained by us.
TYPES OF INVESTMENTS
We were formed to acquire and manage a portfolio of real estate which is
diversified by geographical location and by type and size of retail centers. Our
properties will consist of real estate primarily improved for use as retail
establishments, principally multi-tenant shopping centers. Our real estate will
be located mainly in the states west of the Mississippi River in the United
States. We will endeavor to acquire multiple properties within the same major
metropolitan markets where acquisitions result in efficient property operations
with the potential to achieve market leverage. See "Real Property Investments
- -- General."
Most of these properties will be subject to "net" leases. "Net" leases
typically require tenants to pay a share, either pro rata or fixed, of all or a
majority of the operating expenses. Operating expenses include real estate
taxes, special assessments, utilities, insurance, common area maintenance and
building repairs related to the property, as well as base rent payments.
We may also acquire real estate improved with other commercial facilities
which provide goods and services as well as those leased on a double or
triple-net-lease basis which are either commercial or
85
<Page>
retail. Triple-net-leases also require the tenant to pay a base minimum annual
rent with periodic increases. We may enter into sale and leaseback transactions
in which we will purchase a property and lease the property to the seller of the
property.
To provide us with a competitive advantage over potential purchasers of
properties who must secure financing, we intend to acquire properties free and
clear of permanent mortgage debt. We will do this by paying the entire purchase
price of property in cash, shares, interest in entities that own our properties
or a combination of any of these. We may incur debt of a property to acquire
properties where our board determines that incurring such debt is in our best
interest. In addition, from time to time, we intend to acquire some properties
without financing and later incur mortgage debt secured by selected or all such
properties if favorable financing terms are available. We will use the proceeds
from such loans to acquire additional properties. See "Borrowing" under this
section for a more detailed explanation of our borrowing intentions and
limitations.
We may purchase properties subject to completion of construction in
accordance with terms and conditions we specify. In these cases, we will be
obligated to purchase the property at the completion of construction, if
construction conforms to definitive plans, specifications and costs approved by
us and embodied in the construction contract, as well as, in most instances,
satisfaction that agreed upon percentages of the property are leased. We will
receive a certificate of an architect, engineer or other appropriate party,
stating that the property complies with all plans and specifications. We may
construct or develop properties, and render services in connection with the
development or construction, subject to compliance with applicable requirements
under federal income tax laws. Construction and development activities will
expose us to risks such as cost overruns, carrying costs of projects under
construction and development, availability and costs of materials and labor, our
inability to obtain tenants, weather conditions, and government regulation.
See "- Investment Limitations" under this section and "Summary of Our
Organizational Documents -- Restrictions on Investments" for investment
limitations.
PROPERTY ACQUISITION STANDARDS
We have signed a property acquisition service agreement with Inland Real
Estate Acquisitions, Inc. Under that agreement, Inland Real Estate Acquisitions
has agreed to seek properties for us and to perform due diligence on the
properties and negotiate the terms of the purchase. Through its experience with
the acquisition of over 1,000 real properties by our affiliates, the advisor
believes Inland Real Estate Acquisitions has the ability to identify quality
real properties capable of meeting our investment objectives. When evaluating
property, Inland Real Estate Acquisitions will consider a number of factors,
including a real property's:
- geographic location and type;
- construction quality and condition;
- current and projected cash flow;
- potential for capital appreciation;
- lease rent roll, including the potential for rent increases;
86
<Page>
- potential for economic growth in the tax and regulatory
environment of the community in which the property is located;
- potential for expanding the physical layout of the property
and/or the number of sites;
- occupancy and demand by tenants for properties of a similar type
in the same geographic vicinity;
- prospects for liquidity through sale, financing or refinancing of
the property;
- competition from existing properties and the potential for the
construction of new properties in the area; and
- treatment under applicable federal, state and local tax and other
laws and regulations.
Inland Real Estate Acquisitions also requires the seller of a property to
provide a current Phase I environmental report and, if necessary, a Phase II
environmental report.
Before purchasing a property, Inland Real Estate Acquisitions examines and
evaluates the potential value of the site, the financial condition and business
history of the property, the demographics of the area in which the property is
located or to be located, the proposed purchase price, geographic and market
diversification and potential sales. In a sale-leaseback situation, since the
seller of the property generally is assuming the operating risk, the price paid
for the property by us may be greater than if it was not leased back to the
seller. All acquisitions from our affiliates must be approved by a majority of
our directors, including a majority of the independent directors.
DESCRIPTION OF LEASES
When spaces become vacant or existing leases expire, we anticipate entering
into "net" leases. Net leases require tenants to pay a share, either pro rata or
fixed, of all or a majority of the operating expenses, including real estate
taxes, special assessments, insurance, utilities, common area maintenance and
building repairs related to the properties, as well as base rent payments. We
intend to include provisions which increase the amount of base rent payable at
various points during the lease term and/or provide for the payment of
additional rent calculated as a percentage of a tenant's gross sales above
predetermined thresholds in most leases. The leases with most anchor tenants
generally have initial terms of 10 to 25 years, with one or more renewal options
available to the tenant. By contrast, smaller tenant leases typically have
three- to five-year terms.
Triple net leases generally have a term of 15 to 25 years and are typically
not less than 10 years. In addition, the tenant of a triple-net-lease is
responsible for the base rent in addition to the costs and expenses related to
property taxes, insurance, repairs and maintenance applicable to the leased
space.
Each net lease tenant is required to pay its share of the cost of the
liability insurance covering the property in which it is a tenant. The
third-party liability coverage insures, among others, us, our advisor and our
property manager. Typically, each tenant is required to obtain, at its own
expense, property insurance naming us as the insured party for fire and other
casualty losses in an amount equal to the full value of its premises and the
contents of the premises. All property insurance must be approved by the
property manager. In general, the net lease may be assigned or subleased with
our prior written consent,
87
<Page>
but the original tenant must remain liable under the lease unless the assignee
meets income and net worth tests.
In connection with sale and leaseback transactions, the tenant is
responsible for paying a predetermined minimum annual rent generally based upon
our cost of purchasing the land and building. In addition to the base rent,
these tenants are generally responsible for the costs and expenses related to
property taxes, insurance, repairs and maintenance applicable to the leased
space.
PROPERTY ACQUISITION
We anticipate acquiring fee interests in properties, although other methods
of acquiring a property may be used if we deem it to be advantageous. For
example, we may acquire properties through a joint venture or the acquisition of
substantially all of the interests of an entity which in turn owns the real
property. We may also use separate entities to acquire a property. Such entities
will be formed solely for the purpose of acquiring a property or properties. See
" -- Joint Ventures" in this section and "Federal Income Tax Considerations --
Federal Income Taxation as a REIT."
Our advisor and its affiliates may purchase properties in their own name,
assume loans in connection with the purchase or loan and temporarily hold title
to the properties for the purpose of facilitating acquisition or financing by
us, the completion of construction of the property or any other purpose related
to our business.
Under our articles of incorporation, we are prohibited from purchasing a
property from an affiliate unless a majority of the directors not interested in
the transaction and a majority of our independent directors approve the purchase
as fair and reasonable to us and at a cost to us no greater than the cost of the
asset to our affiliate. However, the cost to us may be greater than the cost to
our affiliate if a substantial justification for the excess exists and such
excess is reasonable. Our policy currently provides that in no event may our
cost of the asset exceed its appraised value at the time we acquire the
property.
If remodeling is required prior to the purchase of a property, we will pay
a negotiated maximum amount either upon completion or in installments commencing
prior to completion. The price will be based on the estimated cost of
remodeling. In such instances, we will also have the right to review the
tenant's books during and following completion of the remodeling to verify
actual costs. If substantial disparity exists between estimated and actual
costs, an adjustment in the purchase price may be negotiated. If remodeling is
required after the purchase of a property, an affiliate of our advisor may serve
as construction manager for a fee no greater than 90% of the fee a third party
would charge for such services.
BORROWING
We intend to acquire properties free and clear of permanent mortgage
indebtedness by paying the entire purchase price in cash or for shares, limited
partnership units in the operating partnership, interest in our subsidiaries
that own our properties, or a combination of any of these. However, we may incur
indebtedness to acquire properties where our board determines that it is in our
best interest. On properties purchased without financing, we may later incur
mortgage debt by obtaining loans secured by selected properties, if favorable
financing terms are available. We will use the proceeds from such loans to
acquire additional properties. We may also incur debt to finance improvements to
our properties. Aggregate borrowings secured by all of our properties will not
exceed 55% of their combined fair market value. Our articles of incorporation
provide that the aggregate amount of borrowing in relation to the net
88
<Page>
assets, in the absence of a satisfactory showing that a higher level is
appropriate, not exceed 300% of net assets. Net assets means our total assets,
other than intangibles at cost before deducting depreciation or other non-cash
reserves less our total liabilities, calculated at least quarterly on a basis
consistently applied. Any excess in borrowing over such 300% of net assets level
must be approved by a majority of our independent directors, disclosed to our
stockholders in our next quarterly report to stockholders, along with
justification for such excess.
We may incur debt secured by our properties, but most likely on a
non-recourse basis, some of which may be subject to certain carve outs. This
means that a lender's rights on default will generally be limited to foreclosing
on the property. We may secure recourse financing or provide a guarantee to
lenders if we believe this may result in more favorable terms. When we give a
guaranty for a property, we will be responsible to the lender for the
satisfaction of the indebtedness if it is not paid by the property. We do not
borrow funds from a program sponsored by our advisor or its affiliates which
makes or invests in mortgage loans. We seek to obtain financing which will
result in the most favorable overall economic benefit while balancing various
risk factors associated with the debt. At certain times the majority of debt may
require level payments and at others the majority may be based on variable
rates. We have determined that it may be in our best interest to make use of
mortgages the majority of which provide for a balloon payment. There are no
prescribed limits on the number or amount of mortgages which may be placed on
any one property. Any mortgages secured by a property will comply with the
restrictions set forth by the Commissioner of Corporations of the State of
California.
SALE OR DISPOSITION OF PROPERTIES
Our board will determine whether a particular property should be sold or
otherwise disposed of after considering the relevant factors, including
performance or projected performance of the property and market conditions, with
a view toward achieving our principal investment objectives.
We intend to hold our properties for a minimum of four years prior to
selling them. See "Federal Income Tax Considerations -- Federal Income Taxation
as a REIT." We also intend to reinvest the proceeds from the sale, financing,
refinancing or other disposition of our properties into additional properties.
Alternatively, we may use these proceeds to fund maintenance or repair of
existing properties or to increase reserves for such purposes. The objective of
reinvesting the sale, financing and refinancing proceeds in new properties is to
increase our real estate assets, and our net income, which our board believes
will enhance our chances of having our shares traded in a public trading market.
Notwithstanding this policy, the board, in its discretion, may distribute all or
part of the proceeds from the sale, financing, refinancing or other disposition
of all or any of our properties to our stockholders. In determining whether to
distribute these proceeds to stockholders, the board will consider, among other
factors, the desirability of properties available for purchase, real estate
market conditions, the likelihood of the listing of our shares on a national
stock exchange or including the shares for quotation on a national market system
and compliance with the applicable requirements under federal income tax law
under federal income tax laws. Because we may reinvest the proceeds from the
sale, financing or refinancing of our properties, we could hold stockholders'
capital indefinitely. However, upon the affirmative vote of a majority of the
shares of common stock, we will be forced to liquidate our assets and dissolve.
When we sell a property, we intend to obtain an all-cash sale price.
However, we may take a purchase money obligation secured by a mortgage on the
property as partial payment, and there are no limitations or restrictions on our
ability to take such purchase money obligations. The terms of payment to us will
be affected by custom in the area in which the property being sold is located
and the then prevailing economic conditions. If we receive notes and other
property instead of cash from sales, these proceeds, other than any interest
payable on these proceeds, will not be available for distributions until
89
<Page>
and to the extent the notes or other property are actually paid, sold,
refinanced or otherwise disposed. Therefore, the distribution of the proceeds of
a sale to the stockholders may be delayed until that time. In these cases, we
will receive payments in cash and other property in the year of sale in an
amount less than the selling price and subsequent payments will be spread over a
number of years. See "Federal Income Tax Considerations."
CHANGE IN INVESTMENT OBJECTIVES AND POLICIES
Our stockholders have no voting rights to implement our investment
objectives and policies. Our board has the responsibility for our investment
objectives and policies. Our board may not, however, make any material changes
regarding the restrictions on investment policies set forth in our articles of
incorporation without amending the articles of incorporation. Any amendment to
our articles of incorporation requires the affirmative vote of a majority of our
then outstanding voting shares of common stock. See "Summary of Our
Organizational Documents -- Restrictions on Investments."
INVESTMENT LIMITATIONS
We will not:
- invest more than 10% of our total assets in unimproved real
property (and will only invest in unimproved real property
intended to be developed) or in mortgage loans on unimproved real
property;
- invest in commodities or commodity future contracts;
- issue redeemable shares of common stock;
- issue shares on a deferred payment basis or other similar
arrangement; and
- operate in such a manner as to be classified as an "investment
company" for purposes of the Investment Company Act. See "Summary
of Our Organizational Documents -- Restrictions on Investments"
for additional investment limitations.
We do not intend to engage in hedging or similar activities for speculative
purposes.
We have no current plans to invest any proceeds from this offering, or
other funds, in the securities of other issuers for the purpose of exercising
control over such other issuers.
OTHER INVESTMENTS
Consistent with our investment limitations, we may from time to time invest
amounts of money in the securities of other companies that may or may not be
REITs or companies related to real estate to seek superior returns on these
investments. In addition, we may make loans to third parties from time to time
in connection with retail centers we intend to purchase or on a short-term basis
to real estate ventures.
APPRAISALS
All real property acquisitions to be made by us will be supported by an
appraisal prepared by a competent, independent appraiser who is a member-in-good
standing of the Appraisal Institute prior to
90
<Page>
the purchase of the property. Our policy currently provides that the purchase
price of each property will not exceed its appraised value at the time of our
acquisition of the property. Appraisals are, however, estimates of value and
should not be relied on as measures of true worth or realizable value. We will
maintain the appraisal in our records for at least five years, and copies of
each appraisal will be available for review by stockholders upon their request.
RETURN OF UNINVESTED PROCEEDS
If at least 200,000 shares are not sold within six months from the original
effective date of this prospectus, all funds received from subscribers will be
promptly returned to them, together with any interest earned on the funds. We
would expect to return funds to subscribers within five business days after the
offering is terminated if at least 200,000 shares are not sold within six months
from the original effective date of this prospectus. Any of the proceeds of this
offering allocable to investments in real property which have not been invested
in real property or committed for investment within the later of 24 months from
the original effective date of this prospectus or 12 months from the termination
of the offering, will be distributed to the stockholders. All funds we receive
out of the escrow account will be available for our general use from the time we
receive them until expiration of the period discussed in the prior sentence. We
may use these funds to:
- fund expenses incurred to operate the properties which have been
acquired,
- reimburse the advisor for our expenses, to the extent allowable
under the advisory agreement,
- pay the advisor its compensation under the advisory agreement;
and
- pay the property manager its property management fee under the
management agreement
See "Estimated Use of Proceeds" and "Plan of Distribution -- Escrow
Conditions." We will not segregate funds separate from our other funds pending
investment, and interest will be payable to the stockholders if uninvested funds
are returned to them.
ADDITIONAL OFFERINGS AND EXCHANGE LISTING
We anticipate that by August 20, 2008, our board will determine when, and
if, to apply to have our shares of common stock listed for trading on a national
stock exchange or included for quotation on a national market system, if we meet
the then applicable listing requirements; and/or whether to commence subsequent
offerings after completion of this offering. We believe that an exchange listing
or inclusion of our shares in a national market system may allow us to increase
our size, portfolio diversity, stockholder liquidity, access to capital and
stability, and decrease our operating costs through economies of scale. However,
we cannot assure that such listing or inclusion will ever occur. If it is not
feasible to list shares or include them in a national market system by August
20, 2008, our board may decide to sell our assets individually, list our shares
at a future date; or liquidate us within ten years of such date. The sale of all
or substantially all of our assets as well as our liquidation would also require
the affirmative vote of a majority of the then-outstanding voting shares of
stock.
91
<Page>
JOINT VENTURES
We may invest in joint venture arrangements with other public real estate
programs formed by our advisor or any of its affiliates if a majority of our
directors not otherwise interested in the transaction and a majority of our
independent directors approve the transaction as being fair and reasonable. In
addition, the investment by each joint venture partner must be substantially on
the same terms and conditions as those received by other joint venturers.
We may also invest in general partnerships or joint venture arrangements
with our affiliates as co-owners of a property. The general partnership or joint
venture agreement for these investments will provide that we will be able to
increase our equity participation in such entity as we receive additional
proceeds of the offering. As a result, we will ultimately own a 100% equity
ownership of the property and the affiliated general or joint venture partner
will not be entitled to any profit or other benefit on the sale of its equity
participation to us. Once we own, directly or indirectly, 100% of the ownership
interests in the general partnership or joint venture entity, we will determine
whether the continued existence of that entity is necessary. For example, we may
determine to continue the existence of the entity to minimize expenses or to
meet lender requirements.
In addition, we may enter into joint venture or partnership arrangements
with unaffiliated third parties. Therefore, we may enter into acquisitions with
sellers who are desirous of transactions in tax advantaged structures such as
arrangements typically referred to as "Down REITs." A Down REIT is an
organizational structure in which, in addition to owning indirect interests in
real estate properties through the ownership of an interest in a lower-tier
operating partnership (as in an UPREIT), a REIT also owns real estate properties
directly at the REIT level. In a Down REIT structure, because the REIT owns real
estate properties directly, the value of the REIT shares do not bear a direct
relationship with the value of an interest in the lower-tier Down REIT operating
partnership. You should consider the potential risk that our non-affiliated
joint venture partner may be unable to agree with us on a matter material to the
joint venture. See "Risk Factors -- Risks Related to the Offering."
We are unable to estimate the proportion of our assets that may be invested
in joint venture interests.
CONSTRUCTION AND DEVELOPMENT ACTIVITIES
From time to time, we may attempt to enhance investment opportunities by
undertaking construction and development activities and rendering services in
connection with them. Our advisor has advised us that, in its view, we may be
able to reduce overall purchase costs if we were to undertake construction and
development rather than merely being limited to purchasing properties subject to
completion of construction by a third party. The construction and development
activities would expose us to such risks as cost overruns, carrying costs of
projects under construction or development, availability and costs of materials
and labor, weather conditions, government regulation and our inability to obtain
tenants. We nevertheless have concluded that our investment prospects would be
enhanced by permitting us to engage in construction and development activities
so long as such activities did not cause us to lose our status as a REIT. To
comply with the applicable requirements under federal income tax law under
federal income tax law, and until the Internal Revenue Service changes its
pronouncements with regard to these requirements, we intends to limit our
construction and development activities to the performance of oversight and
review functions, including reviewing the construction and tenant improvement
design proposals, negotiating and contracting for feasibility studies and
supervising compliance with local, state or federal laws and regulations,
negotiating contracts, oversight of construction, accounts, and obtaining
financing. In addition to using independent contractors to provide services in
connection with the
92
<Page>
operation of our properties, we may also use "taxable REIT subsidiaries" to
carry out these functions. See "Federal Future Tax Considerations - Federal
Income Taxation as a REIT" for a discussion of a "taxable REIT subsidiary." We
will retain independent contractors to perform the actual physical construction
work on tenant improvements, the installation of heating, ventilation and air
conditioning systems. See "Real Property Investments - General" for a detailed
description of the types of properties we may invest in.
OTHER POLICIES
Before we purchase a particular property, we may obtain an option to
purchase the property. The amount paid for the option, if any, usually would be
surrendered if the property was not purchased and normally would be credited
against the purchase price if the property was purchased. See "Real Property
Investments - General" for a detailed description of the types of properties we
may invest in.
We hold all funds, pending investment in properties, in assets which will
allow us to continue to qualify as a REIT. These investments are highly liquid
and provide for appropriate safety of principal and may include, but are not
limited to, investments such as bonds issued by the Government National Mortgage
Association, or GNMA, and real estate mortgage investment conduits also known as
REMICs. See "Federal Income Tax Considerations - Federal Income Taxation as a
REIT."
We will not make distributions-in-kind, except for:
- distributions of readily marketable securities;
- distributions of beneficial interests in a liquidating trust
established for our dissolution and the liquidation of our assets in
accordance with the terms of our articles of incorporation; or
- distributions of in-kind property which meet all of the following
conditions:
- our board of directors advises each stockholder of the risks
associated with direct ownership of the in-kind property;
- our board of directors offers each stockholder the election of
receiving in-kind property distributions; and
- the directors distribute in-kind property only to those
stockholders who accept our offer.
Although our articles of incorporation and bylaws do not prohibit the
following, we have no current plans to:
- underwrite the securities of other issuers;
- invest in real estate mortgages; or
- invest the proceeds of the offering, other than on a temporary
basis, in non-real estate related investments.
93
<Page>
We may change our current plans, without stockholder approval, if our board of
directors determines that it would be in the best interests of our stockholder
to engage in any such transaction.
Although we are authorized to issue senior securities, we have no current
plans to do so. See "Description of Securities - Preferred Stock," "- Issuance
of Additional Securities and Debt Instruments" and "- Restrictions on Issuance
of Securities."
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
94
<Page>
REAL PROPERTY INVESTMENTS
INVESTING IN REITS
A real estate investment trust or REIT is a company that owns and, in most
cases, operates income-producing properties. To qualify as a REIT, generally a
company must annually distribute at least 90% of its taxable income to
stockholders.
According to the National Association of Real Estate Investment Trusts
(NAREIT), the average publicly-traded REIT yielded a 6.7% annual return for the
month of June 2003. Total return, which includes distributions and price
appreciation, was higher at 12.1% for the six-month 2003 period from July 1
until June 30. Stock price appreciation for publicly-traded REITs has
historically tracked the rate of increase in the Consumer Price Index, according
to NAREIT. This information is based on REITs that are listed and traded on a
national exchange and would not be representative of an investment in a REIT
that is not publicly traded such as us, and there is no assurance that an
investment in a non-publicly traded REIT will produce comparable results.
An analysis of historical data on publicly-traded REITs by Ibbotson
Associates, a leading financial research firm, concluded that REITs have a low
correlation with other stocks and bonds and represent a potentially powerful
diversification tool. Ibbotson noted, "The asset allocation decision is the most
important determinant of portfolio performance, outweighing the benefits of
market timing and security selection." In particular, Ibbotson found that REITs
may boost return and reduce risk when added to a diversified portfolio. Ibbotson
also found that REITs outperformed most other major market benchmarks over the
1972-2002 period with much less volatility. There can be no assurance that
future performance will mirror past performance and that these results would be
comparable to non-traded REITs, like us.
GENERAL
Our advisor is experienced in acquiring and managing real estate,
particularly retail focused shopping centers. We intend to acquire and manage a
diversified (by geographical location and by type and size of retail centers)
portfolio of real estate primarily improved for use as retail establishments,
principally multi-tenant shopping centers. Our portfolio will consist
predominantly of grocery and discount store anchored retail, including net lease
retail. We may acquire certain mixed use properties that may include lodging,
office and/or multi-family residential if they are part of a retail center. And,
we may also acquire other types of retail shopping centers, such as enclosed
malls, outlet malls and power centers. We also anticipate acquiring real estate
improved with other commercial facilities which provide goods and services as
well as double or triple net leased properties, which are either commercial or
retail, including properties acquired in sale and leaseback transactions. A
triple-net leased property is one which is leased to a tenant who is responsible
for the base rent and all costs and expenses associated with their occupancy,
including property taxes, insurance, repairs and maintenance.
The retail centers we intend to acquire would be located primarily in
states west of the Mississippi River in the United States. Where feasible, we
will endeavor to acquire multiple properties within the same major metropolitan
markets where the acquisitions result in efficient property management
operations with the potential to achieve market dominance.
We do not intend to invest in real estate properties that are primarily:
- farms;
95
<Page>
- health care facilities;
- industrial properties;
- leisure home sites;
- manufacturing facilities;
- mining properties;
- ranches;
- single-family residential properties;
- timberlands; or
- unimproved properties not intended to be developed (vacant land).
Subject to compliance with the applicable requirement under the federal
income tax laws, we may also undertake construction and development activities
and render services in connection with such activities.
See "Investment Objectives and Policies" generally pertaining to our
policies relating to the maintenance, operation and disposition of our
properties.
We intend to initially focus on acquisition activity in major metropolitan
areas in the western United States. The western United States, which consists of
the southwest, rocky mountain and far west states, is projected to experience
the most growth of any region of the country over the next 25 years. Population
is expected to increase by 33.5 million between 2000 and 2025. Most of the
states in the region will experience population growth rates ahead of the
national average. In addition, the western region is forecast to lead the nation
in the rate of employment growth. The western states will generate 22.8 million
new jobs between 1999 and 2025 and account for 38% of total United States job
growth.
California is projected to show the largest gains in population and
employment; however, the region's growth is expected to become more dispersed as
other western states experience higher rates of growth. Texas is expected to
retain its position as the second largest state, with a population likely to
exceed 29.8 million by 2025. Nevada is likely to experience the fastest rate of
growth (2.4% annually between 2000 and 2025), followed by Arizona, Utah, Idaho,
Colorado, Texas, New Mexico, Oregon and Washington.
Employment growth is expected to follow a similar pattern. Nevada, Arizona
and Utah are projected to lead the nation by generating the fastest rate of
annual employment growth. Several western cities are expected to rank among the
nation's ten fastest growing metropolitan markets. These areas include Laredo
and Austin-San Marcos in Texas, Las Vegas in Nevada, Provo-Orem in Utah and
Phoenix-Mesa in Arizona.
The Western region benefits from the diversity of its economy, which has
enabled many western states to maintain employment and income growth even when
some sectors experience reduced demand. Agriculture, natural resources,
manufacturing, trade and services are all represented in the region's economy.
In addition many of the goods and services produced in the west have
international markets.
96
<Page>
Much of the total United States output of agricultural products, oil and natural
gas, lumber and wood products and electronic equipment is produced in the West.
INSURANCE COVERAGE ON PROPERTIES
We carry comprehensive general liability coverage and umbrella liability
coverage on all of our properties with limits of liability which we deem
adequate to insure against liability claims and provide for the costs of
defense. Similarly, we are insured against the risk of direct physical damage in
amounts we estimate to be adequate to reimburse us on a replacement cost basis
for costs incurred to repair or rebuild each property, including loss of rental
income during the reconstruction period. In addition, we intend to insure our
properties against loss caused by earthquake and flood if deemed necessary and
economically justified. The form of management agreement for each property
specifically provides for us to procure and carry public liability, fire and
extended coverage, burglary and theft, rental interruption, flood, if
appropriate, and boiler, if appropriate, insurance. The cost of such insurance
is passed through to tenants whenever possible. Insurance risks associated with
potential terrorism acts could sharply increase the premiums we pay for coverage
against property and casualty claims. Additional, mortgage lenders in some cases
have begun to insist that specific coverage against terrorism be purchased by
commercial property owners as a condition for providing mortgage loans. It is
uncertain whether such insurance policies will be available, or available at
reasonable cost, which could inhibit our ability to finance or refinance our
properties. In such instances, we may be required to provide other financial
support, either through financial assurances or self-insurance, to cover
potential losses. We cannot assure you that we will have adequate coverage for
such losses. Legislation has been enacted to provide federal insurance for
property losses due to terrorism. We cannot be certain what impact this
legislation will have on us or what additional costs to us, if any, could
result.
PROPERTIES
An affiliate, Inland Real Estate Acquisitions, Inc., has entered into an
agreement to acquire a community shopping center in Phoenix, Arizona. This
Safeway-anchored grocery shopping center has approximately 180,000 square feet.
We intend to primarily invest in retail properties ranging from 100,000 to
300,000 square feet in size, we may also purchase larger shopping centers, and
properties in larger centers. We may also purchase these larger shopping
centers, and properties in larger centers, in the future if such purchases are
approved by our board of directors, including a majority of the independent
directors.
We expect that our neighborhood and community shopping centers will be
"anchored" or "shadow-anchored" by a national or regional discount department
store, supermarket or drugstore. A "shadow-anchor" is an anchor tenant that has
leased space in that portion of the center not owned or controlled by us.
In evaluating each of our properties as a potential acquisition and
determining the appropriate amount of consideration to be paid for the property,
we consider a variety of factors including overall valuation of net rental
income, location, demographics, tenant mix, quality of tenants, length of
leases, price per square foot, occupancy and that overall rental rates at each
property are comparable to market rates. We anticipate that each property will
be located within a vibrant economic area. We believe that each of the
properties will be well-located, will have acceptable roadway access, will
attract high quality tenants, will be well-maintained and will have been
professionally managed. Nonetheless, each property will be subject to
competition from similar shopping centers within its market area, and its
economic
97
<Page>
performance could be affected by changes in local economic conditions. We
generally do not consider any other factors materially relevant to the decision
to acquire each of the properties.
When we calculate depreciation expense for tax purposes, we use the
straight-line method. We depreciate buildings and improvements based upon
estimated useful lives of 40 and 20 years, respectively.
A substantial portion of our income will consist of rent received under
long-term leases. In general, each tenant pays its proportionate share of real
estate taxes, insurance and common area maintenance costs, although the leases
with some tenants provide that the tenant's liability for such expenses is
limited in some way, usually so that their liability for such expenses does not
exceed a specified amount.
A lease termination by an anchor tenant could result in lease terminations
or reductions in rent by other tenants whose leases permit cancellation or rent
reduction if another tenant's lease is terminated. We may own centers where the
tenants may have rights to terminate their leases if certain other tenants are
no longer open for business. These "co-tenancy" provisions may also exist in
some leases where we own a portion of a shopping center and one or more of the
anchor tenants leases space in that portion of the center not owned or
controlled by us. If such tenants were to vacate their space, tenants with
co-tenancy provisions would have the right to terminate their leases with us, or
seek a rent reduction from us.
Some of our leases may also contain provisions requiring the payment of
additional rent calculated as a percentage of tenants' gross sales above
predetermined thresholds.
We seek to reduce our operating and leasing risks through geographic and
tenant diversity.
We will receive an appraisal for each of our properties which states that
it was prepared in conformity with the Code of Professional Ethics Standards of
Professional Appraisal Practice of the Appraisal Institute and the Uniform
Standards of Professional Appraisal Practice of the Appraisal Foundation by an
independent appraiser who is a member of the Appraisal Institute. Appraisals are
estimates of value and should not be relied on as a measure of truth worth or
realizable value.
In cases where we have purchased properties from our affiliates, our
directors, including the independent directors, must approve the acquisitions of
the properties from our affiliates as being fair and reasonable.
POTENTIAL PROPERTY ACQUISITIONS
We are currently considering acquiring the one property in Phoenix,
Arizona. Our decision to acquire this property will generally depend upon:
- no material adverse change occurring in the property, the tenants or
the local economic conditions;
- our receipt of sufficient net proceeds from this offering to make
this acquisition or sufficient availability of credit; and
- our receipt of satisfactory due diligence information including
appraisals, environmental reports and lease information.
98
<Page>
Other properties may be identified in the future that we may acquire before
or instead of this property. We cannot guarantee that we will complete this
acquisition.
POTENTIAL PROPERTY: PEORIA STATION, PEORIA, ARIZONA
We anticipate purchasing an existing shopping center known as Peoria
Station, which will contain 181,500 gross leasable square feet upon completion
of the current redevelopment. The center currently contains 140,019 gross
leasable square feet. The center is located at 10160 North 67th Avenue in
Peoria, Arizona.
Inland Real Estate Acquisitions, Inc., an affiliate of our advisor, has
entered into a contract to acquire this property. We anticipate that Inland Real
Estate Acquisitions will assign this purchase contract to us at no cost. We
would then anticipate purchasing Peoria Station from PDG America, an
unaffiliated third party. Our total acquisition cost, including expenses, is
expected to be approximately $25,867,000. This amount may be adjusted based on
actual rental rates achieved on the redeveloped square feet. This amount may
also increase by additional costs, which have not yet been finally determined.
We expect any additional costs to be insignificant. Our acquisition cost is
expected to be approximately $143 per square foot of leasable space.
We may place financing on the property at the time of acquisition.
In evaluating this property as a potential acquisition and determining the
appropriate amount of consideration to be paid for the property, we considered a
variety of factors including overall valuation of net rental income, location,
demographics, tenant mix, quality of tenants, length of leases, price per square
foot, occupancy and the fact that overall rental rates at the shopping center
are comparable to market rates. We believe that this property is well located,
has acceptable roadway access, attracts high-quality tenants, is well maintained
and has been professionally managed. This property will be subject to
competition from similar shopping centers within its market area, and its
economic performance could be affected by changes in local economic conditions.
We did not consider any other factors materially relevant to the decision to
acquire this property.
We do not intend to make significant repairs and improvements to this
property over the next few years. However, if we were to make any repairs or
improvements, the tenants would be obligated to pay a substantial portion of any
monies spent pursuant to the provisions of their respective leases.
Peoria Station was built in 1987 and redeveloped in 2002/2003. As of
December 31, 2002, this property was 100% leased. We anticipate that all
existing leases will be assigned to us.
For federal income tax purposes, the depreciable basis in this property
will be approximately $19,400,000. When we calculate depreciation expense for
tax purposes, we will use the straight-line method. We depreciate buildings and
improvements based upon estimated useful lives of 40 and 20 years, respectively.
Two tenants, Safeway and LA Fitness, each lease more than 10% of the total
gross leasable area of the property. The leases with these tenants require the
tenants to pay base annual rent on a monthly basis as follows:
99
<Page>
<Table>
<Caption>
Base Rent
Approximate Per Square
GLA Leased % of Total Foot Per Lease Term
Lessee (Sq. Ft.) GLA Annum ($) Beginning To
- ------------------- ----------------- --------------- ------------------ --------------- --------------
Safeway 55,471 31% 5.60 04/01/95 12/31/97
6.92 01/01/98 12/31/17
LA Fitness 40,916 23% 6.60 05/01/02 01/31/03
13.20 02/01/03 01/31/07
* 02/01/07 01/31/12
* 02/01/12 01/31/17
</Table>
* Rent increases by CPI
As of December 31, 2002, a total 140,019 square feet was leased to eighteen
tenants at this property. The following table sets forth certain information
with respect to those leases:
<Table>
<Caption>
Approximate GLA Base Rent Per
Leased Current Annual Square Foot
Lessee (Sq. Ft.) Lease Ends Rent ($) Per Annum ($)
- -------------------------- ----------------- ------------------- ------ ------------------ -------------------
Payless Shoesource 2,700 02/03 47,250 17.50
Blackbelt Academy 1,800 08/03 23,886 13.27
Barro's Pizza 2,400 08/03 36,000 15.00
Ombundsman Education 1,763 11/03 28,208 16.00
Melly's Hallmark 3,000 01/04 40,500 13.50
Smartcare Medical
Center 1,200 10/04 30,724 25.60
Other Mothers 4,197 12/04 65,054 15.50
Circus Cleaners 900 01/05 14,362 15.96
Cents Store 5,300 04/05 57,400 10.83
H & R Block 1,800 04/05 33,048 18.36
Great Clips 1,200 06/05 21,900 18.25
Peter Piper Pizza 11,067 12/05 138,337 12.50
#1 Nails 900 01/06 14,812 16.46
Tan Banana 1,800 09/06 30,600 17.00
China Palace 1,885 08/07 41,885 22.22
Dunkin Donuts 1,720 04/09 51,416 29.89
LA Fitness 40,916 01/17 540,091 13.20
Safeway 55,471 12/17 383,859 6.92
</Table>
In general, each tenant pays its proportionate share of real estate taxes,
insurance and common area maintenance costs, although the leases with some
tenants provide that the tenant's liability for such expenses is limited in some
way, usually so that their liability for such expenses does not exceed a
specified amount.
We will obtain an appraisal on this property prior to acquisition. As with
any other property we acquire, our property manager will receive a property
management fee for managing this property and our advisor will receive an
advisor asset management fee.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
100
<Page>
CAPITALIZATION
The following table sets forth our historical capitalization as of June 30,
2003 and our pro forma capitalization as of that date as adjusted to give effect
to the sale of 200,000 shares of common stock and the application of the
estimated net proceeds therefrom as described in "Estimated Use of Proceeds." We
were originally capitalized in March 2003 through the cash contribution of
$200,000 by the advisor, for which the advisor received 20,000 shares of common
stock. Additionally, the table does not include shares of common stock issuable
upon the exercise of options which may be, but have not been, granted under our
independent director stock option plan. The information set forth in the
following table should be read in conjunction with our historical financial
statements included elsewhere in this prospectus and the discussion set forth in
"Management's Discussion and Analysis of Our Financial Condition--Liquidity and
Capital Resources."
<Table>
<Caption>
June 30, 2003
Historical Pro Forma
---------- -----------
DEBT:
Mortgage notes payable.............................................. $ 0 $ 0
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10,000,000 authorized, none
outstanding....................................................... 0 0
Common stock, $.001 par value, 350,000,000 authorized, 20,000
shares issued and outstanding historical; 220,000 shares
issued and outstanding pro forma ................................ 20 220
Additional paid-in capital.......................................... 202,230 1,902,030
Retained earnings deficit........................................... (9,750) (9,750)
---------- -----------
Total stockholders' equity.......................................... 192,500 1,892,500
---------- -----------
Total capitalization................................................ $ 192,500 $ 1,892,500
========== ===========
</Table>
101
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OUR
FINANCIAL CONDITION
Certain statements contained in this "Management's Discussion and Analysis
of Our Financial Condition" and elsewhere in this prospectus constitute
"forward-looking statements" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. See "Cautionary Note Regarding
Forward-Looking Statements." You should read the following discussion along with
our financial statements and the related notes included in this prospectus.
LIQUIDITY AND CAPITAL RESOURCES
We were formed in March 2003 to acquire and manage a diversified portfolio
of real estate, primarily located in states west of the Mississippi River. We
may also acquire single-user retail properties in locations throughout the
United States, certain of which may be sale and leaseback transactions, net
leased to creditworthy tenants. The advisor has guaranteed payment of all public
offering expenses (excluding selling commissions and other fees payable to the
managing dealer) in excess of 5.5% of the gross offering proceeds or all
organization and offering expenses (including such selling expenses) which
together exceeds 15% of the gross offering proceeds.
We will provide the following programs to facilitate investment in the
shares and to provide limited liquidity for stockholders until such time as a
market for the shares develops:
The distribution reinvestment program will allow stockholders who purchase
shares pursuant to this offering to automatically reinvest distributions by
purchasing additional shares from us. Such purchases will not be subject to
selling commissions or the marketing contribution and due diligence expense
allowance and will be sold at a price of $9.50 per share.
The share repurchase program will provide existing stockholders with
limited, interim liquidity by enabling them to sell shares back to us. The
prices at which shares may be sold back to us are as follows:
- One year from the purchase date, at $9.25 per share;
- Two years from the purchase date, at $9.50 per share;
- Three years from the purchase date, at $9.75 per share; and
- Four years from the purchase date, at the greater of: $10.00 per
share; or a price equal to ten times our "funds available for
distribution" per weighted average share outstanding for per prior
calendar year.
Shares purchased by us will not be available for resale.
The net proceeds of the offering will enable us to purchase properties. It
is our policy to acquire properties free and clear of permanent mortgage
indebtedness if we deem it advantageous by paying the entire purchase price of
each property in cash or for shares, interest in entities that own our
properties, or a combination of these means, and to selectively encumber all or
some properties. We may, however, acquire properties subject to existing
indebtedness. Following acquisition, the proceeds from such loans will be used
to acquire additional properties to increase cash flow and provide further
diversity. If the offering is not fully sold, our ability to diversify our
investments may be diminished. Our advisor expects
102
<Page>
that the cash to be generated from operations of the properties identified for
acquisition, which we intend to acquire if sufficient proceeds are raised in the
offering, will be adequate to pay our operating expenses and provide
distributions to stockholders.
Our management will monitor the various qualification tests we must
meet to maintain our status as a REIT. We test large ownership of the shares
upon purchase to determine that no more than 50% in value of the outstanding
shares is owned, directly or indirectly, by five or fewer persons or entities at
any time. Our management also determines, on a quarterly basis, that the gross
income, asset and distribution tests described in the section entitled "Federal
Income Tax Considerations -- Federal Income Taxation as a REIT" are met. On an
ongoing basis, as we and the advisor perform due diligence on potential
purchases of properties or temporary investment of uninvested capital,
management of both entities will determine that the income from the new asset
will qualify for REIT purposes.
CAPITAL RESOURCES
As of the date of this prospectus, we have identified one property in which
to invest. If the minimum 200,000 shares are sold, we would not have sufficient
resources to acquire the property identified.
We have rights to purchase an investment property currently being
redeveloped, known as Peoria Station, from an unaffiliated third party for
approximately $25,867,000. This amount may be adjusted based on actual rental
rates achieved on the redeveloped square feet. We expect to purchase this
property by November 1, 2003, however, the seller may extend the closing date if
minimum rental rates stated in the contract have not yet been achieved.
The number of properties we will acquire will depend upon the amount of the
net proceeds of the offering. The advisor is not aware of any material trends,
favorable or unfavorable, in either capital resources or the outlook for
long-term cash generation, nor does it expect any material changes in the
availability and relative cost of such capital resources, other than as referred
to herein.
The advisor has guaranteed payment of all organization and offering
expenses, including selling commissions and the other fees payable to the
managing dealer, in excess of 15% of the gross offering proceeds of the offering
and all organization and offering expenses, excluding such selling expenses, in
excess of 5.5% of the gross offering proceeds. In addition, if we do not sell
the minimum offering, neither our sponsor nor our advisor will be reimbursed for
any organization and offering expenses.
As of June 30, 2003, we had incurred $308,976 of offering and organization
costs, all of which was advanced by our advisor.
Certain compensation and fees payable to our advisor for services to be
provided to us are limited to maximum amounts. Set forth below is a table
describing compensation and fees payable by us to our advisor.
103
<Page>
Nonsubordinated payments:
<Table>
<Caption>
Offering stage:
Selling commissions 7.5% of the sale price for each share
Marketing contribution and due 3.0%of the gross offering proceeds
diligence allowance
Reimbursable expenses and other We will reimburse our sponsor for actual
expenses of issuance costs incurred, on our behalf, in
connection with the offering
Acquisition stage:
Acquisition expenses We will reimburse an affiliate of our
advisor for costs incurred, on our behalf,
in connection with the acquisition of
properties
Operational stage
Property management fee. THIS FEE 4.5% of the gross income from the
TERMINATES UPON A BUSINESS properties. (Cannot exceed 90% of
COMBINATION WITH OUR the fee which would be payable
PROPERTY MANAGER to an unrelated third party)
Loan servicing fee .08% of the total principal amount
of the loans being serviced for each
full year, up to the first
$100 million and a lesser
percentage on a sliding scale
thereafter
Reimbursable expenses relating to The compensation and reimbursements to our
administrative services advisor and its affiliates will be
approved by a majority of our directors
Liquidation stage:
Property disposition fee. THIS FEE Lesser of 3% of sales price or 50% of the
TERMINATES UPON A BUSINESS COMBINATION customary commission which would be paid
WITH THE ADVISOR to a third party
Subordinated payments:
Operational stage:
Advisor asset management fee. Not more than 1% per annum of
THIS FEE TERMINATES UPON our average assets; subordinated to a
A BUSINESS COMBINATION non-cumulative, non-compounded
WITH OUR ADVISOR return, equal to 6% per annum
Liquidation stage:
Incentive advisory fee. After our stockholders have first received
THIS FEE TERMINATES UPON A a 10% cumulative, non-compounded return
BUSINESS COMBINATION WITH OUR ADVISOR and a return on their net investment, an
incentive advisory fee equal to 15% on net
proceeds from the sale of a property will
be paid to our advisor
</Table>
As of the date of this prospectus, we have no current plans to acquire the
property manager or advisor. No subscriptions for shares have been received from
the public. The only funds received to date are from the advisor's contribution
of $200,000 for 20,000 common shares.
RESULTS OF OPERATIONS
As of the date of this prospectus, we have not yet had any operations. We
intend to use the proceeds of this offering as set forth under "Estimated Use of
Proceeds," principally to acquire properties. Our primary business objective
will be to enhance the performance and value of our properties through
management strategies designed to meet the needs of an evolving retail
marketplace.
104
<Page>
As we have not acquired any properties yet, our advisor is not aware of any
known trends or uncertainties, other than national economic conditions, which
have had or which may be reasonably expected to have a material impact,
favorable or unfavorable, on revenues or income from the acquisition and
operation of real properties other than those referred to in the prospectus.
We have paid no distributions yet.
FUNDS FROM OPERATIONS
One of our objectives is to provide cash distributions to our stockholders
from cash generated by our operations. Cash generated from operations is not
equivalent to our net operating income as determined under accounting principles
generally accepted in the United States of America or GAAP. Due to certain
unique operating characteristics of real estate companies, the National
Association of REITs, also known as "NAREIT", an industry trade group, has
promulgated a standard known as "Funds from Operations" or "FFO" for short,
which it believes more accurately reflects the operating performance of a REIT
such as ours. As defined by NAREIT, FFO means net income computed in accordance
with GAAP, less extraordinary, unusual and non-recurring items, excluding gains
(or losses) from debt restructuring and sales of properties plus depreciation
and amortization and after adjustments for unconsolidated partnership and joint
ventures in which the REIT holds an interest. We have adopted the NAREIT
definition for computing FFO because management believes that, subject to the
following limitations, FFO provides a basis for comparing our performance and
operations to those of other REITs. The calculation of FFO may vary from entity
to entity since capitalization and expense policies tend to vary from entity to
entity. Items which are capitalized do not impact FFO, whereas items that are
expensed reduce FFO. Consequently, the presentation of FFO by us may not be
comparable to other similarly titled measures presented by other REITs. FFO is
not intended to be an alternative to "Net Income" as an indicator of our
performance nor to "Cash Flows from Operating Activities" as determined by GAAP
as a measure of our capacity to pay distributions.
INITIAL PROPERTY
We have the right to acquire a neighborhood center, being the initial
property. If sufficient funds are raised in the offering, we will, subject to
certain conditions, acquire the initial property from an unaffiliated third
party. See "Real Property Investments" for a more detailed description of the
initial property.
CRITICAL ACCOUNTING POLICIES
GENERAL.
The following disclosure pertains to critical accounting policies
management believes will be most "critical" to the portrayal of our financial
condition and results of operations which require management's most difficult,
subjective or complex judgments. These judgments often result from the need to
make estimates about the effect of matters that are inherently uncertain.
Critical accounting policies discussed in this section are not to be confused
with accounting principles and methods disclosed in accordance with GAAP. GAAP
requires information in financial statements about accounting principles,
methods used and disclosures pertaining to significant estimates. This
discussion addresses judgments known to management pertaining to trends, events
or uncertainties known which will be taken into consideration upon the
application of those policies and the likelihood that materially different
amounts would be reported upon taking into consideration different conditions
and assumptions.
105
<Page>
VALUATION AND ALLOCATION OF INVESTMENT PROPERTY. In order to ascertain the
value of an investment property management will take into consideration many
factors which require difficult, subjective or complex judgments to be made.
These judgments require management to make assumptions when valuing each
investment property. Such assumptions include projecting vacancy rates, rental
rates, property operating expenses, capital expenditures, and debt financing
rates, among others. The capitalization rate is also a significant driving
factor in determining the property valuation which requires management's
judgment of factors such as market knowledge, historical experience, length of
leases, tenant financial strength, economy, demographics, environment, property
location, visibility, age, and physical condition, and investor return
requirements, among others. Furthermore, at the acquisition date, every property
acquired will be supported by an independent appraisal. All of the
aforementioned factors are taken as a whole by management in determining the
valuation. The valuation is sensitive to the actual results of any of these
uncertain factors, either individually or taken as a whole. Should the actual
results, differ from management's judgment, the valuation could be negatively
effected.
We will allocate the purchase price of the each acquired investment
property between land, building and improvements, acquired favorable and
unfavorable leases, lease origination value (the market cost avoidance of
executing each acquired lease), and any assumed financing that is determined to
be above or below market terms. The allocation of the purchase price is an area
that requires complex judgments and significant estimates. We use the
information contained in the independent appraisal we obtained as the primary
basis for the allocation to land and building improvements. We determine whether
any financing assumed is above or below market based upon comparison to similar
financing terms for similar investment properties. We also will allocate a
portion of the purchase price to the estimated lease origination value based on
estimated lease execution costs for similar leases and consider various factors
including geographic location and size of leased space. We also will evaluate
each acquired lease based upon current market rates at the acquisition date and
consider various factors including geographical location, size and location of
leased space within the investment property, tenant profile and the credit risk
of the tenant in determining whether the acquired lease is favorable or
unfavorable. After an acquired lease is determined to be favorable or
unfavorable, we will allocate a portion of the purchase price to such favorable
or unfavorable acquired lease based upon the present value of the difference
between the contractual lease rate and the estimated market rate. The
determination of the discount rate used in the present value calculation is
based upon the "risk free rate" for each individual lease and primarily based
upon the credit worthiness of each individual tenant.
On a quarterly basis, we will conduct an impairment analysis in accordance
with Statement of Financial Accounting Standards No. 144 to ensure that the
property's carrying value does not exceed its fair value. If this were to occur,
we are required to record an impairment loss.
The valuation and allocation of purchase price, and possible subsequent
impairment of investment properties is a significant estimate that can and does
change based on management's continuous process of analyzing each property and
on management's assumptions about uncertain inherent factors.
COST CAPITALIZATION AND DEPRECIATION POLICIES. Our policy will be to review
all expenses paid and capitalize any item exceeding a threshold deemed to be an
upgrade or a tenant improvement that is included in the investment property
asset classification. In addition, we will capitalize costs incurred during the
development period, including direct costs and indirect costs such as
construction, insurance, architectural costs, and legal fees, interest and other
financing costs, and real estate taxes. We will cease capitalization of indirect
costs once management considers the property is substantially complete and
available for occupancy.
106
<Page>
Buildings and improvements will be depreciated on a straight line basis
based upon estimated useful lives of 30 years for buildings and improvements and
15 years for site improvements. That portion of the purchase price is allocated
to acquired favorable and unfavorable leases will be amortized on a straight
line basis over the life of the related lease as an adjustment to rental income.
Lease origination value, other leasing costs, and tenant improvements will be
amortized on a straight line basis over the life of the related lease as a
component of amortization expense.
Cost capitalization and the estimate of useful lives requires management
judgment and includes significant estimates that can and do change based on
management's continuous process of analyzing each property and on management's
assumptions about uncertain inherent factors.
REVENUE RECOGNITION. We will recognize rental income on a straight-line
basis over the term of each lease. The difference between rental income earned
on a straight line basis and the cash rent due under the provisions of the lease
agreements will be recorded as deferred rent receivable and is included as a
component of accounts and rents receivable in the accompanying consolidated
balance sheets. We anticipate collecting these amounts over the terms of the
leases as scheduled rent payments are made.
Reimbursements from tenants for recoverable real estate tax and operating
expenses will be accrued as revenue in the period the applicable expenditures
are incurred. Management makes certain assumptions and judgments in estimating
the reimbursements at the end of each reporting period. Should the actual
results differ from management's judgment, the estimated reimbursement could be
negatively effected adjusted appropriately.
In connection with certain acquisitions, we will receive payments under
master lease agreements pertaining to some non-revenue producing spaces either
at the time or subsequent to the purchase. GAAP requires that as these payments
are received, they be recorded as a reduction in the purchase price rather than
as rental income. These master leases may be established at the time of purchase
in order to mitigate the potential negative effects of rent and occupancy
assumptions utilized in the valuation of the investment property. Master lease
payments will be received through a draw of funds escrowed at the time of
purchase and will be for a period from one to three years. There is no assurance
that upon the expiration of the master leases agreements that the valuation
factors pertaining to rent and occupancy assumed by management will be met.
Should the actual results differ from management's judgment, the property
valuation could be negatively or positively affected.
VALUATION OF ACCOUNTS AND RENTS RECEIVABLE. Management will take into
consideration certain factors that require judgments to be made as to the
collectability of receivables. Collectability factors taken into consideration
are the amounts outstanding, payment history, and financial strength of the
tenant, which taken as a whole determines the valuation.
REIT STATUS. In order to maintain our status as a REIT, we are required to
distribute at least 90% of its REIT taxable income to our stockholders. We must
also meet certain asset and income tests, as well as other requirements. We will
monitor the business and transactions that may potentially impact our REIT
status. If we fail to qualify as a REIT in any taxable year, we will be subject
to Federal income tax (including any applicable alternative minimum tax) on our
taxable income at regular corporate rates.
NEW ACCOUNTING PRONOUNCEMENT
On May 15, 2003, the Financial Accounting Standards Board issued Statement No.
150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY. The Statement
107
<Page>
requires issuers to classify as liabilities (or assets in some circumstances)
three classes of freestanding financial instruments that embody obligations for
the issuer.
Generally, the Statement is effective for financial instruments entered into or
modified after May 31, 2003 and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Company adopted the
provisions of the Statement on July 1, 2003.
The Company did not enter into any financial instruments within the scope of the
Statement during June 2003. To the extent stockholders request shares to be
repurchased by the Company under the Share Repurchase Program, the Company's
obligation to repurchase such shares will be classified as a liability at the
redemption amount at the date documentation is complete and accepted by the
Company in accordance with the plan documents.
INFLATION
Inflation is likely to increase rental income from leases to new tenants
and lease renewals, subject to market conditions, for any retail centers we
acquire. Our rental income and operating expenses for any properties to be owned
and operated on a triple-net lease basis are not likely to be directly affected
by future inflation, since rents are or will be fixed under those leases and
property expenses are the responsibility of the tenants. The capital
appreciation of properties leased on triple-net lease basis is likely to be
influenced by interest rate fluctuations. To the extent that inflation
determines interest rates, future inflation may have an effect on the capital
appreciation of properties leased on a triple-net-lease basis.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We may be exposed to interest rate changes primarily as a result of
long-term debt used to maintain liquidity and fund capital expenditures and
expansion of our real estate investment portfolio and operations. Our interest
rate risk management objectives will be to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. To
achieve our objectives we will borrow primarily at fixed rates or variable rates
with the lowest margins available and in some cases, with the ability to convert
variable rates to fixed rates.
We may use derivative financial instruments to hedge exposures to changes
in interest rates on loans secured by our properties. To the extent we do, we
are exposed to credit risk and market risk. Credit risk is the failure of the
counterparty to perform under the terms of the derivative contract. When the
fair value of a derivative contract is positive, the counterparty owes us, which
creates credit risk for us. When the fair value of a derivative contract is
negative, we owe the counterparty and, therefore, it does not possess credit
risk. It is our policy to enter into these transactions with the same party
providing the financing, with the right of offset. In the alternative, we will
minimize the credit risk in derivative instruments by entering into transactions
with high-quality counterparties. Market risk is the adverse effect on the value
of a financial instrument that results from a change in interest rates. The
market risk associated with interest-rate contracts is managed by establishing
and monitoring parameters that limit the types and degree of market risk that
may be undertaken.
With regard to variable rate financing, we assess interest rate cash flow
risk by continually identifying and monitoring changes in interest rate
exposures that may adversely impact expected future cash flows and by evaluating
hedging opportunities. We maintain risk management control systems to monitor
interest rate cash flow risk attributable to both of our outstanding or
forecasted debt obligations as well as our potential offsetting hedge positions.
The risk management control systems involve the use
108
<Page>
of analytical techniques, including cash flow sensitivity analysis, to
estimate the expected impact of changes in interest rates on our future cash
flows.
While this hedging strategy will have the effect of smoothing out interest
rate fluctuations, the result may be to reduce the overall returns on your
investments.
As we have yet to raise any money, our board has not yet established
policies and procedures regarding our use of derivative financial instruments
for hedging or other purposes.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
109
<Page>
DESCRIPTION OF SECURITIES
We were formed under the laws of the State of Maryland. Your rights are
governed by Maryland law, our articles of incorporation and our bylaws. The
following summary of the terms of our stock is only a summary and you should
refer to our articles of incorporation and bylaws for a full description. Copies
of our articles of incorporation and bylaws are filed as exhibits to the
registration statement of which this prospectus is a part. You can obtain copies
of our articles of incorporation and bylaws and every other exhibit to our
registration statement. See "Where You Can Find More Information," below.
AUTHORIZED STOCK
Our articles of incorporation provide that we may issue up to 350,000,000
shares of common stock and 10,000,000 shares of preferred stock. Upon completion
of this offering, if 250,000,000 shares are sold, there will be 250,020,000
shares of common stock outstanding and no preferred stock outstanding.
As permitted by Maryland law, our articles of incorporation contain a
provision permitting the board, without any action by the stockholders, to amend
our articles of incorporation from time to time, to increase or decrease the
aggregate number of shares of stock and the number of shares of stock of any
class or series that we have authority to issue. Our articles of incorporation
also contain a provision permitting our board of directors, without any action
by stockholders, to classify or reclassify any unissued common stock or
preferred stock into one or more classes or series by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or distributions, qualifications or terms or
conditions of redemption of any new class or series of shares of stock.
Nevertheless, certain laws to which we are subject require the approval by a
majority of our then outstanding shares to amend our articles of incorporation
to increase or decrease the number of shares authorized by our articles of
incorporation.
We believe that the power of our board to issue additional authorized but
unissued shares of common stock or preferred stock and to classify or reclassify
shares of stock will provide us with increased flexibility in structuring
possible future financings and acquisitions and in meeting other needs which
might arise. Following amendment of our articles of incorporation to increase
the number of our authorized shares, our board would be able to issue the
additional common stock or preferred stock without further action by our
stockholders.
COMMON STOCK
Upon issuance of our shares for full payment in accordance with the terms
of this offering, all of the common stock we are offering will be duly
authorized, fully paid and nonassessable. Subject to the preferential rights of
any other class or series of stock and to the provisions of our articles of
incorporation regarding the restriction on the transfer of shares of our stock,
holders of our common stock will be entitled to receive distributions if
authorized and declared by our board and to share ratably in our assets
available for distribution to the stockholders in the event of a liquidation,
dissolution or winding-up.
Each outstanding share of our common stock entitles the holder to one vote
on all matters submitted to a vote of stockholders, including the election of
directors. There is no cumulative voting in the election of directors, which
means that the holders of a majority of the outstanding common stock can elect
all of the directors then standing for election, and the holders of the
remaining common stock will not be able to elect any directors.
110
<Page>
Holders of our common stock have no conversion, sinking fund, redemption,
exchange or appraisal rights, and have no preemptive rights to subscribe for any
of our securities. Our articles of incorporation provide that holders of our
common stock are not entitled to exercise any rights of an objecting stockholder
provided for under Maryland law. Shares of our common stock have equal dividend,
distribution, liquidation and other rights.
Under Maryland law and our articles of incorporation, we cannot make
certain material changes to our business form or operations without the approval
of stockholders holding at least a majority of the shares of stock entitled to
vote on the matter. The following events, however, do not require stockholder
approval:
- share exchanges in which we are the acquiror;
- mergers with or into a 90 percent or more owned subsidiary;
- mergers in which we do not:
- reclassify or change the terms of any of our stock that is
outstanding immediately before the effective time of the
merger;
- amend our articles of incorporation; and
- issue in the merger more than 20 percent of the number of
shares of any class or series of stock outstanding immediately
before the merger; and
- transfers of less than substantially all of our assets. Our articles
of incorporation provide that the sale of two-thirds or more of our
assets or the then current fair market value of our properties and
mortgages other than in the ordinary course of our business will be
considered the sale of substantially all of our assets.
Our bylaws provide that the presence in person or by proxy by the holders
of a majority of our outstanding shares will constitute a quorum for the
transaction of business at a meeting of our stockholders. Our articles of
incorporation provide that the election of directors requires a majority of all
the votes present in person or by proxy at a meeting of our stockholders at
which a quorum is present. Our articles of incorporation also provide that the
affirmative vote of the holders of a majority of our outstanding common stock
may remove any director with or without cause.
We will act as our own registrar and transfer agent for our common stock.
PREFERRED STOCK
Shares of our preferred stock may be issued in the future in one or more
series as authorized by our board. Prior to the issuance of shares of any
series, our board is required by Maryland law and our articles of incorporation
to fix the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption for each series. Because our board has the
power to establish the preferences, powers and rights of each series of
preferred stock, it may, without any consideration or approval by our
stockholders, provide the holders of any series of preferred stock with
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of our common stock. The issuance of preferred stock could have the
effect of delaying, deferring or preventing a change of control of us, including
an extraordinary
111
<Page>
transaction (such as merger, tender offer or sale of all or substantially all of
our assets) that might provide a premium price for holders of our common stock.
We have no present plans to issue any preferred stock.
ISSUANCE OF ADDITIONAL SECURITIES AND DEBT INSTRUMENTS
Our directors are authorized to issue additional stock or other convertible
securities for cash, property or other consideration on such terms as they may
deem advisable. Our directors are also authorized to classify or reclassify any
unissued shares of our capital stock without approval of the holders of our
outstanding securities. Subject to some restrictions, our directors may cause us
to issue debt obligations, including debt with conversion privileges on more
than one class of our capital stock. Our directors may issue debt obligations on
such terms and conditions as they may determine, including debt with conversion
privileges, where the holders of our debt obligations may acquire our common
stock. Subject to some restrictions, our directors may also cause us to issue
warrants, options and rights to buy our common stock on such terms as they deem
advisable to our stockholders, as part of a financing arrangement, or pursuant
to stock option plans. Our directors may cause us to issue warrants, options and
rights to buy our common stock and debt with conversion privileges even though
their exercise or conversion could result in dilution in the value of our
outstanding common stock.
RESTRICTIONS ON ISSUANCE OF SECURITIES
Our articles of incorporation provide that we will not issue:
- common stock which is redeemable at the option of the holder;
- debt securities unless the historical debt service coverage in the
most recently completed fiscal year is sufficient to properly
service the higher level of debt;
- options or warrants to purchase stock to our advisor, sponsor,
director(s) or any affiliates of our advisor, sponsor or directors
except on the same terms as sold to the general public and in an
amount not to exceed 10% of our outstanding common or preferred
stock on the date of grant of any options or warrants; or
- stock on a deferred payment basis or similar arrangement.
Our articles of incorporation also provide that we will not issue nonvoting
or assessable common stock or warrants, options or similar evidences of rights
to buy stock unless they are issued to the holders of stock ratably, as part of
a financing arrangement or as part of a stock plan to our directors, officers or
employees.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
In order for us to continue to qualify as a REIT under the Internal Revenue
Code, shares of our stock must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of twelve months (other than the
first year for which an election to be a REIT has been made) or during a
proportionate part of a shorter taxable year. Also not more than 50% of the
value of our outstanding shares of stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Internal Revenue Code to include
some entities such as qualified person plans) during the last half of a taxable
year (other than the first year for which an election to be a REIT has been
made).
112
<Page>
Our articles of incorporation, subject to some exceptions, contain
restrictions on the number of shares of our stock that a person may own. Our
articles of incorporation prohibit any person from acquiring or holding,
directly or indirectly, shares of stock in excess of 9.8% in value of the
aggregate of our outstanding shares of stock. In addition, our articles of
incorporation prohibit any person from acquiring or holding, directly or
indirectly, shares of common stock in excess of 9.8% of the aggregate number of
our outstanding shares of common stock. The 9.8% common stock ownership limit
must be measured in terms of the more restrictive of value or number of shares.
Our board of directors, in its sole discretion, may exempt a person from
the 9.8% limit and the common stock ownership limit. However, the board may not
grant such an exception to any person whose ownership, direct or indirect, of in
excess of 9.8% of the value of our outstanding shares of stock would result in
us being "closely held" within the meaning of Section 856(h) of the Internal
Revenue Code or otherwise would result in us failing to qualify as a REIT. In
order to be considered as an excepted holder, a person also must not own,
directly or indirectly, an interest in any of our tenants (or in a tenant of any
entity owned or controlled by us) that would cause us to own, directly or
indirectly, more than a 9.9% interest in such a tenant. The person seeking an
exemption must represent to our board's satisfaction that it will not violate
these two restrictions. The person also must agree that any violation or
attempted violation of any of these restrictions will result in the automatic
transfer of the shares of stock causing the violation to a trust as explained
below. Our board may require a ruling from the Internal Revenue Service or an
opinion of counsel, in either case in form and substance satisfactory to our
board of directors in its sole discretion, in order to determine or ensure our
status as a REIT.
In addition, our articles of incorporation prohibit any person from
beneficially or constructively owning shares of our common or preferred stock
that would result in us being "closely held" within the meaning of Section
856(h) of the Internal Revenue Code. Our articles of incorporation further
provide that any transfer of our common stock or preferred stock that would
result in our common stock and preferred stock being beneficially owned by fewer
than 100 persons will be void. Any person who acquires or attempts or intends to
acquire beneficial or constructive ownership of our common or preferred stock
that will or may violate any of the foregoing restrictions on transferability
and ownership, or any person who would have owned shares of our common or
preferred stock that resulted in a transfer of shares to the trust, is required
to give us notice immediately and to provide us with such other information as
we may request in order to determine the effect of such transfer on our status
as a REIT. The foregoing restrictions on transferability and ownership will not
apply if our board determines that it is no longer in our best interests to
attempt to qualify, or to continue to qualify, as a REIT.
If any transfer of shares of our stock occurs which, if effective, would
result in any person beneficially or constructively owning shares of our stock
in excess or in violation of the above transfer or ownership limitations, then
the number of shares of our stock the beneficial or constructive ownership of
which would cause the person to violate the limitations will be automatically
transferred under the provisions of our articles of incorporation to a trust for
the exclusive benefit of one or more charitable beneficiaries within the meaning
of 501(c)(3) of the Internal Revenue Code. The proposed transferee that exceeds
the ownership limitations will not acquire any rights in these shares. The
automatic transfer is deemed effective as of the close of business on the
business day, as defined in our articles of incorporation, prior to the date of
the violative transfer. Shares of stock held in the trust will continue as
issued and outstanding common stock or preferred stock. The proposed transferee
will not benefit economically from ownership or any shares of stock held in the
trust, will have no rights to dividends and will not possess any rights to vote
or other rights attributable to the shares of stock held in the trust. The
trustee of the trust will have all voting rights and rights to dividends or
other distributions with respect to shares of stock held in the trust. The
voting rights and rights to dividends will be exercised for the exclusive
benefit of the charitable beneficiary. Any dividend or other distribution paid
prior to our
113
<Page>
discovery that shares of stock have been transferred to the trustee will be paid
by the recipient of the dividend or distribution to the trustee upon demand, and
any dividend or other distributions authorized but unpaid will be paid when due
to the trustee. Any dividend or distribution paid to the trustee will be held in
trust for the charitable beneficiary. The proposed transferee will have no
voting rights with respect to shares of stock held in the trust. Subject to
Maryland law, effective as of the date that such shares of stock have been
transferred to the trust, the trustee will have the authority at his sole
discretion (i) to rescind as void any vote cast by the proposed transferee prior
to our discovery that such shares have been transferred to the trust and (ii) to
recast such vote in accordance with the desires of the trustee acting for the
benefit of the charitable beneficiary. However, if we have already taken
irreversible corporate action, then the trustee will not have the authority to
rescind and recast the vote.
Within twenty days of receiving notice from us that shares have been
transferred to the trust, the trustee shall sell the shares to a person,
designated by the trustee, whose ownership of the shares will not violate the
ownership limitations set forth in the articles of incorporation. Upon the sale,
the interest of the charitable beneficiary in the shares sold will terminate and
the trustee will distribute the net proceeds of the sale to the proposed
transferee and to the charitable beneficiary as follows. The proposed transferee
will receive the lesser of (i) the price paid by him for the shares or, if the
proposed transferee did not give value for the shares in connection with the
event causing the shares to be held in the trust (e.g. a gift, devise or other
such transaction), the market price, as defined in our articles of
incorporation, of the shares on the day of the event causing the shares to
beheld in the trust and (ii) the price per share received by the trustee from
the sale or other disposition of the shares held in the trust. Any net sale
proceeds in excess of the amount payable to the proposed transferee will be paid
immediately to the charitable beneficiary. If, prior to our discovery that
shares of stock have been transferred to the trust, such shares are sold by the
proposed transferee, then (i) shares will be deemed to have been sold on behalf
of the trust and (ii) to the extent that the proposed transferee received an
amount for such shares that exceeds the amount that the proposed transferee was
entitled to receive, the excess will be paid to the trustee upon demand.
In addition, shares of our stock held in the trust will be deemed to have
been offered for sale to us or our designees, at a price per share equal to the
lesser of (i) the price per share in the transaction that resulted in the
transfer to the trust, or, in the case of a devise or gift, the market price at
the time of the devise or gift, and (ii) the market price on the date we, or our
designate, accept such offer. We can accept this offer until the trustee has
sold the shares held in the trust. Upon a sale to us, the interest of the
charitable beneficiary in the shares sold will terminate and the trustee will
distribute the net proceeds of the sale to the proposed transferee.
Our articles of incorporation require all persons who own more than 5%, or
any lower percentages as required pursuant to the Internal Revenue Code or the
regulations under the Internal Revenue Code, of our outstanding common and
preferred stock, within 30 days after the end of each taxable year, to provide
to us written notice stating their name and address, the number of shares of
common and preferred stock they beneficially own directly or indirectly, and a
description of how the shares are held. In addition, each beneficial owner must
provide to us any addition information as we may request in order to determine
the effect, if any, of their beneficial ownership on our status as a REIT and to
ensure compliance with the 9.8% ownership limit. In addition, each stockholder
will, upon demand, be required to provide us any information as we may request,
in good faith, in order to determine our status as a REIT and to comply with the
requirements of any taxing authority or governmental authority or to determine
such compliance.
All certificates representing any shares of our common or preferred stock
will bear a legend referring to the restrictions described above.
114
<Page>
PROVISIONS OF MARYLAND LAW AND OF OUR ARTICLES OF INCORPORATION AND BYLAWS
The following paragraphs summarize some provisions of Maryland law and the
material terms of our articles of incorporation and bylaws. The following
summary does not purport to be complete and is subject to and qualified in its
entirety by reference to Maryland law and our articles of incorporation and
bylaws, copies of which are exhibits to the registration statement of which the
prospectus is a part. See "Where You Can Find More Information."
BUSINESS COMBINATIONS. Under the Maryland Business Combination Act, an
anti-takeover statute, completion of a business combination (including a merger,
consolidation, share exchange or an asset transfer or issuance or
reclassification of equity securities) between a Maryland corporation and an
interested stockholder is prohibited for five years following the most recent
date on which the interested stockholder becomes an interested stockholder.
Maryland law defines an interested stockholder as any person who beneficially
owns ten percent or more of the voting power of the corporation's shares or an
affiliate or associate of the corporation who, at any time within the two-year
period prior to the date in question, was the beneficial owner of ten percent or
more of the voting power of the then-outstanding voting stock of the corporation
(an interested stockholder) or an affiliate of such interested stockholder. A
person is not an interested stockholder if, prior to the most recent time at
which the person would otherwise have become an interested stockholder, the
board of directors of the Maryland corporation approved the transaction which
otherwise would have resulted in the person becoming an interested stockholder.
The board of directors may provide that its approval is subject to compliance
with any terms and conditions determined by the board. Following the five-year
prohibition period, any such business combination with that interested
stockholder must be recommended by the board of directors of such corporation
and approved by the affirmative vote of at least:
- 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation; and
- two-thirds of the votes entitled to be cast by holders of voting
stock of the corporation other than shares held by the interested
stockholder with whom (or with whose affiliate) the business
combination is to be effected or held by an affiliate or associate
of the interested stockholder, unless, among other conditions, the
corporation's common stockholders receive a minimum price (as
defined in the Maryland business combination statute) equal to the
highest price paid by the interested stockholder for its shares and
the consideration is received in cash or in the same form as
previously paid by the interested stockholder for its shares.
These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by our board of directors prior to
the time that the interested stockholder becomes an interested stockholder. As
permitted under Maryland law, our articles of incorporation exempt any business
combinations involving us and The Inland Group or any of its affiliates. As a
result, the five-year prohibition and the super-majority vote requirement will
not apply to any business combinations between The Inland Group or any affiliate
of The Inland Group and us. Therefore, The Inland Group or any affiliate of The
Inland Group may be able to enter into business combinations with us, which may
or may not be in the best interests of the stockholders.
CONTROL SHARE ACQUISITION. Maryland's Control Share Acquisition Act, an
anti-takeover statute, prohibits interested stockholders from engaging in
self-dealing business combinations with a Maryland corporation, except to the
extent approved by the corporation's disinterested stockholders. Maryland law
provides that control shares of a Maryland corporation acquired in a control
share acquisition have no
115
<Page>
voting rights except to the extent approved by the corporation's disinterested
stockholders by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares owned by the corporation's disinterested stockholders,
whom the Act defines as (1) the acquiring person, (2) the corporation's officers
and (3) employees of the corporation who are also directors. Control shares mean
voting shares which, if aggregated with all other voting shares owned by an
acquiring person or which the acquiring person can exercise or direct the
exercise of voting power, would entitle the acquiring person to exercise or
direct the exercise of voting power of shares of the corporation in electing
directors within one of the following ranges of voting power:
- one-tenth or more but less than one-third;
- one-third or more but less than a majority; or
- a majority or more of all voting power.
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 occurs when, subject to some exceptions, a person
directly or indirectly acquires ownership or the power to direct the exercise of
voting power of issued and outstanding control shares. A person who has made or
proposes to make a control share acquisition, upon satisfaction of some specific
conditions, including an undertaking to pay expenses, may compel our board to
call a special meeting of stockholders to be held within 50 days after that
person's demand upon the corporation to consider the voting rights to be
accorded to the control shares. If no request for a meeting is made, we may
present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to some statutory conditions and limitations, the corporation 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 the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of stockholders at
which the voting rights of such shares are considered and not approved. 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 and be entitled to receive in
cash the fair value for their shares of our stock. 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 acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is party to the
transaction or to acquisitions approved or exempted by the articles of
incorporation or bylaws of the corporation.
Our bylaws contain a provision exempting from the control share acquisition
statute any and all acquisitions by The Inland Group or any affiliate of The
Inland Group of our shares of stock.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
116
<Page>
SHARES ELIGIBLE FOR FUTURE SALE
SHARES TO BE OUTSTANDING OR ISSUABLE UPON EXERCISE OR CONVERSION OF OTHER
OUTSTANDING SECURITIES
Upon the completion of the offering and the consummation of the formation
transactions, we expect to have outstanding 270,020,000 shares of common stock.
This includes:
- the 20,000 shares purchased by our advisor;
and assumes that:
- we sell all 250,000,000 shares of common stock offered on a best
efforts basis in this initial public offering;
- we sell all 20,000,000 shares to be issued under our distribution
reinvestment program described in this offering; and
- that there is no exercise of options which are expected to be
outstanding and exercisable.
In addition, we have reserved:
- 75,000 shares for issuance upon exercise of options which may be
granted under our independent director stock option plan.
Subject to the provisions of our articles of incorporation, we could issue
an undetermined number of shares of our common or preferred stock in the
discretion of our board and without the approval by our stockholders:
- directly for equity interests in real properties; or
- upon exchange of any interests in entities that own our properties
or in other companies we control, which might be issued for equity
interests in real properties.
All of the common stock we are offering by this prospectus will be freely
tradable in the public market, should a public market develop, which we cannot
guarantee, without restriction or limitation under the Securities Act of 1933 by
persons other than our affiliates and soliciting dealers considered
underwriters. However, all common stock issuable by us in this offering and
otherwise will be subject to the restrictions explained under "Description Of
Securities - Restrictions on Ownership and Transfer."
SECURITIES ACT RESTRICTIONS
The common stock owned by our affiliates will be subject to Rule 144
adopted under the Securities Act and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including exemptions contained in Rule 144.
In general, under Rule 144, a person, or persons whose common stock is
aggregated with them in accordance with Rule 144, who has beneficially owned
securities acquired from an issuer or an affiliate of the issuer for at least
one year, would be entitled, within any three-month period, to sell a number of
shares of common stock that does not exceed the greater of (1) 1% of the
then-outstanding number of shares or (2) the average weekly reported trading
volume of the common stock on a national securities
117
<Page>
exchange or market during the four calendar weeks preceding each sale. Sales
under Rule 144 must be transacted in the manner specified by Rule 144 and must
meet requirements for public notice as well as public information about us. Any
person who (1) is not deemed to have been our affiliate at any time during the
three months preceding a sale, and (2) has beneficially owned our common stock
for at least two years, would be entitled to sell the common stock under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
notice requirements or public information requirements of Rule 144. An
affiliate, for purposes of the Securities Act, is a person that directly, or
indirectly, through one or more intermediaries, controls, or is controlled by,
or under common control with, us.
INDEPENDENT DIRECTOR STOCK OPTION PLAN
We have established an independent director stock option plan for the
purpose of attracting and retaining independent directors. See
"Management--Independent Director Stock Option Plan." We will issue in the
aggregate options to purchase 9,000 shares of our common stock to our
independent directors, at the exercise price of $8.95 per share, when, and if,
we have 90,000 shares of common stock issued and outstanding. One-third of the
shares will be exercisable upon their grant. An additional 66,000 shares will be
available for future option grants under the independent director stock option
plan. See "Management--Independent Director Stock Option Plan" for additional
information regarding the independent director stock option plan. Rule 701 under
the Securities Act provides that common stock acquired on the exercise of
outstanding options by affiliates may be resold by them subject to all
provisions of Rule 144 except its one-year minimum holding period. We intend to
register the common stock to be issued under the independent director stock
option plan in a registration statement or statements on SEC Form S-8 or other
appropriate form.
EFFECT OF AVAILABILITY OF SHARES ON MARKET PRICE OF SHARES
Prior to the date of this prospectus, there has been no public market for
our common stock. No assurance can be given that a public market for our common
stock will develop. We cannot predict the effects that future sales of common
stock, including sales under Rule 144, or the availability of common stock for
future sale will have on the market price, if any, prevailing from time to time.
Sales of substantial amounts of our common stock, including shares issued upon
the exercise of options or the perception that these sales could occur, could
adversely affect prevailing market prices of our common stock and impair our
ability to obtain additional capital through the sale of equity securities. See
"Risk Factors--Risks Related to the Offering." For a description of restrictions
on transfers of common stock, see "Description of Securities--Restrictions on
Ownership and Transfer." Also, see the following section regarding registration
rights.
REGISTRATION RIGHTS
In the future we may grant "demand" and/or "piggyback" registration rights
to:
- stockholders receiving our common stock directly in exchange for
their equity interests in assets of theirs we would acquire; and
- persons receiving interests in any real property partnership for
their interests in real properties we would acquire.
"Piggyback" registration rights allow the holder to have his, her or its
shares registered along with our shares ONLY at such time(s) in the future when
we would choose to register some of our shares for financing purposes - that is,
to join with us in the registration of our shares. "Demand" registration rights
118
<Page>
permit the holder of demand rights to REQUIRE us to register with the SEC his,
her or its shares at such time(s) as the holder requests, regardless of any
desire by us to register our own shares for financing purposes, even if we do
not have sufficient capital resources to effect a registration of shares.
These rights will be for registration under the Securities Act of any of
our common stock acquired by them directly. The terms and conditions of any
agreements for registration rights will be negotiated and determined at such
future time as we determine advisable in connection with the acquisition of one
or more properties. Our future granting of registration rights could include
registration of the subject shares at our expense. If that were the case, our
obligation could result in a substantial expense to us at a time when we might
not be able to afford such an expense and could also hinder our future attempts
to obtain financing.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
119
<Page>
SUMMARY OF OUR ORGANIZATIONAL DOCUMENTS
Each stockholder is bound by and is deemed to have agreed to the terms of
our organizational documents by his, her or its election to become a stockholder
of our company. Our organizational documents consist of our articles of
incorporation and bylaws. Our directors, including all the independent
directors, reviewed and unanimously ratified our articles of incorporation and
bylaws at our first board meeting, which was required. The following is a
summary of material provisions of our organizational documents and does not
purport to be complete. This summary is qualified in its entirety by specific
reference to the organizational documents filed as exhibits to our registration
statement of which this prospectus is a part. See "Where You Can Find More
Information."
Our articles of incorporation were filed with the State Department of
Assessments and Taxation of Maryland and became operative on March 5, 2003. Our
articles of incorporation were filed in Maryland, and provide that we have
perpetual existence. The bylaws in their present form became operative when our
board approved them on March 5, 2003. Neither our articles of incorporation nor
bylaws have an expiration date. As a result, they will remain operative in their
current form throughout our existence, unless they are amended or we are
dissolved.
ARTICLES OF INCORPORATION AND BYLAW PROVISIONS
The stockholders' rights and related matters are governed by our articles
of incorporation and bylaws and Maryland law. Some provisions of the articles of
incorporation and bylaws, summarized below, may make it more difficult to change
the composition of our board and could have the effect of delaying, deferring,
preventing a change in control of us, including an extraordinary transaction
(such as a merger, tender offer or sale of all or substantially all of our
assets) that might provide a premium price for holders of our common stock.
STOCKHOLDERS' MEETINGS
Our bylaws provide that an annual meeting of the stockholders will be
held on the date and at such time as our board may designate. However, the
meeting will not be held less than 30 days after the delivery of our annual
report to stockholders. The purpose of each annual meeting of the stockholders
is to elect directors and to transact any other proper business. The chairman,
the president, a majority of the directors or a majority of the independent
directors may call a special meeting of the stockholders. The secretary or some
other officer must call a special meeting when stockholders holding 10% or more
of the outstanding shares entitled to vote make a written request for a meeting.
The written request may be in person or by mail and must state the purpose(s) of
the meeting and the matters to be acted upon. We have entered into an agreement
with Inland Real Estate Investment Corporation, our sponsor, which provides that
it will pay for the reasonably estimated cost to prepare and mail a notice of
any special meeting of stockholders requested by the stockholders. The meeting
will be held on a date not less than 15 nor more than 60 days after the
distribution of the notice, at the time and place specified in the notice.
Except as provided in the preceding sentence, we will give notice of any annual
or special meeting of stockholders not less than 10 nor more than 90 days before
the meeting. The notice will state the purpose of the meeting. At any meeting of
the stockholders, each stockholder is entitled to one vote for each share owned
of record on the applicable record date. In general, the presence in person or
by proxy of a majority of the outstanding shares entitled to vote at a meeting
will constitute a quorum. The affirmative vote of a majority of the shares of
our stock, present in person or by proxy at a meeting of stockholders duly
called and at which a quorum is present, will be sufficient, without the
necessity for concurrence by the directors, to elect the directors. A majority
of the votes cast at a meeting of stockholders duly called and at which a quorum
is present will be sufficient to approve any other matter which may properly
come
120
<Page>
before the meeting, unless more than a majority of the votes cast is required by
statute or our articles of incorporation.
BOARD OF DIRECTORS
Our articles of incorporation and bylaws provide that we may not have fewer
than three nor more than eleven directors. Our bylaws currently provide that the
number of directors shall be seven. Our articles of incorporation require that a
majority of our directors must be independent directors. Independent directors
are directors who are not and have not been affiliated with us, our sponsor, or
our advisor, within the two years prior to their becoming our independent
director and who perform no services on our behalf other than as a director. A
vacancy on the board caused by the death, resignation or incapacity of a
director or by an increase in the number of directors, within the limits
described above, may be filled by the vote of a majority of the remaining
directors whether or not the voting directors constitute a quorum. Our articles
of incorporation require that our independent directors must nominate
replacements to vacancies in independent director positions irrespective of how
the vacancy arises. Our bylaws provide that a vacancy on our board caused by an
increase in the number of directors may be filled by a majority of the entire
board; that when a vacancy occurs as a result of the removal of a director by
our stockholders, the vacancy must be filled by a majority vote of our
stockholders; and that any director may resign at any time and may be removed
with or without cause by the affirmative vote of the holders of not less than a
majority of the outstanding shares. Our bylaws provide that the majority of
members of each committee of our board of directors be comprised of independent
directors and that all the members of our audit committee be independent
directors.
Our articles of incorporation provide that a director must have at least
three years of relevant experience and demonstrate the knowledge required to
successfully acquire and manage the type of assets that we intend to acquire. At
least one of our independent directors must have three years of relevant real
estate experience.
STOCKHOLDER VOTING RIGHTS
Each share of our common stock has one vote on each matter submitted to a
vote of stockholders. Shares of common stock do not have cumulative voting
rights or preemptive rights. Stockholders may vote in person or by proxy.
Directors are elected when they receive the majority of votes of holders of
shares present in person or by proxy at a stockholders' meeting, provided there
was a quorum when the meeting commenced. A quorum is reached when the
stockholders holding a majority of the outstanding shares entitled to vote are
present either in person or represented by proxy. All questions other than
election of directors, removal of a director or directors and except as set
forth below must be decided by a majority of the votes cast at a meeting at
which a quorum is present. Maryland law provides that any action required or
permitted to be taken at a meeting of stockholders may be taken without a
meeting by the unanimous written consent of all stockholders (which may be
impracticable for a publicly held corporation).
The approval by our board and by holders of at least a majority of our
outstanding voting shares of stock is necessary for us to do any of the
following:
- amend our articles of incorporation, except to increase or decrease
authorized stock as permitted by Maryland law;
- transfer all or substantially all of our assets other than in the
ordinary course of business;
121
<Page>
- engage in mergers, consolidations or share exchanges, except in
certain circumstances; or
- dissolve or liquidate.
Our articles of incorporation provide that a sale of two-thirds or more of
our assets, based on the total number or the current fair market value of
properties and mortgages we own, is a sale of substantially all of our assets.
See "Description of Securities -- Common Stock" for an explanation of instances
where stockholder approval is not required.
Our articles of incorporation provide that neither the advisor, the
sponsor, the directors, nor any affiliate may vote their shares of stock or
consent on matters submitted to the stockholders regarding the removal of the
advisor, the sponsor, the directors or any affiliate or any transaction between
us and any of them. For purposes of determining the necessary percentage and
interest of shares needed to approve a matter on which the advisor, the sponsor,
the directors and any affiliate may not vote or consent, the shares of our
common stock owned by them will not be included.
RIGHTS OF OBJECTING STOCKHOLDERS
As permitted by Maryland law, our articles of incorporation provide that
our stockholders are not entitled to exercise any rights of an objecting
stockholder provided for under Maryland law. As a result of this provision, our
stockholders will not have any right to dissent under Maryland law to an
extraordinary transaction, such as the merger of our company into another
company or the sale of all or substantially all of our assets, and in the
proceedings to receive a cash payment representing the fair value of their
shares of our common stock.
STOCKHOLDER LISTS; INSPECTION OF BOOKS AND RECORDS
Any stockholder or his designated representative will be permitted access
to all of our records at all reasonable times and may inspect and copy any of
them for the purposes specified below. We maintain an alphabetical list of
names, record addresses and business telephone numbers, if any, of all
stockholders with the number of shares held by each at our principal office. The
stockholder list is updated at least quarterly and is open for inspection by a
stockholder or his designated agent at the stockholder's request. A stockholder
may request a copy of the stockholder list to find out about matters relating to
the stockholder's voting rights and their exercise under federal proxy laws. We
will mail the stockholder list to any stockholder requesting it within 10 days
of receiving the request. We may impose a reasonable charge for expenses
incurred in reproducing the list.
If our advisor or directors neglect or refuse to produce or mail a copy of
the stockholder list as requested, then in accordance with applicable law and
our articles of incorporation, the advisor and the directors will be liable to
the stockholder who requested the list. Their liability will include the costs,
including reasonable attorneys' fees, incurred by the stockholder in compelling
the production of the list and actual damages suffered by the stockholder
because of the refusal or neglect. However, the fact that the actual purpose of
the request is to secure the list for the purpose of selling it, or using it for
a commercial or other purpose is a defense against liability for refusal to
supply the list. We may require the stockholder requesting the list to represent
that the stockholder list is not requested for a commercial purpose unrelated to
the stockholder's interest in us.
In addition, our books and records are open for inspection by state
securities administrators upon reasonable notice and during normal business
hours at our principal place of business.
122
<Page>
AMENDMENT OF THE ORGANIZATIONAL DOCUMENTS
Our articles of incorporation may be amended, after approval by our board,
by the affirmative vote of a majority of our then-outstanding voting shares of
stock. Our bylaws may be amended in a manner not inconsistent with the articles
of incorporation and bylaws by a majority vote of our directors present at the
board meeting.
DISSOLUTION OR TERMINATION OF THE COMPANY
As a Maryland corporation, we may be dissolved under Maryland law at any
time with the approval of a majority of our outstanding shares of stock.
However, we anticipate that by August 20, 2008, our board will determine whether
to:
- apply to have our shares of common stock listed for trading on a
national stock exchange or included for quotation on a national
market system, provided we meet the then applicable listing
requirements; and/or
- commence subsequent offerings after completion of the offering.
If listing our shares of common stock is not feasible by that time, our
board may decide to:
- sell our assets individually, provided, however, that if this action
would constitute the sale of all or substantially all of our assets,
such an action is approved by the holders of at least a majority of
the then-outstanding voting shares of stock;
- list our shares of common stock at a future date; or
- liquidate us within 10 years of such date, provided however, that
such an action is approved by the holders of at least a majority of
our then-outstanding voting shares of stock.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
Our bylaws provide that, with respect to our annual meeting of
stockholders, nominations for election to our board and the proposal of business
to be considered by stockholders may be made only:
- in accordance with our notice of the meeting;
- by or at the direction of our board; or
- by a stockholder who was a stockholder of record both at the time of
the giving of notice and at the time of the meeting, who is entitled
to vote at the meeting and who has complied with the advance notice
procedures set forth in the bylaws.
Our bylaws also provide that, with respect to special meetings of
stockholders, only the business specified in our notice of meeting may be
brought before a meeting of stockholders and nominations for election to the
board may be made only:
- in accordance with our notice of the meeting;
- by or at the direction of our board; or
123
<Page>
- provided that our board has determined that directors will be
elected at the meeting, by a stockholder who was a stockholder of
record both at the time of the giving of notice and at the time of
the annual meeting, who is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in our bylaws.
A stockholder's notice for an annual meeting must be delivered to our secretary
at our principal executive offices:
- not less than 45 days prior to the first anniversary of the date of
mailing of the notice of the previous year's annual meeting; or
- if the number of directors to be elected is increased and there is
no announcement of that fact, at least 70 days before the first
anniversary of the date of mailing of the notice of the previous
year's annual meeting, or not later than the close of business on
the tenth day of our first public announcement.
A stockholder's notice for a special meeting must be delivered to our secretary
at our principal executive offices:
- not earlier than the ninetieth day prior to the special meeting, and
- not later than the close of business on the later of either:
- the sixtieth day prior to the special meeting; or
- the tenth day following the day of our first public
announcement of the date of the special meeting and the
nominees proposed by our board to be elected at the meeting.
RESTRICTIONS ON CERTAIN CONVERSION TRANSACTIONS AND ROLL-UPS
Our articles of incorporation require that some transactions involving an
acquisition, merger, conversion or consolidation in which our stockholders
receive securities in a surviving entity, a roll-up entity, must be approved by
the holders of a majority of our then-outstanding shares. Approval by a majority
of our then-outstanding shares for a transaction resulting in a roll-up entity
is only required, however, until our board determines that it is no longer in
our best interest to attempt or continue to qualify as a REIT. The holders of a
majority of the shares do not need to approve any such transaction effected
because of changes in applicable law, or to preserve tax advantages for a
majority in interest of our stockholders.
A roll-up entity is a partnership, REIT, corporation, trust or other entity
that would be created or would survive after the successful completion of a
proposed roll-up transaction. A roll-up does not include (1) a transaction
involving securities that have been listed on a national securities exchange or
traded through The Nasdaq Stock Market -- Nasdaq National Market for at least 12
months, or (2) a transaction involving our conversion to a trust or association
form if, as a consequence of the transaction, there will be no significant
adverse change in any of the following:
- stockholders' voting rights;
- our term and existence;
124
<Page>
- sponsor or advisor compensation; or
- our investment objectives.
In the event of a proposed roll-up, an appraisal of all our assets must be
obtained from a person with no current or prior business or personal
relationship with our advisor or directors. Further, that person must be
substantially engaged in the business of rendering valuation opinions of assets
of the kind we hold. The appraisal must be included in a prospectus used to
offer the securities of a roll-up entity. It must also be filed with the
Securities and Exchange Commission and the state regulatory commissions as an
exhibit to the registration statement for the offering of the roll-up entity's
shares. As a result, an issuer using the appraisal will be subject to liability
for violation of Section 11 of the Securities Act and comparable provisions
under state laws for any material misrepresentations or material omissions in
the appraisal. Our assets will be appraised in a consistent manner and the
appraisal will:
- be based on an evaluation of all relevant information;
- indicate the value of our assets as of a date immediately prior to
the announcement of the proposed roll-up transaction; and
- assume an orderly liquidation of our assets over a 12-month period.
The terms of the engagement of the appraiser will clearly state that the
engagement is for the benefit of us and our stockholders. A summary of the
independent appraisal, indicating all material assumptions underlying it, will
be included in a report to the stockholders in the event of a proposed roll-up.
We may not participate in any proposed roll-up which would:
- result in the stockholders of the roll-up entity having rights which
are more restrictive to stockholders than those provided in our
articles of incorporation, including any restriction on the
frequency of meetings;
- result in the stockholders having less comprehensive voting rights
than are provided in our articles of incorporation;
- result in the stockholders having greater liability than provided in
our articles of incorporation;
- result in the stockholders having fewer rights to receive reports
than those provided in our articles of incorporation;
- result in the stockholders having access to records that are more
limited than those provided for in our articles of incorporation;
- include provisions which would operate to materially impede or
frustrate the accumulation of shares by any purchaser of the
securities of the roll-up entity, except to the minimum extent
necessary to preserve the tax status of the roll-up entity;
- limit the ability of an investor to exercise its voting rights in
the roll-up entity on the basis of the number of the shares held by
that investor;
125
<Page>
- result in investors in the roll-up having less comprehensive rights
of access to the records of the roll-up than those provided in our
articles of incorporation; or
- place any of the costs of the transaction on us if the roll-up is
not approved by our stockholders.
However, with the prior approval of a majority of our then-outstanding shares of
our stock, we may participate in a proposed roll-up if the stockholders would
have rights and be subject to restrictions comparable to those contained in our
articles of incorporation.
Stockholders who vote "no" on the proposed roll-up will have the choice of:
- accepting the securities of the roll-up entity offered; or
- one of either:
- remaining as our stockholders and preserving their interests on
the same terms and conditions as previously existed; or
- receiving cash in an amount equal to their pro rata share of
the appraised value of our net assets.
These provisions in our articles of incorporation, bylaws and Maryland law
could have the effect of delaying, deferring or preventing a change in control
of us, including an extraordinary transaction (such as a merger, tender offer or
sale of all or substantially all of our assets) that might provide a premium
price for holders of our common stock.
The limitations and restrictions set forth below under " -- Limitation on
Total Operating Expenses," " -- Transactions with Affiliates," and " --
Restrictions on Borrowing" in this section will be effective until our board
determines that it is no longer in our or our stockholders' best interests that
we continue to operate as a REIT, or until such time as we fail to qualify as a
REIT.
LIMITATION ON TOTAL OPERATING EXPENSES
Our articles of incorporation provide that, subject to the conditions
described in the following paragraph, our annual total operating expenses in any
fiscal year shall not exceed the greater of 2% of our average assets or 25% of
our net income, before any additions to or allowances for reserves for
depreciation, amortization or bad debts or other similar non-cash reserve and
before any gain from the sale of an our assets. Our independent directors have a
fiduciary responsibility to limit our annual total operating expenses to amounts
that do not exceed these limits. Our independent directors may, however,
determine that a higher level of total operating expenses is justified for such
period because of unusual and non-recurring expenses. Such a finding by our
independent directors and the reasons supporting it shall be recorded in our
minutes of meetings of our directors. If at the end of any fiscal quarter our
total operating expenses for the 12 months then ended are more than 2% of
average assets or more than 25% of net income, before any additions to or
allowances for reserves for depreciation, amortization or bad debts or other
similar non-cash revenues and before any gain from the sale of our assets,
whichever is greater, as described above, we will disclose this in writing to
the stockholders within 60 days of the end of the fiscal quarter. If our
independent directors conclude that higher total operating expenses are
justified, the disclosure will also contain an explanation of the conclusion. If
total operating expenses exceed the limitations described above and if our
directors are unable to conclude that the excess was justified, then the advisor
will reimburse us the amount by which the aggregate annual total operating
expenses we paid
126
<Page>
or incurred exceed the limitation. We must make the reimbursement within 60 days
after the end of the fiscal year.
TRANSACTIONS WITH AFFILIATES
Our articles of incorporation impose restrictions on transactions between
us and our advisor, sponsor and any director or their affiliates as follows:
- SALES AND LEASES TO US. We will not purchase property from our
sponsor, advisor, directors or any of their affiliates, unless a
majority or our disinterested directors, including a majority of our
disinterested independent directors, approves it as fair and
reasonable for us. The price to us can be no greater than the cost
of the asset to our sponsor, adviser, director or their affiliate.
If our price to us is greater than such cost, there must be
substantial, reasonable justification for the excess cost. In no
event will our cost for the property exceed its appraised value at
the time we acquired it.
- SALES AND LEASES TO SPONSOR, ADVISOR, DIRECTOR OR ANY AFFILIATE. Our
sponsor, advisor, directors or any of their affiliates will not
acquire assets from us unless a majority of disinterested directors,
including a majority of our disinterested independent directors,
approves the transaction as being fair and reasonable to us. We may
lease assets to our sponsor, advisor, director or any of their
affiliates, but still only if a majority of our disinterested
directors, including a majority of our disinterested independent
directors, approves it as fair and reasonable to us.
- LOANS. We will not make loans to our sponsor, advisor, directors or
any of their affiliates except as provided in clauses (4) and (6)
under " -- Restrictions on Investments" below in this section, or to
our wholly owned subsidiaries. Also, we may not borrow money from
our sponsor, advisor, director or any of their affiliates, unless a
majority of our disinterested directors, including a majority of our
disinterested independent directors, approves the transaction as
fair, competitive and commercially reasonable and no less favorable
to us than loans between unaffiliated parties under the same
circumstances.
- INVESTMENTS. We will not invest in joint ventures with our sponsor,
advisor, directors or any of their affiliates, unless a majority of
our disinterested directors, including a majority of our
disinterested independent directors, approves the transaction as
fair and reasonable to us and on substantially the same terms and
conditions as those received by the other joint ventures. Neither
can we invest in equity securities unless a majority of our
disinterested directors, including a majority of our disinterested
independent directors, approves the transaction as being fair,
competitive and commercially reasonable.
- OTHER TRANSACTIONS. All other transactions between us and our
sponsor, advisor, directors or any of their affiliates, require
approval by a majority of our disinterested directors, including a
majority of our disinterested independent directors, as being fair
and reasonable and on terms and conditions not less favorable to us
than those available from unaffiliated third parties.
RESTRICTIONS ON BORROWING
We may not incur indebtedness to enable us to make distributions except as
necessary to satisfy the requirement to distribute at least the percentage of
our REIT taxable income required for annual distribution of dividends by the
Internal Revenue Code of 1986, or otherwise as necessary or advisable to
127
<Page>
ensure that we maintain our qualification as a REIT for federal income tax
purposes. Our aggregate borrowings, secured and unsecured, will be reasonable in
relation to our net assets and will be reviewed by our board at least quarterly.
We anticipate that, in general, aggregate borrowings secured by all our
properties will not exceed 55% of their combined fair market value. This
anticipated amount of leverage will be achieved over time. Our articles of
incorporation provide that the aggregate amount of borrowing in relation to our
net assets will, in the absence of a satisfactory showing that a higher level of
borrowing is appropriate, not exceed 300% of net assets. Any excess in borrowing
over such 300% of net assets level will be:
approved by a majority of our independent directors;
- disclosed to our stockholders in our next quarterly report to them,
along with justification for such excess; and
- subject to approval of our stockholders.
See "Investment Objectives and Policies -- Borrowing."
RESTRICTIONS ON INVESTMENTS
The investment policies set forth in our articles of incorporation have
been approved by a majority of independent directors. Our articles of
incorporation prohibit our investments in:
- any foreign currency or bullion;
- short sales; and
- any security in any entity holding investments or engaging in
activities prohibited by our articles of incorporation.
In addition to other investment restrictions imposed by our directors from
time to time consistent with our objective to qualify as a REIT, we will observe
the following restrictions on our investments as set forth in our articles of
incorporation:
(1) Not more than 10% of our total assets will be invested in unimproved
real property or mortgage loans on unimproved real property. For
purposes of this paragraph, "unimproved real property" does not
include properties acquired for the purpose of producing rental or
other operating income, properties under development or
construction, and properties under contract for development or in
planning for development within one year.
(2) We will not invest in commodities or commodity future contracts.
This limitation does not apply to interest rate futures when used
solely for hedging purposes.
(3) We will not invest in contracts for the sale of real estate.
(4) We will not invest in or make mortgage loans unless we obtain an
appraisal of the underlying property. Mortgage indebtedness on any
property will not exceed the property's appraised value. In cases in
which the majority of independent directors so determine, and in all
cases in which the mortgage loan involves our advisor, sponsor,
directors or their affiliates, we must obtain the appraisal from an
independent expert. We
128
<Page>
will keep the appraisal in our records for at least five years,
where it will be available for inspection and duplication by any
stockholder. In addition to the appraisal, we will also obtain a
mortgagee's or owner's title insurance policy or commitment as to
the priority of the mortgage or condition of the title. We will not
invest in real estate contracts of sale otherwise known as land sale
contracts.
(5) We will not make or invest in mortgage loans, including construction
loans, on any one property if the aggregate amount of all
outstanding mortgage loans outstanding on the property, including
our loans, would exceed an amount equal to 85% of the appraised
value of the property. However, if there is substantial
justification due to other underwriting criteria and provided that
loans would not exceed the appraised value of the property at the
date of the loans, we could invest in mortgage loans that exceed 85%
of the appraised value of the property. The aggregate amount of all
mortgage loans outstanding on the property, including the loans of
the REIT, shall include all interest (excluding contingent
participation in income and/or appreciation in value of the
mortgaged property), the current payment of which may be deferred
pursuant to the terms of such loans, to the extent that deferred
interest on each loan exceeds 5% per annum of the principal balance
of the loan.
(6) We will not make or invest in any mortgage loans that are
subordinate to any mortgage or equity interest of the advisor, the
sponsor, any director or their affiliates.
(7) We will not invest in equity securities unless a majority of our
disinterested directors, including a majority of our disinterested
independent directors, approves the transaction as being fair,
competitive and commercially reasonable. Investments in entities
affiliated with our advisor, the sponsor, any director or their
affiliates are subject to the restrictions on joint venture
investments. Notwithstanding these restrictions, we may purchase our
own securities when traded on a national securities exchange or
market if a majority of our directors, including a majority of our
independent directors, determines the purchase to be in our best
interests.
(8) We will not engage in any short sale nor will we borrow on an
unsecured basis if the borrowing will result in an asset coverage of
less than 300%.
(9) To the extent we invest in properties, a majority of the directors,
including a majority of the independent directors, will approve the
consideration paid for such properties based on the fair market
value of the properties. If a majority of independent directors so
determines, the fair market value will be determined by a qualified
independent real estate appraiser selected by our independent
directors. If any property is acquired from our sponsor, our
advisor, any director, or any of their affiliates, the provisions on
transactions with affiliates will apply.
(10) We will not invest in debt that is secured by a mortgage on real
property that is subordinate to the lien of other debt, except where
the amount of total debt does not exceed 90% of the appraised value
of the property. The value of all of these investments may not
exceed 25% of our tangible assets. The value of all investments in
this debt that does not meet these requirements will be limited to
10% of our tangible assets, which would be included within the 25%
limitation.
(11) We will not engage in trading, as compared with investment,
activities.
129
<Page>
(12) We will not engage in underwriting activities, or distribute as
agent, securities issued by others.
(13) We will not acquire securities in any entity holding investments or
engaging in activities prohibited by the restrictions on investments
set forth in the foregoing clauses (1) through (12). Temporary
investments in cash may be in such entities.
Our independent directors will review our investment policies at least
annually to determine whether our policies that we are following are in the best
interests of our stockholders. Subject to the above restrictions and so long as
we qualify as a REIT, a majority of our directors, including a majority of our
independent directors, may alter the investment policies if they determine that
a change is in our best interests.
[THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
130
<Page>
FEDERAL INCOME TAX CONSIDERATIONS
We intend to qualify as a REIT under the applicable provisions of the
Internal Revenue Code of 1986, as amended, and the Treasury regulations
promulgated thereunder and receive the beneficial federal income tax treatment
described below. However, we cannot assure you that we will meet the applicable
requirements under federal income tax laws, which are highly technical and
complex. The following discusses the applicable requirements under federal
income tax laws, the federal income tax consequences to maintaining REIT status
and the material federal income tax consequences to you. Duane Morris LLP has
acted and will act as our tax counsel in connection with our election to be
taxed as a REIT, and has rendered the opinion set forth below. Some of the
federal income tax implications of your investment are set forth in the
"--Federal Income Taxation of Stockholders" section below. We, however, urge you
to consult your tax advisor with respect to the federal, state, local, foreign
and other tax consequences of the purchase, ownership and disposition of common
shares which may be particular to your tax situation.
In brief, a corporation that invests primarily in real estate can, if it
complies with the provisions in Sections 856-860 of the Internal Revenue Code,
qualify as a REIT and claim federal income tax deductions for the dividends it
pays to its stockholders. Such a corporation generally is not taxed on its net
income that is currently distributed to its shareholders. This treatment
substantially eliminates the "double taxation" that a corporation and its
shareholders generally bear together. However, as discussed in greater detail
below, a corporation could be subject to federal income tax in some
circumstances even if it qualifies as a REIT, and would likely suffer adverse
consequences, including reduced cash available for distribution to its
stockholders, if it failed to qualify as a REIT. We intend to operate in a
manner that permits us to elect REIT status for the taxable year ending December
31, 2003, and to maintain this status in each taxable year thereafter, so long
as REIT status remains advantageous.
Duane Morris LLP is of the opinion, assuming that the actions described in
this section are completed on a timely basis and we timely file the requisite
elections, that we have been organized in conformity with the requirements for
qualification as a REIT beginning with our taxable year ending December 31,
2003, and our proposed method of operation (as described in this prospectus)
will enable us to satisfy the applicable requirements under federal income tax
laws for qualification as a REIT. This opinion has been filed as an exhibit to
the registration statement of which this prospectus is a part, and is based and
conditioned, in part, on various assumptions made by Duane Morris LLP and
representations made to Duane Morris LLP by us and the advisor as to factual
matters. Our qualification and federal income tax treatment as a REIT depends
upon our ability to meet, through operation of the properties we acquire and our
investment in other assets, the applicable requirements under federal income tax
laws. Duane Morris LLP has not reviewed, and will not in the future review,
these operating results for compliance with the applicable requirements under
federal income tax laws. Therefore, we cannot assure you that our actual
operating results will allow us to satisfy the applicable requirements under
federal income tax laws in any taxable year. In addition, this opinion
represents Duane Morris LLP's legal judgment and is not binding on the Internal
Revenue Service.
FEDERAL INCOME TAXATION AS A REIT
GENERAL. In any year in which we qualify as a REIT and have a valid
election in place, we will claim deductions for the dividends we pay to the
stockholders, and therefore will not be subject to federal income tax on that
portion of our REIT Taxable Income as defined Section 857(b)(2) of the Internal
Revenue Code or REIT capital gain which is distributed to our stockholders. We
will, however, be subject to federal income tax at normal corporate rates on any
REIT Taxable Income or capital gain not distributed.
131
<Page>
Although we can eliminate or substantially reduce our federal income tax
liability by maintaining our REIT status and paying sufficient dividends, we
could be subject to federal income tax on certain items of income. If we fail to
satisfy either the 95% Gross Income Test or the 75% Gross Income Test (each of
which is described below), yet maintain our REIT status by meeting other
requirements, we will be subject to a penalty tax based on the amount of income
which caused us to fail these tests, as described below. We will also be subject
to a 100% federal income tax on the net income from any "prohibited
transaction," as described below. In addition, in order to retain our REIT
status, we generally must distribute annually at least 90% of our REIT Taxable
Income for such year. While we are not required to distribute REIT net capital
gain income for any year in order to retain our REIT status, we will pay tax on
such income to the extent we do not distribute it in such year. We may also be
subject to the corporate alternative minimum tax. Additionally, we will be
subject to federal income tax at the highest corporate rate on certain
"nonqualifying" income from foreclosure property. In general, foreclosure
property consists of property acquired (by foreclosure or otherwise) in
connection with the default of a loan secured by such property.
REIT QUALIFICATION TESTS. The Code defines a REIT as a corporation, trust
or association:
- that is managed by one or more trustees or directors;
- the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
- that would be taxable as a domestic corporation but for its status
as a REIT;
- that is neither a financial institution nor an insurance company;
- the beneficial ownership of which is held by 100 or more persons on
at least 335 days in each full taxable year, proportionately
adjusted for a partial taxable year;
- generally in which, at any time during the last half of each taxable
year, no more than 50% in value of the outstanding stock is owned,
directly, or indirectly, by five or fewer individuals or certain
entities; and
- that meets the gross income, asset and annual distribution
requirements, described in greater detail below.
The first four and last conditions must be met during each taxable year for
which REIT status is sought, while the other two conditions do not have to be
met until after the first taxable year for which a REIT election is made.
Although the 25% Asset Test (as defined below) generally prevents a REIT
from owning more than 10% of the voting stock of an entity other than another
REIT, the Internal Revenue Code provides an exception for ownership of voting
stock in a "qualified REIT subsidiary." A qualified REIT subsidiary is a
corporation that is wholly owned by a REIT throughout its existence. For
purposes of the 25% Asset Test and the Gross Income Tests described below, all
assets, liabilities and tax attributes of a qualified REIT subsidiary are
treated as owned by the REIT. A qualified REIT subsidiary is not subject to
federal income tax, but may be subject to state or local tax. We may hold
investments through qualified REIT subsidiaries.
We, in satisfying the general tests described above, must meet, among
others, the following requirements:
132
<Page>
- - SHARE OWNERSHIP TESTS. The common stock and any other stock we issue must
be held by a minimum of 100 persons (determined without attribution to the
owners of any entity owning our stock) for at least 335 days in each full
taxable year, proportionately adjusted for partial taxable years. In
addition, at all times during the second half of each taxable year, no more
than 50% in value of our stock may be owned, directly or indirectly, by
five or fewer individuals (determined with attribution to the owners of any
entity owning our stock). However, these two requirements do not apply
until after the first taxable year an entity elects REIT status. In
addition, our articles of incorporation contain provisions restricting the
transfer of our stock, which provisions are intended to assist us in
satisfying both requirements. Furthermore, the distribution reinvestment
program contains provisions that prevent it from causing a violation of
these tests as do the terms of the options granted to the independent
directors and the warrants issuable to the dealer manager and soliciting
dealers. Pursuant to the applicable requirements under federal income tax
laws, we will maintain records which disclose the actual ownership of the
outstanding stock, and demand written statements each year from the record
holders of specified percentages of the stock disclosing the beneficial
owners. Those stockholders failing or refusing to comply with our written
demand are required by the Internal Revenue Code and our articles of
incorporation to submit, with their tax returns, a similar statement
disclosing the actual ownership of stock and certain other information. See
"Description of Securities--Restrictions on ownership and transfer."
- - ASSET TESTS. We must satisfy, at the close of each calendar quarter of the
taxable year, two tests based on the composition of our assets. After
initially meeting the Asset Tests at the close of any quarter, we will not
lose our status as a REIT for failure to satisfy the Asset Tests at the end
of a later quarter solely due to changes in value of our assets. In
addition, if the failure to satisfy the Asset Tests results from an
acquisition during a quarter, the failure can be cured by disposing of
nonqualifying assets within 30 days after the close of that quarter. We
intend to maintain adequate records of the value of our assets to insure
compliance with these tests, and will act within 30 days after the close of
any quarter as may be required to cure any noncompliance.
75% ASSET TEST. At least 75% of the value of our assets must be
represented by "real estate assets," cash, cash items (including
receivables) and government securities. Real estate assets include (i) real
property (including interests in real property and interests in mortgages
on real property), (ii) shares in other qualifying REITs, and (iii) any
property (not otherwise a real estate asset) attributable to the temporary
investment of "new capital" in stock or a debt instrument, but only for the
one-year period beginning on the date we received the new capital. Property
will qualify as being attributable to the temporary investment of new
capital if the money used to purchase the stock or debt instrument is
received by us in exchange for our stock (other than amounts received
pursuant to our distribution reinvestment program) or in a public offering
of debt obligations that have a maturity of at least five years.
Additionally, regular and residual interests in a real estate mortgage
investment conduit, known as a REMIC, and regular interests in a financial
asset securitization trust, known as a FASIT, are considered real estate
assets. However, if less than 95% of the assets of a REMIC or FASIT are
real estate assets, we will be treated as holding a proportionate share of
the assets and income of the REMIC or FASIT directly.
When we purchase new real estate properties, we intend that the
purchase contracts will apportion no more than 5% of the purchase price of
any property to property other than "real property," as defined in the
Code. In addition, we intend to invest funds not used to acquire properties
in cash sources, "new capital" investments or other liquid investments
which will allow us to qualify under the 75% Asset Test. Therefore, our
investment in the real properties will constitute "real estate assets" and
should allow us to meet the 75% Asset Test.
133
<Page>
25% ASSET TEST. The remaining 25% of our assets may generally be
invested subject to the following restrictions: If we invest in any
securities that do not qualify under the 75% Asset Test, such securities
may not exceed either (i) 5% of the value of our assets as to any one
issuer; or (ii) 10% of the outstanding securities by vote or value of any
one issuer.
Modifications apply to the 25% Asset Test for qualified REIT
subsidiaries and taxable REIT subsidiaries. As discussed above, the stock
of a "qualified REIT subsidiary" is not counted for purposes of the 25%
Asset Test. A qualified REIT subsidiary is a corporation that is wholly
owned by a REIT throughout the subsidiary's existence. All assets,
liabilities and tax attributes of a qualified REIT subsidiary are treated
as belonging to the REIT. A qualified REIT subsidiary is not subject to
federal income tax, but may be subject to state or local tax. We may hold
investments through qualified REIT subsidiaries.
Additionally, for purposes of the 25% Asset Test, securities of a
taxable REIT subsidiary are excepted from the 10% vote and value
limitations on a REIT's ownership of securities of a single issuer.
However, no more than 20% of the value of a REIT may be represented by
securities of one or more taxable REIT subsidiaries. A taxable REIT
subsidiary is a corporation (other than another REIT) that is owned in
whole or in part by a REIT, and joins in an election with the REIT to be
classified as a taxable REIT subsidiary. Corporations that directly or
indirectly operate or manage lodging or health care facilities cannot be
taxable REIT subsidiaries. A corporation that is 35% owned by a taxable
REIT subsidiary will also be treated as a taxable REIT subsidiary. A
taxable REIT subsidiary may not be a qualified REIT subsidiary, and vice
versa. As described below regarding the 75% Gross Income Test, a taxable
REIT subsidiary is utilized in much the same way an independent contractor
is used to provide certain types of services without causing the REIT to
receive or accrue certain types of non-qualifying income. In addition to
utilizing independent contractors to provide certain services in connection
with the operation of our properties, we may also utilize taxable REIT
subsidiaries to carry out these functions.
We intend to invest funds not otherwise invested in properties in cash
sources and other liquid investments in a manner which will enable us to
satisfy the 25% Asset Test.
GROSS INCOME TESTS. We must satisfy for each calendar year two separate
tests based on the composition of our gross income, as defined under our method
of accounting.
THE 75% GROSS INCOME TEST. At least 75% of our gross income for the
taxable year must result from (i) rents from real property, (ii) interest
on obligations secured by mortgages on real property or on interests in
real property, (iii) gains from the sale or other disposition of real
property (including interests in real property and interests in mortgages
on real property) other than property held primarily for sale to customers
in the ordinary course of our trade or business, (iv) dividends from other
qualifying REITs and gain (other than gain from prohibited transactions)
from the sale of shares of other qualifying REITs, (v) other specified
investments relating to real property or mortgages thereon, and, (vi) for a
limited time, qualified temporary investment income, as defined under the
75% Asset Test. We intend to invest funds not otherwise invested in real
properties in cash sources or other liquid investments in a manner that
will allow us to qualify under the 75% Gross Income Test.
Income attributable to a lease of real property will generally qualify
as "rents from real property" under the 75% Gross Income Test (and the 95%
Gross Income Test, described below), subject to the rules discussed below:
134
<Page>
- Rent from a particular tenant will not qualify if we, or an owner of
10% or more of our stock, directly or indirectly, owns 10% or more
of the voting stock or the total number of shares of all classes of
stock in, or 10% or more assets or net profits of, the tenant.
- The portion of rent attributable to personal property rented in
connection with real property will not qualify, unless the portion
attributable to personal property is 15% or less of the total rent
received under, or in connection with, the lease.
- Generally, rent will not qualify if it is based in whole, or in
part, on the income or profits of any person from the underlying
property. However, rent will not fail to qualify if it is based on a
fixed percentage (or designated varying percentages) of receipts or
sales, including amounts above a base amount so long as the base
amount is fixed at the time the lease is entered into, the
provisions are in accordance with normal business practice and the
arrangement is not an indirect method for basing rent on income or
profits.
- Rental income will not qualify if we furnish or render services to
tenants or manage or operate the underlying property, other than
through a permissible "independent contractor" from whom we derive
no revenue, or through a taxable REIT subsidiary. This requirement,
however, does not apply to the extent that the services, management
or operations we provide are "usually or customarily rendered" in
connection with the rental of space, and are not otherwise
considered "rendered to the occupant."
With respect to the "usual or customarily rendered" rule, our tenants will
receive some services in connection with their leases to the real properties. We
believe that the services to be provided are usually or customarily rendered in
connection with the rental of the properties, and, therefore, that providing
these services will not cause the rents we receive with respect to the
properties to fail to qualify as rents from real property for purposes of the
75% Gross Income Test (and the 95% Gross Income Test, described below). The
board of directors intends to hire qualifying independent contractors or to
utilize taxable REIT subsidiaries to render services which it believes, after
consultation with Duane Morris LLP, are not usually or customarily rendered in
connection with the rental of space.
THE 95% GROSS INCOME TEST. In addition to deriving 75% of our gross income
from the sources listed above, at least 95% of our gross income (excluding gross
income from prohibited transactions) for the taxable year must be derived from
(i) sources which satisfy the 75% Gross Income Test, (ii) dividends, (iii)
interest, or (iv) gain from the sale or disposition of stock or other securities
that are not assets held primarily for sale to customers in the ordinary course
of our trade or business. It is important to note that dividends and interest on
obligations not collateralized by an interest in real property qualify under the
95% Gross Income Test, but not under the 75% Gross Income Test. We intend to
invest funds not otherwise invested in properties in cash sources or other
liquid investments which will allow us to qualify under the 95% Gross Income
Test.
Our share of income from the properties will primarily give rise to rental
income and gains on sales of the properties, substantially all of which will
generally qualify under the 75% gross income and 95% Gross Income Tests. Our
anticipated operations indicate that it is likely that we will have little or no
nonqualifying income to cause adverse federal income tax consequences.
If we fail to satisfy either the 75% Gross Income Test or the 95% Gross
Income Test for any taxable year, we may retain our status as a REIT for such
year if we satisfy the Internal Revenue Service that: (i) the failure was due to
reasonable cause and not due to willful neglect, (ii) we attach to our return a
schedule describing the nature and amount of each item of our gross income, and
(iii) any incorrect information on such schedule was not due to fraud with
intent to evade federal income tax. If this relief
135
<Page>
provision is available, we would remain subject to a 100% tax based upon the
amount by which we failed the 75% Gross Income Test or the 95% Gross Income
Test.
ANNUAL DISTRIBUTION REQUIREMENTS. In addition to the other tests described
above, we are required to distribute dividends (other than capital gain
dividends) to the stockholders each year in an amount at least equal to the
excess of: (1) the sum of: (a) 90% of our REIT Taxable Income (determined
without regard to the deduction for dividends paid and by excluding any net
capital gain); and (b) 90% of the excess of the net income (after tax) from
foreclosure property; less (2) the sum of certain types of items of non-cash
income. Whether sufficient amounts have been distributed is based on amounts
paid in the taxable year to which they relate, or in the following taxable year
if we: (1) declare a dividend before the due date of our tax return (including
extensions), (2) distribute the dividend within the 12-month period following
the close of the taxable year (and not later than the date of the first regular
dividend payment made after such declaration), and (3) file an election with our
tax return. Additionally, dividends that we declare in October, November or
December in a given year payable to stockholders of record in any such month
will be treated as having been paid on December 31 of that year so long as the
dividends are actually paid during January of the following year. If we fail to
meet the annual distribution requirements as a result of an adjustment to our
federal income tax return by the Internal Revenue Service, we may cure the
failure by paying a "deficiency dividend" (plus penalties and interest to the
Internal Revenue Service) within a specified period.
If we do not distribute all of our net capital gain or distribute at least
90%, but less than 100% of our REIT Taxable Income, we will be subject to
federal income tax on the undistributed portion. Furthermore, to the extent that
we fail to distribute by year end at least the sum of: (1) 85% of our REIT
Taxable Income for such year; (2) 95% of our REIT capital gain net income for
such year; and (3) any undistributed taxable income from prior years, we would
be subject to an excise tax equal to 4% of the difference between the amount
required to be distributed under this formula and the amount actually
distributed.
We intend to pay sufficient dividends each year to satisfy the annual
distribution requirements and avoid federal income tax on net capital gains. It
is possible that we may not have sufficient cash or other liquid assets to meet
the annual distribution requirements due to tax accounting rules and other
timing differences. We will closely monitor the relationship between our REIT
Taxable Income and cash flow and, if necessary to comply with the annual
distribution requirements, will borrow funds to fully provide the necessary cash
flow.
FAILURE TO QUALIFY AS A REIT. If we fail to qualify for federal income tax
purposes as a REIT in any taxable year and the relief provisions are not
available or cannot be met, we will not be able to deduct our dividends and will
be subject to federal income tax (including any applicable alternative minimum
tax) on our taxable income at regular corporate rates, thereby reducing cash
available for distributions. In such event, all distributions to stockholders
(to the extent of our current and accumulated earnings and profits), will be
taxable as ordinary income. This "double taxation" results from our failure to
qualify as a REIT. Unless entitled to relief under specific statutory
provisions, we will not be eligible to elect REIT status for the four taxable
years following the year during which qualification was lost.
PROHIBITED TRANSACTIONS. As discussed above, we will be subject to a 100%
federal income tax on any net income derived from "prohibited transactions." Net
income derived from prohibited transactions arises from the sale or exchange of
property held for sale to customers in the ordinary course of our business which
is not foreclosure property. There is an exception to this rule for sales of
property that:
- is a real estate asset under the 75% Asset Test;
136
<Page>
- has been held for at least four years;
- has aggregate expenditures which are includable in the basis of the
property not in excess of 30% of the net selling price;
- in certain cases, was held for production of rental income for at
least four years;
- when combined with other sales in the year, either does not cause
the REIT to have made more than seven sales of property during the
taxable year, or occurs in a year when the REIT disposes of less
than 10% of its assets (measured by federal income tax basis and
ignoring involuntary dispositions and sales of foreclosure
property); and
- in certain cases, substantially all of the marketing and development
expenditures were made through an independent contractor.
Although we may eventually sell some or all of our properties, our primary
intention in acquiring and operating the properties is the production of rental
income and we do not expect to hold any property for sale to customers in the
ordinary course of our business.
FEDERAL INCOME TAXATION OF STOCKHOLDERS
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS. As long as we qualify as a REIT,
distributions paid to our domestic stockholders out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
ordinary dividend income. Distributions in excess of current and accumulated
earnings and profits are treated first as a tax-deferred return of capital to
the stockholder, reducing the stockholder's tax basis in his or her common stock
by the amount of such distribution, and then to the extent such a distribution
exceeds a stockholder's tax basis, as capital gain. Because earnings and profits
are reduced for depreciation and other noncash items, it is possible that a
portion of each distribution will constitute a tax-deferred return of capital.
Additionally, because distributions in excess of earnings and profits reduce the
stockholder's basis in our stock, this will increase the stockholder's gain on
any subsequent sale of the stock.
Dividend income is characterized as "portfolio" income under the passive
loss rules and cannot be offset by a stockholder's current or suspended passive
losses. Corporate stockholders cannot claim the dividends received deduction for
such dividends unless we lose our REIT status. Distributions that are designated
as capital gain dividends will be taxed as long-term capital gains to the extent
they do not exceed our actual net capital gain for the taxable year. However,
corporate stockholders may be required to treat up to 20% of some types of
capital gain dividends as ordinary income. Although stockholders generally
recognize taxable income in the year that a distribution is received, any
distribution we declare in October, November or December of any year and is
payable to a stockholder of record on a specific date in any such month will be
treated as both paid by us and received by the stockholder on December 31 of the
year it was declared even if paid by us during January of the following calendar
year. Because we are not a pass-through entity for federal income tax purposes,
stockholders may not use any of our operating or capital losses to reduce their
tax liabilities. We may also decide to retain, rather than distribute, our net
long-term capital gains and pay any tax thereon. In this case, stockholders
would include their proportionate shares of such gains in income and receive a
credit on their returns for their proportionate share of our tax payments.
In general, the sale of common stock held for more than 12 months will
produce long-term capital gain or loss. All other sales of common stock
generally will produce short-term gain or loss. In each case, the gain or loss
is equal to the difference between the amount of cash and fair market value of
any property received from the sale and the stockholder's basis in the common
stock sold. However, any loss
137
<Page>
from a sale or exchange of common stock by a stockholder who has held such stock
for six months or less will be treated as a long-term capital loss, to the
extent of our distributions that the stockholder treated as long-term capital
gains.
We will report to our domestic stockholders and to the Internal Revenue
Service the amount of dividends paid during each calendar year, and the amount
(if any) of federal income tax we withhold. A stockholder may be subject to
backup withholding (the current rate of which is 30%) with respect to dividends
paid unless such stockholder: (a) is a corporation or comes within other exempt
categories; or (b) provides us with a taxpayer identification number, certifies
as to no loss of exemption, and otherwise complies with applicable requirements.
A stockholder that does not provide us with its correct taxpayer identification
number may also be subject to penalties imposed by the Internal Revenue Service.
Any amount paid as backup withholding can be credited against the stockholder's
federal income tax liability. In addition, we may be required to withhold a
portion of distributions made to any stockholders who fail to certify their
nonforeign status to us. See "--Taxation of Foreign Stockholders" in this
section.
TAXATION OF TAX EXEMPT STOCKHOLDERS. Our distributions to a stockholder
that is a tax-exempt entity should not constitute unrelated business taxable
income, or UBTI, unless the stockholder borrows funds (or otherwise incurs
acquisition indebtedness within the meaning of the Internal Revenue Code) to
acquire its common shares, or the common shares are otherwise used in an
unrelated trade or business of the tax-exempt entity.
Special rules apply to the ownership of REIT shares by certain tax-exempt
pension trusts. If we would fail to satisfy the "five or fewer" share ownership
test (discussed above with respect to the Share Ownership tests) because the
stock held by tax-exempt pension trusts was viewed as being held by the trusts
rather than by their respective beneficiaries, tax-exempt pension trusts owning
more than 10% by value of our stock may be required to treat a percentage of our
dividends as UBTI. This rule applies if: (1) at least one tax-exempt pension
trust owns more than 25% by value of our shares, or (2) one or more tax-exempt
pension trusts (each owning more than 10% by value of our shares) hold in the
aggregate more than 50% by value of our shares. The percentage treated as UBTI
is our gross income (less direct expenses) derived from an unrelated trade or
business (determined as if we were a tax-exempt pension trust) divided by our
gross income from all sources (less direct expenses). If this percentage is less
than 5%, however, none of the dividends will be treated as UBTI. Because of the
restrictions in our articles of incorporation of incorporation regarding the
ownership concentration of our common stock, we believe that a tax-exempt
pension trust should not become subject to these rules. However, because our
common shares may be publicly traded, we can give no assurance of this.
Prospective tax-exempt purchasers should consult their own tax advisors as
to the applicability of these rules and consequences to their particular
circumstances.
TAXATION OF FOREIGN STOCKHOLDERS. The following discussion is intended only
as a summary of the rules governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts and
estates. These rules are quite complex and prospective foreign stockholders
should consult with their own tax advisors to determine the impact of federal,
state, and local income tax laws including any reporting requirements with
respect to their investment in our REIT.
In general, foreign stockholders will be subject to regular U.S. income tax
with respect to their investment if such investment is "effectively connected"
with the conduct of a trade or business in the U.S. A corporate foreign
stockholder that receives (or is deemed to have received) income that is
effectively connected with a U.S. trade or business may also be subject to the
30% "branch profits tax" under Code Section 884, which is payable in addition to
regular federal corporate income tax. The
138
<Page>
following discussion applies to foreign stockholders whose investment is not
considered "effectively connected."
Generally, any dividend that constitutes ordinary income for federal income
tax purposes will be subject to a U.S. tax equal to the lesser of 30% of the
gross amount of dividends or the rate in an applicable tax treaty. Generally, a
distribution that does not exceed our earnings and profits will be treated as a
dividend taxable as ordinary income. A distribution in excess of our earnings
and profits is treated first as a nontaxable return of capital that will reduce
a foreign stockholder's basis in its common stock (but not below zero) and then
as gain from the disposition of such common stock, subject to the rules
discussed below for dispositions.
Our distributions that are attributable to gain from the sale or exchange
of a "U.S. real property interest" are taxed to a foreign stockholder as if the
distributions were gains "effectively connected" with a United States trade or
business conducted by such foreign shareholder. As a result, a foreign
stockholder will be taxed on these amounts at the capital gain rates applicable
to a U.S. stockholder (subject to any applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals).
In addition, such dividends may also be subject to a 30% branch profits tax when
made to a corporate foreign stockholder that is not entitled to treaty
exemptions.
We will report to our foreign stockholders and the Internal Revenue Service
the amount of dividends paid during each calendar year, and the amount (if any)
of federal income tax we withhold. These information reporting requirements
apply regardless of whether withholding was reduced or eliminated in any
applicable tax treaty. Copies of these information returns may also be made
available under the provisions of a specific treaty or agreement with the tax
authorities in the country in which the foreign stockholder resides. As
discussed below, withholding tax rates of 30% and 35% may apply to distributions
on common stock to foreign stockholders.
Although tax treaties may reduce our withholding obligations, we will
generally be required to withhold from dividends to foreign stockholders, and
remit to the Internal Revenue Service, 35% of any distribution that could be
designated as a capital gain dividend (regardless of the amount actually
designated as a capital gain dividend) and 30% of ordinary dividends paid out of
earnings and profits. In addition, if we designate prior dividends as capital
gain dividends, subsequent dividends, up to the amount of such prior dividends,
will be treated as capital gain dividends for withholding purposes. The amount
of federal income tax withheld is creditable against the foreign stockholder's
federal income tax liability, and if the amount of tax we withhold exceeds the
U.S. tax liability, the foreign stockholder may file for a refund of such excess
from the Internal Revenue Service. (Note that the 35% withholding tax rate on
capital gain dividends currently corresponds to the maximum income tax rate
applicable to corporations, but is higher than the 20% maximum rate on long-term
capital gains of individuals.)
Applicable Treasury regulations provide certain presumptions under which a
foreign stockholder would be subject to backup withholding and information
reporting until we receive certification from these stockholders of their
foreign status. The regulations generally require a foreign stockholder to
provide us with federal Form W-8BEN referred to as a Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding, Form W-8ECI
referred to as a Certificate of Foreign Person's Claim for Exemption From
Withholding on Income Effectively Connected With the Conduct of a Trade or
Business in the United States, or Form W-8EXP referred to as a Certificate of
Foreign Government or Other Foreign Organization for United States Tax
Withholding certifying the foreign stockholder's entitlement to the benefits of
any treaty.
Unless the common shares constitute a "U.S. real property interest" under
Section 897 of the Internal Revenue Code, gain on a sale of common stock by a
foreign stockholder generally will not be
139
<Page>
subject to U.S. income taxation unless (i) investment in the common stock is
effectively connected with the foreign stockholder's U.S. trade or business, in
which case, as discussed above, the foreign shareholder would be subject to the
federal income tax, or (ii) the foreign stockholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year, in which case the nonresident alien individual may be subject to a
30% tax on such gain.
The common shares will not constitute a "U.S. real property interest" if we
are a "domestically controlled REIT." A domestically controlled REIT is a REIT,
which at all times during the preceding five-year period, had less than 50% in
value of its common stock held directly or indirectly by foreign stockholders.
We (or, if shorter, the period during which the REIT is in existence) expect to
be a domestically controlled REIT, and, therefore, the sale of common stock
should not be subject to such taxation for foreign stockholders, except as
discussed above. However, because the common shares may be (but are not
guaranteed to be) publicly traded, we can not assure you that we will continue
to be a domestically controlled REIT. If we do not constitute a domestically
controlled REIT, whether a foreign stockholder's gain on the sale of stock is
subject to federal income tax as a sale of a U.S. real property interest depends
primarily on whether the common shares are "regularly traded" on an established
securities market and on the size of the selling stockholder's interest. If the
gain on the sale of common shares is subject to federal income tax under these
rules, the foreign stockholder would be subject to the same treatment as a U.S.
stockholder with respect to the gain (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). In any event, a purchaser of common stock from a foreign
stockholder will not be required to withhold on the purchase price if the
purchased shares are "regularly traded" on an established securities market or
if we are a domestically controlled REIT. Otherwise, the purchaser of stock may
be required to withhold 10% of the purchase price and remit this amount to the
Internal Revenue Service.
If the proceeds of a disposition of common stock are paid by or through a
U.S. office of a broker-dealer, the payment is generally subject to information
reporting and to backup withholding (the current rate of which is 30%) unless
the disposing foreign stockholder certifies as to his name, address and non-U.S.
status or otherwise establishes an exemption. Generally, U.S. information
reporting and backup withholding may not apply to a payment of disposition
proceeds if the payment is made outside the U.S. through a foreign office of a
foreign broker-dealer. Prospective foreign purchasers should consult their tax
advisers concerning these rules.
OTHER TAX CONSIDERATIONS
DISTRIBUTION REINVESTMENT PROGRAM. Stockholders who participate in the
distribution reinvestment program will recognize taxable dividend income in the
amount they would have received had they elected not to participate, even though
they receive no cash. These deemed dividends will be treated as actual dividends
from us to the participating stockholders and will retain the character and
federal income tax effects applicable to all dividends. See "--Taxation of
Stockholders" in this section. Stock received under the program will have a
holding period beginning with the day after purchase, and a federal income tax
basis equal to its cost, which is the gross amount of the deemed distribution.
STATE AND LOCAL TAXES. We and you may be subject to state or local taxation
in various jurisdictions, including those in which we transact business or
reside. Our and your state and local tax treatment may not conform to the
federal income tax consequences discussed above. Consequently, you should
consult your own tax advisors regarding the effect of state and local tax laws
on an investment in the common shares.
LEGISLATIVE PROPOSALS. You should recognize that our and your present
federal income tax treatment may be modified by legislative, judicial or
administrative actions at any time, which may be
140
<Page>
retroactive in effect. The rules dealing with federal income taxation are
constantly under review by Congress, the Internal Revenue Service and the
Treasury Department, and statutory changes as well as promulgation of new
regulations, revisions to existing statutes, and revised interpretations of
established concepts occur frequently. We are not currently aware of any pending
legislation that would materially affect our or your taxation as described in
this prospectus. You should, however, consult your advisors concerning the
status of legislative proposals that may pertain to a purchase of common shares.
President Bush has proposed to exempt certain dividend payments made by certain
corporations from federal taxation. We cannot be sure what impact, if any, any
possible legislation could have on us or you as a stockholder.
[THE BALANCE OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
141
<Page>
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA,
including the prohibited transaction provisions of ERISA, and of Section 4975 of
the Internal Revenue Code that may be relevant to a prospective purchaser of the
shares where such prospective purchaser is an employee benefit plan, IRA or
other tax-exempt entity under the Internal Revenue Code. This discussion does
not deal with all aspects of ERISA or Section 4975 of the Internal Revenue Code
or, to the extent not preempted, state law that may be relevant to particular
employee benefit plan stockholders (including plans subject to Title I of ERISA,
other employee benefit plans and IRAs subject to the prohibited transaction
provisions of Section 4975 of the Internal Revenue Code, and governmental plans
and church plans that are exempt from ERISA and Section 4975 of the Internal
Revenue Code but that may be subject to state law and other Internal Revenue
Code requirements) in light of their particular circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES ON BEHALF OF A
PROSPECTIVE INVESTOR WHICH IS A PENSION, PROFIT-SHARING, RETIREMENT, IRA OR
OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR
REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE
INTERNAL REVENUE CODE, AND (TO THE EXTENT NOT PREEMPTED) STATE LAW WITH RESPECT
TO THE PURCHASE, OWNERSHIP, OR SALE OF SHARES BY SUCH BENEFIT PLAN. BENEFIT
PLANS SHOULD ALSO CONSIDER THE ENTIRE DISCUSSION UNDER THE PRECEDING SECTION
ENTITLED "FEDERAL INCOME TAX CONSIDERATIONS," AS MATERIAL CONTAINED THEREIN IS
RELEVANT TO ANY DECISION BY A BENEFIT PLAN TO PURCHASE THE SHARES.
In considering whether to invest a portion of the assets of a benefit plan
in shares, fiduciaries of the benefit plan should consider, among other things,
whether the investment:
- will be in accordance with the governing documents of the benefit
plan and is authorized and consistent with their fiduciary
responsibilities under ERISA;
- will allow the benefit plan to satisfy the diversification
requirements of ERISA, if applicable;
- will result in UBTI to the benefit plan (see "Federal Income Tax
Considerations -- Taxation of Stockholders -- Taxation of
Tax-Exempt Stockholders");
- will be sufficiently liquid for the benefit plan after taking
this investment into account; and
- is prudent and in the best interests of the benefit plan, its
participants and beneficiaries under ERISA standards.
The fiduciary of an IRA or a benefit plan not subject to Title I of ERISA
because it is a governmental or church plan or because it does not cover common
law employees should consider that such an IRA or non-ERISA plan may be subject
to prohibitions against certain related-party transactions under Section 503 of
the Internal Revenue Code, which operate similar to the prohibited transaction
rules of ERISA and the Internal Revenue Code. In addition, the fiduciary of any
governmental or church plan must consider applicable state or local laws, if
any, and the restrictions and duties of common law, if any, imposed upon such
plan. We express no opinion on whether an investment in shares is appropriate or
permissible for any governmental or church plan under Section 503 of the
Internal Revenue Code, or under any state, county, local, or other law
respecting such plan.
142
<Page>
In addition to imposing general fiduciary standards of investment prudence
and diversification, ERISA and the corresponding provisions of the Internal
Revenue Code prohibit a wide range of transactions involving the assets of the
benefit plan and persons who have certain specified relationships to the benefit
plan ("parties in interest" under ERISA and "disqualified persons" under the
Internal Revenue Code).
Benefit plan fiduciaries may not enter into a prohibited transaction
involving "plan assets" and a "party in interest" or "disqualified person" with
respect to a plan investor, unless an exemption applies. A prohibited
transaction may occur if our assets are deemed to be assets of a benefit plan
(i.e., the "look-through rule") which invests in shares and thereafter a "party
in interest" or a "disqualified person" deals with the assets in a manner not
permitted under ERISA or the Internal Revenue Code. Under such circumstances,
any person that exercises authority or control with respect to the management or
disposition of benefit plan assets is a benefit plan fiduciary and, therefore,
is a "party in interest" and a "disqualified person" capable of participating in
a prohibited transaction with the benefit plan. Thus, the actions of an employee
of ours in dealing with our assets could, under certain circumstances, cause a
benefit plan which invests in the shares to be a participant in a prohibited
transaction. While "plan assets" are not defined in ERISA or the Internal
Revenue Code, the United States Department of Labor, or the DOL, has issued
regulations that provide guidance on the circumstances under which a benefit
plan's investment in shares will be subject to the "look-through rule" and thus
result in our assets being deemed benefit plan assets. The DOL regulations
provide an exception to the "look-through rule" for a benefit plan which invests
in a "publicly-offered security." This exception would apply to the shares, if
they are part of a class of securities that is "widely-held,"
"freely-transferable," and either registered under Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, or sold to the benefit plan pursuant to an
effective registration statement under the Securities Act of 1933, provided the
class of securities of which the security is a part are registered under the
Securities Exchange Act of 1934 within 120 days or such longer period as is
allowed by the Securities and Exchange Commission after the end of the fiscal
year of the issuer during which the offering occurred. The shares are being sold
in an offering registered under the Securities Act of 1933 and we represent that
the class of securities of which the shares are a part have been registered
under the Securities Exchange Act within the applicable time limits.
The DOL regulations indicate that a security is "widely-held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely-held"
because the number of independent investors falls below 100 subsequent to the
initial offering as a result of events beyond the issuer's control. We expect
(although no assurances can be given) that the shares will be held by over 100
independent investors and, therefore, should be considered "widely-held."
The DOL regulations further provide that whether a security is
"freely-transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL regulations state that generally, when
a security is part of an offering in which the minimum investment is $10,000 or
less, as is the case with this offering, certain restrictions ordinarily will
not, alone or in combination, affect the determination of the finding that such
securities are "freely-transferable." One such example under the DOL regulations
is that a restriction or prohibition against a transfer or assignment which
would result in a termination or reclassification of an entity for federal or
state income tax purposes will not affect the determination of whether
securities are "freely transferable." We believe that the ownership limits
imposed under our charter of incorporation on the transfer of the shares are
designed to prevent violations of the five or fewer requirement of federal
income tax laws (which would cause a termination of REIT status for tax
purposes) or are otherwise permitted under the DOL regulations and, therefore,
will not cause the shares to not be "freely-transferable."
143
<Page>
The DOL regulations are interpretive in nature and, therefore, no assurance
can be given that the DOL and the United States Department of the Treasury will
not conclude that the shares are not "freely-transferable," or not
"widely-held." However, we believe that the shares are "publicly offered
securities" for purposes of the DOL regulations and that:
- our assets will not be deemed to be "plan assets" of any benefit
plan that invests in the shares; and
- any person who exercises authority or control with respect to our
assets should not be treated as a benefit plan fiduciary of any
benefit plan that invests in the shares, for purposes of the
prohibited transaction rules of ERISA and Section 4975 of the
Internal Revenue Code.
In addition, a prohibited transaction may also occur under ERISA or the
Internal Revenue Code where there are circumstances indicating that:
- investment in the shares is made or retained for the purposes of
avoiding application of the fiduciary standards of ERISA;
- the investment in the REIT constitutes an arrangement under which
it is expected that the REIT will engage in transactions which
would otherwise be prohibited if entered into directly by the
benefit plan purchasing the shares;
- the investing benefit plan, by itself, has the authority or
influence to cause the REIT to engage in such transactions; or
- the person who is prohibited from transacting with the investing
benefit plan may, but only with the aid of its affiliates and the
investing benefit plan, cause the REIT to engage in such
transactions with such person.
In any event, a fiduciary or other person investing "plan assets" of any
benefit plan should not purchase shares if we or any of our affiliates either:
- have investment discretion with respect to the investment of such
assets; or
- have authority or responsibility to give or regularly gives
investment advice with respect to such assets, for a fee,
pursuant to an agreement or understanding that such advice will
serve as a primary basis for investment decisions with respect to
such assets and that such advice will be based on the particular
investment needs of such benefit plan.
Unless an exemption is available for an employer maintaining or
contributing to such benefit plans, any such purchase might result in a
non-exempt prohibited transaction under ERISA or Section 4975 of the Internal
Revenue Code.
See "Risk Factors -- Employee Benefit Plan Risks -- Annual Statement of
Value is an Estimate" for an explanation of the annual statement of value we
will provide stockholders subject to ERISA.
144
<Page>
PLAN OF DISTRIBUTION
GENERAL
Of the 270,000,000 shares of our common stock offered by this prospectus,
we are offering:
- up to 250,000,000 shares at a purchase price of $10.00 per share
through Inland Securities Corporation, the managing dealer, to the
public on a best-efforts basis. Our managing dealer is one of our
affiliates. A "best-efforts" basis means that neither the managing
dealer nor the soliciting dealers are under any obligation to
purchase any of the shares being offered. Therefore, no specified
number of shares are guaranteed to be sold and no specified amount
of money is guaranteed to be raised from this offering.
- up to 20,000,000 shares at a purchase price of $9.50 per share for
issuance through our distribution reinvestment program which will
provide you with an opportunity to purchase additional shares of our
common stock at a reduced rate by reinvesting your distributions.
The offering price of our stock is subjective and was determined by our
board of directors. Our board of directors determined the offering price based
on the offering price of earlier REITs organized by our sponsor, the range of
offering prices of other REITs that do not have a public trading market and the
recommendation of the managing dealer based on its consultations with likely
soliciting dealers. This offering will commence as of the date of this
prospectus. If the minimum offering of 200,000 shares is not sold by August 20,
2004 , we will cancel this offering and your investment will be returned to you
within five business days after cancellation with any interest earned on your
investment and with no deduction from your investment. If the minimum offering
of 200,000 shares of common stock is sold and if this offering continues
thereafter, the offering will terminate on or before, August 20, 2004, unless we
elect to extend it to a date no later than August 20, 2005, in states that
permit an extension. We reserve the right to terminate this offering at any
time.
Our dealer manager is a wholly owned subsidiary of our sponsor, Inland Real
Estate Investment Corporation. Our dealer manager was also the dealer manager
for the offerings for Inland Real Estate Corporation and Inland Retail Real
Estate Trust, Inc. Inland Real Estate Corporation raised approximately
$570,000,000 in its offering. As of June 30, 2003, Inland Retail Real Estate
Trust, Inc. raised approximately $1,650,000,000 in its offering.
Our sponsor is an affiliate of our dealer manager.
ESCROW CONDITIONS
If you are qualified to participate in this offering, the proceeds from
your subscription will be deposited in a segregated escrow account with the
escrow agent, LaSalle Bank National Association, 120 South LaSalle Street,
Chicago, Illinois, and will be held in trust for your benefit, pending release
to us. Your investment will not be commingled with any other funds. None of the
common stock offered by this prospectus will be sold, no commissions or fees
will be paid, and your initial admission as a stockholder will not take place
unless the escrow agent has received and accepted paid subscriptions for at
least 200,000 shares of common stock for $2,000,000 within six months from the
date of this prospectus. If subscriptions for at least the minimum offering have
not been received, accepted, and paid for within six months from the date of
this prospectus, the escrow agent will promptly refund your investment, together
with your pro rata share of any interest earned. If a refund is made, our
sponsor will pay any escrow fees.
145
<Page>
The escrow agreement between us, the managing dealer and the escrow agent
provides that escrowed funds will be invested by the escrow agent in an interest
bearing account with the power of investment in short term securities issued or
guaranteed by the United States Government which can be readily sold, or other
investments permitted under the Securities Exchange Act of 1934. Additionally,
as soon as we have received subscription proceeds for at least 200,000 shares of
our common stock, we may invest the proceeds in other short term investments
which can be readily sold, with appropriate safety of principal. After the
minimum offering amount is sold, subscription proceeds are expected to be
released to us as subscriptions are accepted. We will accept or reject
subscriptions within 10 days after our receipt of a fully completed copy of the
subscription agreement and payment for the number of shares of common stock
subscribed for.
The interest, if any, earned on subscription proceeds relating to the
minimum offering prior to the release of the subscription proceeds to us from
escrow will be distributed to you on a pro rata basis within 30 days after the
end of the quarter during which you were admitted as a stockholder. After your
initial admission as a stockholder in connection with the sale of at least
200,000 shares, you will not be entitled to interest earned on our funds or to
receive interest on your investment.
The escrow agreement provides that the escrow agent will be appointed as an
investment manager by a named fiduciary of any ERISA plan that is providing
money to the escrow. The escrow agreement among us, the managing dealer, and the
escrow agent also provides (1) that until all the conditions precedent for
transferring the monies held in escrow are met, the escrow property may be
considered plan assets under ERISA and the escrow holder shall act as a
fiduciary to any benefit plan with respect to those assets, and (2) that the
property will be returned to the benefit plan if the conditions precedent are
not met in a reasonable period of time.
SUBSCRIPTION PROCESS
We are offering up to 250,000,000 shares of our common stock to the public
through the managing dealer and the soliciting dealers. The agreement between
our managing dealer and the soliciting dealers requires the soliciting dealers
to make diligent inquiries of you in order to determine whether a purchase of
our common stock is suitable for you, and to transmit promptly to us the
completed subscription documentation and any supporting documentation we may
reasonably require.
The managing dealer or a soliciting dealer is also required to deliver to
you a copy of this prospectus and its appendices. We plan to make this
prospectus and the appendices available electronically to the managing dealer
and the soliciting dealers, as well as to provide them paper copies. As a
result, if the managing dealer or a soliciting dealer chooses, with your prior
consent, it may provide you with the option of receiving this prospectus and the
appendices electronically. In any case, however, you may always receive a paper
copy upon request. For at least six years, we shall maintain records of the
information we have to determine that an investment in our shares is suitable
and appropriate for a stockholder.
Our common stock is being sold as subscriptions for the common stock are
received and accepted by us, subject to the satisfaction by us of the escrow
conditions described in the section immediately above. We have the unconditional
right to accept or reject your subscription within 10 days after our receipt of
a fully completed copy of the subscription agreement and payment for the number
of shares of common stock subscribed for. If we accept your subscription, a
confirmation will be mailed to you not more than three business days after our
acceptance. No sale of our common stock may be completed until at least five
business days after the date you receive this prospectus and, if required by
state regulatory authorities, a copy of our organizational documents. If for any
reason your subscription is rejected, your
146
<Page>
funds and your subscription agreement will be returned to you, without interest
or deduction, within 10 days after receipt.
REPRESENTATIONS AND WARRANTIES IN THE SUBSCRIPTION AGREEMENT
The subscription agreement requires you to make the following factual
representations:
- Your tax identification number set forth in the subscription
agreement is accurate and you are not subject to backup withholding;
- You received a copy of this prospectus not less than five business
days prior to signing the subscription agreement (unless your state
requires otherwise);
- You meet the minimum income, net worth and any other applicable
suitability standards established for you, as described in "Who May
Invest," which appears earlier in this prospectus;
- You are purchasing our common stock for your own account; and
- You acknowledge that our common stock cannot be readily sold.
Each of the above representations is included in the subscription agreement
in order to help satisfy our responsibility to make every reasonable effort to
determine that the purchase of our common stock is a suitable and appropriate
investment for you and that appropriate income tax reporting information is
obtained. We will not sell any common stock to you unless you are able to make
the above factual representations by executing the subscription agreement.
By executing the subscription agreement, you will not be waiving any rights
under the federal securities laws.
DETERMINATION OF YOUR SUITABILITY AS AN INVESTOR
We, our managing dealer, each soliciting dealer and our sponsor will make
reasonable efforts to determine that you satisfy the suitability standards set
forth herein and that an investment in our common stock is an appropriate
investment for you. The soliciting dealers must determine whether you can
reasonably benefit from this investment. In making this determination, the
soliciting dealers will consider whether:
- you have the capability of understanding fundamental aspects of our
business based on your employment experience, education, access to
advice from qualified sources such as attorneys, accountants and tax
advisors and prior experience with investments of a similar nature;
- you have an apparent understanding of:
- the fundamental risks and possible financial hazards of this
type of investment;
- that the shares cannot be readily sold;
- the role of our advisor in directing or managing your
investment in us; and
- the tax consequences of your investment; and
147
<Page>
- you have the financial capability to invest in our common stock.
By executing the subscription agreement, each soliciting dealer
acknowledges its determination that our common stock is a suitable investment
for you. Each soliciting dealer is required to represent and warrant that it has
complied with all applicable laws in determining the suitability of our common
stock as an investment for you. We and our affiliates will coordinate the
processes and procedures used by the managing dealer and the soliciting dealers
and, where necessary, implement additional reviews and procedures to determine
that you meet the suitability standards set forth in this prospectus.
COMPENSATION WE WILL PAY FOR THE SALE OF OUR SHARES
Except for the special sales described later in this section, we will pay
the managing dealer cash selling commissions of 7.5% on all of the up to
250,000,000 shares of common stock sold on a best-efforts basis. Of this 7.5%
selling commissions, the managing dealer will reallow up to 7% to soliciting
dealers as compensation for their services in soliciting and obtaining
subscriptions from you and other investors. Except for the special sales
described later in this section, we will pay an additional 2.5% of the gross
proceeds from this offering to the managing dealer as a marketing contribution
in lieu of reimbursement of expenses associated with marketing, and we may
reimburse the managing dealer for its bona fide due diligence expenses and for
those of the soliciting dealers. The maximum reimbursement, however, will not
exceed 0.5% of the gross proceeds from the up to 250,000,000 shares sold. The
managing dealer may, at its discretion, retain or give all or any portion of the
marketing contribution and due diligence expense allowance to soliciting
dealers. Generally, the managing dealer will not give any portion of the
marketing contribution to soliciting dealers unless they have a prescribed
minimum annual sales volume of our common stock. Marketing and due diligence
costs paid by the managing dealer on behalf of, or to, the soliciting dealers
will be deducted from any marketing contribution or due diligence expense
allowance otherwise payable to the soliciting dealers.
The following table shows the compensation payable to our dealer manager.
<Table>
<Caption>
TYPE OF COMPENSATION AMOUNT ESTIMATED MAXIMUM AMOUNT
------------------------------ --------------------------------
Selling commissions 7.5% of sale price for each
share $ 187,500,000
------------------------------ --------------------------------
Marketing contribution and due diligence 3% of gross offering proceeds
allowance $ 75,000,000
------------------------------ --------------------------------
</Table>
We will not pay selling commissions, marketing contributions or due
diligence expense allowances in connection with the following special sales:
- the sale of common stock in connection with the performance of
services to our employees, directors and associates and our
affiliates, our advisor, affiliates of our advisor, the managing
dealer or their respective officers and employees and some of their
affiliates; and
- the purchase of common stock under the distribution reinvestment
program.
- No selling commissions will be paid in connection with the following
special sales:
148
<Page>
- the sale of our common stock to one or more soliciting dealers and
to their respective officers and employees and some of their
respective affiliates who request and are entitled to purchase
common stock net of selling commissions;
- the sale of common stock to investors whose contracts for investment
advisory and related brokerage services include a fixed or "wrap"
fee feature; and
- the common stock credited to an investor as a result of a volume
discount.
It is illegal for us to pay or award any commissions or other compensation
to any person engaged by you for investment advice as an inducement to such
advisor to advise you to purchase our common stock; however, nothing herein will
prohibit a registered broker dealer or other properly licensed person from
earning a sales commission in connection with a sale of the common stock.
We will not pay any registered investment advisory fees in connection with
any purchase by you of our common stock, although you may elect to have your
registered investment advisory fees deducted from your account with us and paid
directly to your registered investment advisor. See "How to Subscribe."
VOLUME DISCOUNTS
Investors making an initial purchase of at least $250,010 worth of common
stock (25,001 shares) through the same soliciting dealer may receive a reduction
of the reallowable 7.0% selling commission payable in connection with the
purchase of those shares in accordance with the following schedule:
<Table>
<Caption>
AMOUNT OF PURCHASER'S INVESTMENT
AMOUNT OF SELLING -------------------------------------- MAXIMUM COMMISSION
VOLUME DISCOUNT FROM TO PER SHARE
----------------------- --------------- ----------------- ------------------
1% $ 250,010 $ 500,000 6%
2% $ 500,010 $ 1,000,000 5%
3% $ 1,000,010 $ 2,500,000 4%
4% $ 2,500,010 $ 5,000,000 3%
5% $ 5,000,010 $ 10,000,000 2%
6% $ 10,000,010 more than 1%
$ 10,000,000
</Table>
Any reduction in the amount of the selling commissions in respect of volume
discounts received may be credited to the investor in the form of additional
whole shares or fractional shares. Selling commissions will not be paid on any
such whole shares or fractional shares issued for a volume discount.
Some purchases may be combined for the purpose of qualifying for a volume
discount, and for determining commissions payable to the managing dealer or the
soliciting dealers, so long as all the combined purchases are made through the
same soliciting dealer. You may combine subscriptions made in this offer with
other subscriptions in this offering for the purposes of computing amounts
invested. Purchases by spouses may also be combined and purchases by you may be
combined with other purchases of common stock to be held as a joint tenant or as
tenants-in-common by you with others for purposes of computing amounts invested.
Purchases by entities not required to pay federal income tax may only be
combined with purchases by other entities not required to pay federal income tax
for purposes of computing amounts invested if investment decisions are made by
the same person. If the
149
<Page>
investment decisions are made by an independent investment adviser, that
investment adviser may not have any direct or indirect beneficial interest in
any of the entities not required to pay federal income tax whose purchases are
sought to be combined. You must mark the "Additional Investment" space on the
subscription agreement signature page in order for purchases to be combined. We
are not responsible for failing to combine purchases if you fail to mark the
"Additional Investment" space.
If the subscription agreements for the purchases to be combined are
submitted at the same time, then the additional common stock to be credited to
you as a result of such combined purchases will be credited on a pro rata basis.
If the subscription agreements for the purchases to be combined are not
submitted at the same time, then any additional common stock to be credited as a
result of the combined purchases will be credited to the last component
purchase, unless we are otherwise directed in writing at the time of the
submission. However, the additional common stock to be credited to any entities
not required to pay federal income tax whose purchases are combined for purposes
of the volume discount will be credited only on a pro rata basis based on the
amount of the investment of each entity not required to pay federal income tax
and their combined purchases.
Notwithstanding the preceding paragraphs, you may not receive a discount
greater than 5% on any purchase of shares if you already own, or may be deemed
to already own, any shares. This restriction may limit the amount of the volume
discount available to you after your initial purchase and the amount of
additional shares that you may be credited as a result of the combination of
purchases.
If the dollar amount of commissions paid for combined purchases exceeds the
maximum commissions for combined purchases, taking the volume discount into
effect, the managing dealer will be obligated to return to us, and soliciting
dealers will be obligated to return to the managing dealer, any excess
commissions received. The managing dealer and we may adjust any future
commissions due for any such excess commissions that are not returned.
DEFERRED COMMISSION OPTION
DETERMINATION OF THE NUMBER OF SHARES TO BE ISSUED AND THE AMOUNT OF THE
DEFERRED SELLING COMMISSIONS. You may agree with the participating soliciting
dealer and the managing dealer to have selling commissions due with respect to
the purchase of your shares paid over a period of up to six years pursuant to a
deferred commission option arrangement. Our net proceeds from this offering will
not be affected by the election of the deferred commission option. Under this
arrangement and based upon a $10 per share deemed value to each share issued, if
you elect the deferred commission option, you will pay a 1.5% selling commission
upon subscription, of which 1% will be reallowed upon subscription, rather than
the 7.5% selling commission, of which 7% is reallowable, and we will deduct an
amount equal to up to 1% selling commission per year thereafter for up to the
next six years from cash distributions otherwise payable to you. For example, if
you elect the deferred commission option, you will be required to pay a total of
$9.40 per share purchased upon subscription, rather than $10 per share, with
respect to which $0.15 per share will be payable as selling commissions due upon
subscription, of which $0.10 per share will be reallowed (based on the number of
shares that would have been issued if the deferred commission option had not
been elected). For example, for a $100,000 initial investment, we will issue
10,638.298 shares ($100,000 divided by $9.40), and you would pay maximum selling
commissions of $1,500 upon subscription ($0.15 times the 10,000 shares which
would have been issued for $100,000 if the deferred commission option had not
been elected), of which $1,000 is reallowable. For each of the up to six years
following the subscription, on a date or dates to be determined from time to
time by the managing dealer (initially contemplated to be monthly as of when
distributions are paid), we will deduct $0.10 per share (based on the number of
shares that would have been issued if the deferred commission option had not
been elected) on an annual basis from cash distributions otherwise payable to
you. This amount will be used to pay deferred commission obligations. In the
example of an initial cash investment of $100,000,
150
<Page>
$1,000 would be deducted on an annual basis and used in the above described
manner for each of the six years following the subscription. The managing dealer
will pay the selling commissions paid upon subscription and in each of the
following up to six years, which selling commissions may be reallowed to the
soliciting dealer by the managing dealer and the deferred commission obligations
would be satisfied.
As in any volume discount situation, selling commissions are not paid on
any shares issued for a volume discount. Therefore, when the deferred commission
option is used, we will not make deductions for deferred commission obligations
from cash distributions payable on the shares issued for a volume discount,
because there will not be any deferred commission obligation as to those
particular shares. The number of shares issued, if any, for a volume discount,
will be determined as provided above under "Plan of Distribution--Volume
Discounts."
TAXES. If you elect the deferred commission option and you are subject to
federal income taxation, you will incur tax liability for cash distributions
payable to them with respect to their shares even though we will withhold such
cash distributions and will instead pay third parties to satisfy deferred
commission obligations.
SUBSCRIPTION AGREEMENT. If you wish to elect the deferred commission
option, you must make the election on the subscription agreement/signature page.
In addition, the broker-dealer must also complete and sign the subscription
agreement/signature page to acknowledge its agreement to the deferred commission
option.
AUTHORIZATION TO WITHHOLD CASH DISTRIBUTIONS. If you elect the deferred
commission option you will be authorizing us to withhold cash distributions
otherwise payable to you for the purpose of paying selling commissions due under
the deferred commission option; provided, however, that in no event may we
withhold in excess of $0.60 per share in the aggregate (lower when the volume
discount provisions are also applicable and less than 6% of the selling
commissions are deferred) under the deferred commission option.
ACCELERATION OF DEFERRED COMMISSION OBLIGATION. If our shares become listed
for trading on a national securities exchange or included for quotation on a
national market system, or such listing or inclusion is reasonably anticipated
to occur at any time prior to the satisfaction of the remaining deferred
commission obligations, we will accelerate the remaining selling commissions due
under the deferred commission option. In such event, we will provide notice of
such acceleration to stockholders who have elected the deferred commission
option. The amount of the remaining selling commissions due will be deducted and
paid by us out of cash distributions otherwise payable to such stockholders
during the time period prior to any such listing of the shares for trading on a
national securities exchange or inclusion for quotation on a national market
system. However, in no event may we withhold in excess of $0.60 per share in the
aggregate during the six-year period following the subscription. The maximum
amount that we may withhold and the maximum number of years for which we may
offer selling commissions will be lower when the volume discount provisions are
also applicable and less than 6% of the selling commissions are deferred. To the
extent that the cash distributions during such time period are insufficient to
satisfy the remaining deferred selling commissions due, the obligation of us and
our stockholders to make any further payments of deferred selling commissions
under the deferred commission option shall terminate and the managing dealer
(and participating soliciting dealers if the deferred selling commissions are
reallowed to them by the managing dealer) will not be entitled to receive any
further portion of the unpaid deferred selling commissions following any such
listing for trading or inclusion for quotation of our shares.
In addition, if you elect the deferred commission option and subsequently
elect to participate in our share repurchase program or request that we transfer
your shares for any other reason prior to the time
151
<Page>
that the remaining deferred selling commissions have been deducted from cash
distributions otherwise payable to you during the mentioned period of up to six
years, then we will accelerate the remaining selling commissions due under the
deferred commission option. In such event, we shall provide notice of such
acceleration to you, and:
- in the case of an election to sell the shares under our share
repurchase program, you will be required to pay to us the unpaid
portion of the remaining deferred commission obligation prior to or
concurrently with our purchase of your shares pursuant to our share
repurchase program or we may deduct such unpaid portion of the
remaining deferred commission obligation from the amount otherwise
due to you for our purchase of your shares under our share
repurchase program; or
- if you request that we transfer the shares for any other reason, you
will not be entitled to effect any such transfer until you first
either:
- pay to us the unpaid portion of the remaining deferred
commission obligation; or
- provide a written instrument in form and substance satisfactory
to us, and appropriately signed by the transferee, to the
effect that the proposed transferee agrees to have the unpaid
portion of the remaining deferred commission obligation
deducted from cash distributions otherwise payable to the
transferee during the remaining portion of the specified up to
six year period.
LEGEND. All certificates representing any shares that elect the deferred
commission option (including any shares issued for the volume discount in
connection with the election of the deferred commission option) will bear a
legend referring to the fact that such shares are subject to the terms of the
deferred commission option including the withholding of cash distributions
otherwise payable to the stockholders for the purpose of paying the deferred
selling commission obligation.
MARKETING CONTRIBUTION AND DUE DILIGENCE EXPENSE ALLOWANCE. The marketing
contribution of 2.5% and the due diligence expense allowance of 0.5% will be
payable by us on the gross offering proceeds for all of the shares issued based
on an assumed price of $10 per share. We will pay those amounts due from the
proceeds we receive at the time of the initial investment.
INDEMNIFICATION
We will indemnify the managing dealer and the soliciting dealers against
liabilities, including liabilities under the Securities Act of 1933, if one or
more of the following conditions are met:
- there has been a successful adjudication on the merits of each count
involving alleged securities law violations as to the particular
indemnitee and a court of competent jurisdiction has approved
indemnification of the litigation costs; or
- the claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction as to the particular indemnitee and
the court has approved indemnification of the litigation costs; or
- a court of competent jurisdiction approves a settlement of the
claims against a particular indemnitee and approves indemnification
of the settlement and related costs after being advised of the
position of the Securities and Exchange Commission and the published
opinions of any state securities regulatory authority in which our
common stock was offered and sold respecting the availability and/or
propriety of indemnification for
152
<Page>
securities law violations. The soliciting dealer will be required to
indemnify us and our advisor against such liabilities.
In the opinion of the Securities and Exchange Commission, indemnification
for liabilities arising under the Securities Act of 1933 is against public
policy and, therefore, unenforceable. The managing dealer and each of the
soliciting dealers may be deemed to be an "underwriter" as that term is defined
in the Securities Act of 1933.
[THE BALANCE OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.]
153
<Page>
HOW TO SUBSCRIBE
Investors who meet the suitability standards described above may purchase
shares of common stock. See "Who May Invest" and "Plan of Distribution --
Determination of Your Suitability as an Investor," above, for the suitability
standards. Investors who want to purchase shares must proceed as follows:
- Read the entire prospectus and the current supplement(s), if any,
accompanying the prospectus.
- Complete the execution copy of the subscription agreement. A
specimen copy of the subscription agreement, including instructions
for completing it, is included in the prospectus as Appendix C.
- Deliver a check for the full purchase price of the shares being
subscribed for, payable to "LNB/Escrow Agent for IWRRET ", along
with the completed subscription agreement to the soliciting dealer.
If you are qualified to participate in this offering, for
administrative convenience, the proceeds from your subscription will
be deposited in a segregated escrow account with the escrow agent,
LaSalle Bank National Association, 120 South LaSalle Street,
Chicago, Illinois, and will be held in trust for your benefit,
pending release to us. Your investment will not be commingled with
any other funds. Subject to us selling the minimum amount,
subscription proceeds are expected to be released to us as
subscriptions are accepted. We will accept or reject subscriptions
within ten days after we receive them. The name of your soliciting
dealer appears on your subscription agreement.
- By executing the subscription agreement and paying the full purchase
price for the shares subscribed for, each investor attests that he
or she meets the suitability standards as stated in the subscription
agreement and agrees to be bound by all of its terms.
In addition, if a subscriber elects the deferred commission option, he or
she must do so by completing and signing the subscription agreement/signature
page of the form of subscription agreement. The soliciting dealer must also
complete and sign the subscription agreement/signature page to acknowledge its
agreement to the deferred commission option. This is more fully explained under
"Plan of Distribution - Deferred Commission Option."
A sale of the shares may not be completed until at least five business days
after the subscriber receives the prospectus. Within 10 days, and generally
within 24 hours, of our receipt of each completed subscription agreement, we
will accept or reject the subscription. If we accept the subscription, we will
mail a confirmation within three days. If for any reason we reject the
subscription, we will promptly return the check and the subscription agreement,
without interest or deduction, within 10 days after we received it.
An approved trustee must process through us and forward to us subscriptions
made through individual retirement accounts, Keogh plans and 401(k) plans. In
the case of individual retirement accounts, Keogh plans and 401(k) plan
stockholders, we will send the confirmation to the trustee.
You have the option of placing a transfer on death, or TOD, designation on
your shares purchased in this offering. A TOD designation transfers ownership of
the shares to your designated beneficiary upon your death. This designation may
only be made by individuals, not entities, who are the sole or joint owners with
right of survivorship of the shares. This option, however, is not available to
residents of the States of Louisiana, New York, and North Carolina. If you would
like to place a transfer on death
154
<Page>
designation on your shares, you must check the TOD box on the subscription
agreement and you must complete and return the transfer on death form included
as Appendix D to this prospectus in order to effect the designation.
You may elect to have any registered investment advisory fees deducted from
your account with us and paid directly to your registered investment advisor by
completing and signing a letter of instruction (in the form attached as Appendix
E1 to this prospectus). The letter of instruction will authorize us to deduct a
specified dollar amount or percentage of distributions paid by us as advisory
fees payable to your registered investment advisor on a periodic basis.
The letter of instruction will be irrevocable and we will continue to pay
advisory fees payable from your account until such time as you provide us with a
notice (in the form attached as Appendix E2 to this prospectus) of your election
to terminate deductions from your account for the purposes of such advisory
fees.
[THE BALANCE OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
155
<Page>
SALES LITERATURE
In addition to and apart from this prospectus, we may use certain
supplemental sales material in connection with the offering. This material,
prepared by our advisor, may consist of a brochure describing the advisor and
its affiliates and our objectives. The material may also contain pictures and
summary descriptions of properties similar to those we intend to acquire that
our affiliates have previously acquired. This material may also include
audiovisual materials and taped presentations highlighting and explaining
various features of the offering, properties of prior real estate programs and
real estate investments in general; and articles of incorporation and
publications concerning real estate. Business reply cards, introductory letters
and seminar invitation forms may be sent to the dealer members of the National
Association of Securities Dealers designated by Inland Securities Corporation
and prospective investors. No person has been authorized to prepare for, or
furnish to, a prospective investor any sales literature other than that
described herein and "tombstone" newspaper advertisements or solicitations of
interest that are limited to identifying the offering and the location of
sources of further information.
The use of any sales materials is conditioned upon filing with and, if
required, clearance by appropriate regulatory agencies. Such clearance (if
provided), however, does not indicate that the regulatory agency allowing the
use of the materials has passed on the merits of the offering or the adequacy or
accuracy of the materials.
This offering is made only by means of this prospectus. Except as described
herein, we have not authorized the use of other supplemental literature or sales
material in connection with this offering.
[THE BALANCE OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
156
<Page>
DISTRIBUTION REINVESTMENT AND SHARE REPURCHASE PROGRAMS
DISTRIBUTION REINVESTMENT PROGRAM
Our distribution reinvestment program provides our stockholders with an
opportunity to purchase additional shares of common stock by reinvesting
distributions. Stockholders who elect to participate in the distribution
reinvestment program will authorize us to use distributions payable to them to
purchase additional shares of common stock. A participant will not be able to
acquire common stock under the program if the purchase would cause it to exceed
the 9.8% ownership limit or would violate any of the other share ownership
restrictions imposed by our articles of incorporation.
As further explained below, purchases under the distribution reinvestment
program are made at a price, $9.50 per share at first, equal to 95% of the
market price of a share of common stock on the date of purchase until such time
as our shares are listed on a national stock exchange or included for quotation
on a national market system. This reduced price reflects a decrease in costs
associated with these issuances. Participants in the distribution reinvestment
program may also purchase fractional shares of common stock, so that 100% of
distributions will be used to acquire common stock. Common stock will be
purchased under the distribution reinvestment program on the record date for the
distribution used to purchase the common stock. Distributions on common stock
acquired under the distribution reinvestment program will be paid at the same
time as distributions are paid on common stock purchased outside the program and
are calculated with a daily record and distribution declaration date. Each
participant agrees that if, at any time prior to listing the common stock on a
national stock exchange or inclusion of them for quotation on a national market
system, he or she fails to meet the suitability requirements for making an
investment in us or cannot make the other representations or warranties set
forth in the subscription agreement, he or she will promptly notify us in
writing.
Beginning with the first distribution paid after the effective date of the
offering, participants will acquire our shares at a fixed price of $9.50 per
share. This will continue until the earlier of (1) the increase of the public
offering price per share of common stock in the offering from $10 per share, if
there is an increase, and (2) the termination of the offering. Thereafter,
participants may acquire our shares at a price equal to 95% of the market price
of a share on the date of purchase until our shares are listed on a national
stock exchange or included for quotation on a national market system. In the
event of listing or inclusion, we will purchase shares for the distribution
reinvestment program on the exchange or market at the prevailing market price.
We will then sell the shares to stockholders at that price. The discount from
the public offering price per share will not exceed 5% of the market price of a
share on the date of purchase. It is possible that a secondary market will
develop for the shares, and that the prices on the secondary market will be
lower or higher than the price of shares purchased through the distribution
reinvestment program. Neither we nor our affiliates will receive a fee for
selling shares through the distribution reinvestment program. We do not warrant
or guarantee that participants will acquire shares at the lowest possible price
through the program.
A participant may stop participating in the distribution reinvestment
program at any time without penalty, by delivering written notice to us. Prior
to listing the shares on a national securities exchange or including them for
quotation on a national market system, any transfer of shares by a participant
to a non-participant will terminate participation in the distribution
reinvestment program with respect to the transferred shares. Within 90 days
after the end of our fiscal year, we will:
- issue certificates showing ownership of shares purchased through the
distribution reinvestment program during the prior fiscal year,
ownership of these shares will be in book-entry form prior to the
issuance of certificates; and
157
<Page>
- provide each participant with an individualized report on his or her
investment, including the purchase date(s), purchase price and
number of shares owned, as well as the dates of distribution and
amount of distributions received during the prior fiscal year.
The individualized statement to participants will include receipts and purchases
relating to each participant's participation in the distribution reinvestment
program including the tax consequences relative thereto. The directors,
including a majority of independent directors, by majority vote may amend or
terminate the distribution reinvestment program upon 30 days notice to
participants.
Stockholders who participate in the distribution reinvestment program will
recognize dividend income, taxable to the extent of our current or accumulated
earnings and profits, in the amount and as though they had received the cash
rather than purchased shares through the distribution reinvestment program.
These deemed dividends will be treated as actual dividends and will retain the
character and tax effects applicable to all dividends. In addition, the 5%
discount applicable to shares purchased under the dividend reinvestment program
will itself be treated as a deemed distribution to the purchaser. Shares
received under the distribution reinvestment program will have a holding period,
for tax purposes, beginning with the day after purchase, and a tax basis equal
to their cost, which is the gross amount of the deemed distribution. See
"Federal Income Tax Considerations -- Federal Income Taxation of Stockholders"
for a full discussion of the tax effects of dividend distributions.
As explained under "Description of Securities -- Restrictions on Ownership
and Transfer," the certificates representing shares purchased through the
distribution reinvestment program will bear a legend referring to the
restrictions on their ownership and transfer.
SHARE REPURCHASE PROGRAM
The share repurchase program may, subject to certain restrictions discussed
below, provide eligible stockholders with limited, interim liquidity by enabling
them to sell shares back to us. The prices at which shares may be sold back to
us are as follows:
- One year from the purchase date, at $9.25 per share;
- Two years from the purchase date, at $9.50 per share;
- Three years from the purchase date, at $9.75 per share; and
- Four years from the purchase date, at the greater of: $10.00 per
share; or a price equal to 10 times our "funds available for
distribution" per weighted average share outstanding for the prior
calendar year.
A stockholder must have beneficially held the shares for at least one year
prior to offering them for sale to us through the share repurchase program.
However, if a stockholder dies, we may waive this one-year holding period for
the beneficiaries or heirs, as appropriate.
We will make repurchases under the share repurchase program, if requested
by a stockholder, monthly. Subject to funds being available, we will limit the
number of shares repurchased during any calendar year to five percent, 5%, of
the weighted average number of shares outstanding during the prior calendar
year. Funding for the share repurchase program will come exclusively from
proceeds we receive from the sale of shares under our distribution reinvestment
plan and other operating funds, if any, as the board, at its sole discretion,
may reserve for this purpose.
158
<Page>
A stockholder may request that his or her shares be repurchased by
submitting a written request, and then generally within one week an assignment
form is sent for execution by the stockholder or his custodian/trustee along
with a request to return the certificate of ownership. At the end of each month,
the completed requests are reviewed. It is possible that a stockholder may not
have his or her entire request honored due to the funds available. If that were
to occur, the shares would be purchased on a "pro rata basis" and the portion of
his or her request unfulfilled would then be first in line as soon as funds are
available.
We accept shares on a pro rata basis. Consequently, a stockholder might not
be able to have us repurchase his or her shares. Therefore, that stockholder
might not be able to sell or otherwise liquidate his or her shares and might
have to hold his or her shares for an indeterminate period of time.
Following commencement of our offering, we will be subject to the reporting
requirements of the Securities Exchange Act of 1934. In this regard, we will
prepare and file with the SEC annual reports on SEC Form 10-K and quarterly
reports on SEC Form 10-Q; we will provide copies of these filings to our
stockholders regularly following our filing with the SEC. Additionally, we will
amend on a quarterly basis the registration statement of which this prospectus
is a part; we will distribute to our stockholders the updated prospectus
regularly.
Any stockholder who wishes us to repurchase his or her shares must
beneficially own the shares for at least one year. Our obligation to repurchase
any shares under the program is conditioned upon our having sufficient funds
available for repurchase of shares. The stockholder should direct a written
request to Ms. Roberta S. Matlin, Vice President of Administration, Inland
Western Retail Real Estate Trust, Inc., 2901 Butterfield Road Oak Brook,
Illinois 60523. The request must state the name of the person/entity who owns
the shares, the date of purchase of the subject shares and the number of shares
to be repurchased. We will forward an assignment form to the owner of record of
the subject shares for execution. The requesting stockholder must properly
execute and return the form along with the stock certificate for the shares to
be repurchased. Upon receipt of the form, we will conduct a Uniform Commercial
Code (UCC) search to ensure that no liens are held against the shares at the
cost of $100 to the stockholder, which will be deducted from the proceeds of the
repurchase. The repurchase will occur on a prorata basis each month assuming
all documentation is complete, including a negative response from a UCC search.
If the UCC search determines that a lien exists against the shares, we will
charge the requesting stockholder for the UCC search. If we do not have
sufficient funds available for repurchase of the entire request, we will
purchase only those shares for which we have sufficient funds available; and we
will place the requesting stockholder on a waiting list until funds become
available sufficient to complete the transaction.
If a stockholder wishes to withdraw his or her request to have his or her
shares repurchased, the stockholder must notify us in writing. We will not
repurchase that stockholder's shares so long as we receive the written request
to withdraw prior to the date we send payment to the applicable stockholder. The
requesting stockholder will be responsible for payment of the $100 UCC search
fee even if that stockholder withdraws his or her request, if we have conducted
a UCC search.
There is no limit on the number of shares that an individual stockholder
may request to be repurchased, subject to the limitations regarding availability
of funds and the aggregate amount of stock that we are permitted to purchase
under the program.
Payment for repurchased shares from the time of the initial request to
receipt of the funds is usually three to four weeks dependent upon receipt of
the executed assignment form and certificate of ownership, and completion of a
UCC search to ensure that no liens are held against the stock.
159
<Page>
The board, at its sole discretion, may choose to terminate the share
repurchase program after the end of the offering period, or reduce the number of
shares purchased under the program, if it determines that the funds allocated to
the share repurchase program are needed for other purposes, such as the
acquisition, maintenance or repair of properties, or for use in making a
declared distribution. A determination by the board to eliminate or reduce the
share repurchase program will require the unanimous affirmative vote of the
independent directors.
We cannot guarantee that the funds set aside for the share repurchase
program will be sufficient to accommodate all requests made each year. If no
funds are available for the program when repurchase is requested, the
stockholder may withdraw the request, or ask that we honor the request when
funds are available. Pending requests could be pro rated, depending upon
availability of funds.
Stockholders are not required to sell their shares to us. The share
repurchase program is only intended to provide interim liquidity for
stockholders until a liquidity event occurs, such as the listing of the shares
on a national securities exchange, inclusion of the shares for quotation on a
national market system, or our merger with a listed company. We cannot guarantee
that a liquidity event will occur.
Shares we purchase under the share repurchase program will be canceled, and
will have the status of authorized but unissued shares. Shares we acquire
through the share repurchase program will not be reissued unless they are first
registered with the Securities and Exchange Commission under the Securities Act
of 1933 and under appropriate state securities laws or otherwise issued in
compliance with such laws.
If we terminate, reduce or otherwise change the share repurchase program,
we will send a letter to stockholders informing them of the change at least 30
days in advance, and we will disclose the changes in quarterly reports filed
with the Securities and Exchange Commission on Form 10-Q.
See "Plan of Distribution -- Deferred Commission Option" for an explanation
of what will be required of the stockholder if the stockholder has elected the
deferred commission option and subsequently elects to participate in our share
repurchase program while there is an unpaid portion of the remaining deferred
commission obligation.
[THE BALANCE OF THIS PAGE WAS INTENTIONALLY LEFT BLANK]
160
<Page>
REPORTS TO STOCKHOLDERS
Our advisor will keep, or cause to be kept, full and true books of account
on an accrual basis of accounting, in accordance with generally accepted
accounting principles. All of these books of account, together with a copy of
our articles of incorporation, will at all times be maintained at our principal
office, and will be open to inspection, examination and duplication at
reasonable times by the stockholders or their agents.
The advisor will submit to each stockholder our audited annual reports
within 120 days following the close of each fiscal year. The annual reports will
contain the following:
- audited financial statements;
- the ratio of the costs of raising capital during the period to the
capital raised;
- the aggregate amount of advisory fees and the aggregate amount of
fees paid to the advisor and any affiliate of the advisor, including
fees or charges paid to the advisor and to any affiliate of the
advisor by third parties doing business with us;
- our total operating expenses, stated as a percentage of the average
assets and as a percentage of net income;
- a report from the independent directors that the policies we follow
are in the best interests of our stockholders and the basis for such
determination; and
- separately stated, full disclosure of all material terms, factors
and circumstances surrounding any and all transactions involving us,
the directors, the advisor and any of their affiliates occurring in
the year for which the annual report is made. Independent directors
are specifically charged with the duty to examine and comment in the
report on the fairness of such transactions.
In addition, unaudited quarterly reports containing the information
required by Form 10-Q will be submitted to each stockholder within 60 days after
the end of the first three fiscal quarters.
At the same time as any distribution, we will provide stockholders with a
statement disclosing the source of the funds distributed. If the information is
not available when the distribution is made, we will provide a statement setting
forth the reasons why the information is not available. In no event will the
information be provided to stockholders more than 60 days after we make the
distribution.
Within 60 days following the end of any calendar quarter during the period
of the offering in which we have closed an acquisition of a property, we will
submit a report to each stockholder containing:
- the location and a description of the general character of the
property acquired during the quarter;
- the present or proposed use of the property and its suitability and
adequacy for that use;
- the terms of any material leases affecting the property;
- the proposed method of financing, if any, including estimated down
payment, leverage ratio, prepaid interest, balloon payment(s),
prepayment penalties, "due-on-sale" or
161
<Page>
encumbrance clauses and possible adverse effects thereof and similar
details of the proposed financing plan; and
- a statement that title insurance has been or will be obtained on the
property acquired.
- In addition, we will send a report to each stockholder and submit to
prospective investors when the advisor believes a property will
probably be acquired:
- on specified terms, i.e., upon completion of due diligence which
includes review of the title insurance commitment, appraisal and
environmental analysis; and
- involving the use of 10% or more, on a cumulative basis, of the net
proceeds of the offering.
After the completion of the last acquisition, the advisor will, upon
request, send a schedule to the Commissioner of Corporations of the State of
California. The schedule, verified under the penalty of perjury, reflects: each
acquisition made; the purchase price paid; the aggregate of all acquisition
expenses paid on each transaction; and a computation showing compliance with our
articles of incorporation. We will, upon request, submit to the Commissioner of
Corporations of the State of California or to any of the various state
securities administrators, any report or statement required to be distributed to
stockholders pursuant to our articles of incorporation or any applicable law or
regulation.
The accountants we regularly retain will prepare our federal tax return and
any applicable state income tax returns. We will submit appropriate tax
information to the stockholders within 30 days following the end of each of our
fiscal years. We will not provide a specific reconciliation between generally
accepted accounting principles and income tax information to the stockholders.
However, the reconciling information will be available in our office for
inspection and review by any interested stockholder. Annually, at the same time
as the dissemination of appropriate tax information to stockholders, we will
provide each stockholder with an individualized report on his or her investment,
including the purchase date(s), purchase price and number of shares owned, as
well as the dates of distribution and amounts of distributions received during
the prior fiscal year. The individualized statement to stockholders will include
any purchases of shares under the distribution reinvestment program.
Stockholders requiring individualized reports on a more frequent basis may
request these reports. We will make every reasonable effort to supply more
frequent reports, as requested, but we may, at our sole discretion, require
payment of an administrative charge either directly by the stockholder, or
through pre-authorized deductions from distributions payable to the stockholder
making the request.
See "Risk Factors -- Employee Benefit Plan Risks" for an explanation of the
annual statement of value we provide to stockholders subject to ERISA.
PRIVACY POLICY NOTICE
To help you understand how we protect your personal information, we have
included our Privacy Policy Notice as Appendix F to this Prospectus. This Notice
describes our current privacy policy and practices. Should you decide to
establish or continue a shareholder relationship with us, we will advise you of
our policy and practices at least once annually, as required by law.
LITIGATION
We are not subject to any material pending legal proceedings.
162
<Page>
RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into agreements to pay our advisor and its affiliates
certain fees or other compensation for providing services to us.
The compensation arrangements between us and our advisor, The Inland Group
and its affiliates, were not determined by arm's-length negotiations. See
"Conflicts of Interest." The following table discloses the compensation which we
may pay our advisor and its affiliates. In those instances in which there are
maximum amounts or ceilings on the compensation which may be received, our
advisor and its affiliates may not recover any excess amounts for those services
by reclassifying them under a different compensation or fee category.
We define net income as total revenues less expenses other than additions
to reserves for depreciation or bad debts or other similar non-cash reserves.
When we use the term "net income" for purposes of calculating some expenses and
fees, it excludes the gain from the sale of our assets. This definition of net
income is prescribed by the Statement of Policy Regarding REITs adopted by the
North American Securities Administrators Association, Inc., or NASAA; but it is
not in accordance with generally accepted accounting principles in the United
States, because depreciation and other non-cash reserves are not deducted in
determining net income under the NASAA REIT Statement. Excluding
depreciation will result in not reimbursing our Advisor for a non-cash
expenditure and not excluding the gain from the sale of our assets could
result in greater net income on which the 25% reimbursement to our Advisor is
allowed.
NONSUBORDINATED PAYMENTS
The following aggregate amounts of compensation, allowances and fees we may
pay to our advisor and its affiliates are not subordinated to the returns on net
investments that we are required to pay to our stockholders.
<Table>
<Caption>
TYPE OF COMPENSATION AND ESTIMATED MAXIMUM
RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------------- --------------------------------------------------- ---------------------------------
OFFERING STAGE
Selling commissions payable to the We will pay a selling commission of 7.5% of the The actual amount depends upon
managing dealer and dealers sale price for each share (and reallow 7%), the amount of shares sold. We
designated by the managing dealer subject to reduction for special sales under the will not pay selling commissions
referred to as soliciting circumstances as described in the "Plan of if the minimum offering is not
dealers. Neither the managing Distribution - Compensation - We Will Pay For the sold. If only the minimum
dealer, the soliciting dealers, Sale of Our Shares." offering is sold and there are
nor our officers or directors no special sales, a total of
will be offered to purchase shares We will permit the managing dealer and its $150,000 in selling commissions
of our stock in order to meet the respective officers and employees and certain of will be paid. A total of
minimum thresholds. its affiliates to purchase shares net of sales $187,500,000 in selling
commissions and the marketing contribution and commissions will be paid if the
due diligence expense allowance or for $8.95 per maximum offering is sold and
share. there are no special sales.
Also, soliciting dealers and their respective
officers and employees and certain of their
respective affiliates who request and are entitled
to purchase shares net of selling commissions may
make an initial purchase of shares net of sales
commissions or for $9.30 per share; however, any
subsequent purchases of shares by any such
persons are limited to a maximum discount of 5%.
</Table>
163
<Page>
<Table>
<Caption>
TYPE OF COMPENSATION AND ESTIMATED MAXIMUM
RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------------- --------------------------------------------------- ---------------------------------
Marketing contribution and due We will pay an amount equal to 2.5% of the gross The actual amount depends on the
diligence expense allowance paid offering proceeds to the managing dealer, all or number of shares. If there are
to the managing dealer and a portion of which may be passed on to soliciting no special sales, approximately
soliciting dealers. dealers, in lieu of reimbursement of specific the following amounts will be
expenses associated with marketing. We may pay paid for the marketing
an additional 0.5% of the gross offering proceeds contribution and the due
to the managing dealer, which may be passed on to diligence expense allowance:
the soliciting dealers, for due diligence
expenses. We will not pay the marketing - $60,000 if we sell the
contribution and due diligence expense allowance minimum number of shares; or
in connection with any special sales, except
those receiving volume discounts and those - $75,000,000 if we sell the
described in "Plan of Distribution - Volume maximum number of shares.
Discounts."
Other expenses of issuance and We expect to incur the following expenses in All amounts other than the
distribution connection with this offering: Securities and Exchange
Commission registration fee and
Securities and Exchange the NASD filing fee are
Commission registration estimates. The actual amounts
fee $217,621 of these expenses cannot be
NASD filing fee $ 30,500 determined at the present time.
Printing and mailing We estimate the total amount of
expenses $3,500,000 the issuance and distribution
Blue Sky fees and expenses to be approximately
expenses $136,000 $14,684,121.
Legal fees and
expenses $650,000
Accounting fees and
expenses $650,000
Advertising and sales
literature $5,000,000
Due diligence $3,000,000
Data Processing fees $500,000
Bank fees and other
administrative
expenses $200,000
We will reimburse our sponsor for actual costs Expenses of approximately
incurred in connection with the offering on our $691,911 have been advanced by
behalf. However, if the aggregate of all our sponsor through June 30,
offering expenses, including selling commissions, 2003 in connection with this
the marketing contribution and due diligence offering. We may reimburse for
expense allowance, exceeds 15% of the gross offering expenses advanced:
offering proceeds, or if the aggregate of all - $90,000 if we sell the
offering expenses, excluding the selling minimum offering based on
expenses, exceeds 5.5% of the gross offering the 15% limitation; or
proceeds, our advisor or its affiliates will - $14,684,000 if we sell the
promptly pay the excess and we will have no maximum offering.
liability for these expenses at any time If the offering is not
afterward. successful, then our sponsor
will be solely responsible for
the organization and offering
expenses to the extent it has
</Table>
164
<Page>
<Table>
<Caption>
TYPE OF COMPENSATION AND ESTIMATED MAXIMUM
RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------------- --------------------------------------------------- ---------------------------------
not been reimbursed.
<Caption>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------------- --------------------------------------------------- ---------------------------------
ACQUISITION STAGE
Acquisition expenses paid to our We will pay an amount, estimated to be up to 0.5% We may pay the following amounts
advisor and its affiliates. of the total of (1) the gross offering proceeds for the reimbursement of
from the sale of 250,000,000 shares, (2) the acquisition expenses:
gross proceeds from the sale of up to 20,000,000
shares pursuant to the distribution reinvestment - no more than $10,000 if
programs. The acquisition expenses for any the minimum number of
particular property will not exceed 6% of the shares are sold; or
gross purchase price of the property.
- no more than $13,450,000 if
However, if we request additional services, the the maximum number of
compensation will be provided on separate shares are sold and all of
agreed-upon terms and the rate will be approved the 20,000,000 shares are
by a majority of disinterested directors, sold pursuant to the
including a majority of the disinterested distribution reinvestment
independent directors, as fair and reasonable for program.
us.
However, the actual amounts
cannot be determined at the
present time.
Interest expenses paid to our We may borrow money from our advisor and its The actual amounts are dependent
advisor and its affiliates and affiliates in order to acquire properties. In on actual borrowings.
Inland Mortgage Corporation in such instances, we will pay our advisor and its Therefore, these amounts cannot
connection with loans. affiliates customary interest payments. be determined at the present
time.
<Caption>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------------- --------------------------------------------------- ---------------------------------
OPERATIONAL STAGE
Property management fee paid to We will pay a monthly fee of 4.5% of the gross The actual amounts are dependent
our property manager, Inland income from the properties. We will also pay a upon results of operations and,
Western Management Corp. We will monthly fee for any extra services equal to no therefore, cannot be determined
pay the fee for services in more than 90% of that which would be payable to at the present time. If we
connection with the rental, an unrelated party providing the services. The acquire the businesses of our
leasing, operation and management property manager may subcontract its duties for a advisor and/or our property
of the properties. fee that may be less than the fee provided for in manager, the property management
the management services agreements. fees will cease.
Advisor asset management fee. We We will pay our advisor an asset management fee The actual amounts are dependent
will pay the fee for services in after our stockholders have first received a 6% upon results of operations and,
connection with our day-to-day annual return. therefore, cannot be determined
operations, including making at the present time.
strategic decisions, performing
day-to-day operations that include
accounting, investment advisory
services, risk management services
and tax
</Table>
165
<Page>
<Table>
reduction services and
providing other services as our
board deems appropriate.
<Caption>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------------- --------------------------------------------------- ---------------------------------
OPERATIONAL STAGE
Reimbursable expenses to our We will reimburse some expenses of the advisor. The actual amounts are dependent
advisor. These may include costs The compensation and reimbursements to our upon results of operations and,
of goods and services, advisor will be approved by a majority of our therefore, cannot be determined
administrative services and directors and a majority of our independent at the present time.
non-supervisory services performed directors as fair and reasonable for us.
directly for us by independent
parties.
<Caption>
ESTIMATED MAXIMUM
TYPE OF COMPENSATION AND RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------------- --------------------------------------------------- ---------------------------------
LIQUIDATION STAGE
Property disposition fee payable We may pay a property disposition fee to our The actual amounts to be
to our advisor's affiliates, advisor and its affiliates if we sell any of our received depend upon the sale
Inland Real Estate Sales, Inc. and real property in an amount equal to the lesser price of our properties and,
Inland Partnership Property Sales of: therefore, cannot be determined
Corp. at the present time. If we
3. 3% of the contract sales price of the acquire the advisor, the
property; or property disposition fee will
cease.
4. 50% of the customary commission which would be
paid to a third party broker for the sale of a
comparable property.
The amount paid, when added to the sums paid to
unaffiliated parties, will not exceed either the
customary commission or an amount equal to 6% of
the contracted for sales price. Payment of such
fees will be made only if the advisor provides a
substantial service in connection with the sale
of the property. See "Management -- Our Advisory
Agreement."
</Table>
SUBORDINATED PAYMENTS
We may pay the following additional fees to our advisor after returns on
net investment have been paid to the stockholders:
<Table>
<Caption>
TYPE OF COMPENSATION AND ESTIMATED MAXIMUM
RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------------- --------------------------------------------------- ---------------------------------
OPERATIONAL STAGE
Advisor asset management fee payable We pay an annual advisor asset management fee of The actual amounts to be
to our advisor. not more than 1% of our average assets. Our received depend upon the sale
average assets means the average of the total price of our properties and,
book value of our real estate assets plus the therefore, cannot be
total value of our loans receivables secured by determined at the present
real estate, before reserves for depreciation time. If we acquire the
</Table>
166
<Page>
<Table>
or bad debts or other similar non-cash reserves. advisor, the property
We will compute our average assets by taking the disposition fee will cease.
average of these values at the end of each month
during the quarter for which we are calculating
the fee. The fee is payable quarterly in an
amount equal to1/4of 1% of average assets as of
the last day of the immediately preceding
quarter. For any year in which we qualify as a
REIT, our advisor must reimburse us for the
following amounts if any:
(3) the amounts by which our total operating expenses,
the sum of the advisor asset management fee plus
other operating expenses, paid during the previous
fiscal year exceed the greater of:
- 2% of our average assets for that fiscal
year, or
- 25% of our net income for that fiscal year.
(4) an amount, which will not exceed the advisor
asset management fee for that year, equal to
any difference between the total amount of
distributions to stockholders for that year
and the 6% annual return on the net investment
of stockholders.
Items such as organization and offering expenses,
property expenses, interest payments, taxes,
non-cash expenditures, the incentive advisory fee
and acquisition expenses are excluded from the
definition of total operating expenses.
See "Management -- Our Advisory Agreement" for an
explanation of circumstances where the excess
amount specified in clause (1) may not need to be
reimbursed.
<Caption>
TYPE OF COMPENSATION AND ESTIMATED MAXIMUM
RECIPIENT METHOD OF COMPENSATION DOLLAR AMOUNT
- ----------------------------------- --------------------------------------------------- ---------------------------------
LIQUIDATION STAGE
Incentive advisory fee payable to our We will pay to the advisor an amount equal to 15% The actual amounts to be received
advisor. of the net proceeds from the sale of a property depend upon the sale price of our
after the stockholders have first received: properties and, therefore, cannot be
determined at the present time. If
we acquire or consolidate with the
(1) a cumulative non-compounded business conducted by our advisor,
return equal to 10% a year on their the incentive advisory fee will
net investment; and terminate.
(2) their net investment.
</Table>
167
<Page>
LEGAL MATTERS
Duane Morris LLP, Washington, D.C., has passed upon the legality of the
common stock and Duane Morris LLP, Philadelphia, Pennsylvania, has passed upon
legal matters in connection with our status as a REIT for federal income tax
purposes. Duane Morris LLP is generally referred to in this prospectus as Duane
Morris. Duane Morris does not purport to represent our stockholders or potential
investors, who should consult their own counsel. Duane Morris also provides
legal services to affiliates of our advisor.
Duane Morris has reviewed the statements in the section in the prospectus
titled "Federal Income Tax Considerations" and elsewhere as they relate to
federal income tax matters and the statements in the section in the prospectus
titled "ERISA Considerations."
EXPERTS
The balance sheet of Inland Western Retail Real Estate Trust, Inc. as of
June 30, 2003, and the historical summary of gross income and direct operating
expenses of Peoria Station for the year ended December 31, 2002, have been
included herein in reliance upon the reports of KPMG LLP, independent
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are filing this registration statement on Form S-11 with the Securities
and Exchange Commission in connection with our initial public offering. We are
required to file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission.
This prospectus is part of the registration statement and does not contain
all of the information included in the registration statement and all of its
exhibits, certificates and schedules. Whenever a reference is made in this
prospectus to any contract or other document of ours, the reference may not be
complete and you should refer to the exhibits that are a part of the
registration statement for a copy of the contract or document.
You can read our registration statement and our future SEC filings over the
Internet at www.sec.gov. You may also read and copy any document we file with
the SEC at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549.
You may also obtain copies of the documents at prescribed rates by writing
to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1 800 SEC-0330 or e-mail at
publicinfo@sec.gov for further information on the operation of the public
reference facilities.
168
<Page>
INDEX TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENTS
<Table>
1. INLAND WESTERN RETAIL REAL ESTATE TRUST, INC.:
(a) Independent Auditors' Report F-1
(b) Balance Sheet at June 30, 2003 F-2
(c) Notes to Balance Sheet at June 30, 2003 F-3
2. PEORIA STATION:
(a) Independent Auditors' Report F-8
(b) Historical Summary of Gross Income and Direct Operating Expenses for the
year ended December 31, 2002 and six months ended June 30, 2003
(unaudited) F-9
(c) Notes to the Historical Summary of Gross Income and Direct
Operating Expenses for the year ended December 31, 2002 and
six months ended June 30, 2003 (unaudited) F-10
</Table>
F-i
<Page>
Independent Auditors' Report
Board of Directors
Inland Western Retail Real Estate Trust, Inc.
We have audited the accompanying balance sheet of Inland Western Retail Real
Estate Trust, Inc. (the "Company") as of June 30, 2003. This financial statement
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the balance sheet
is free of material misstatement. An audit of a balance sheet includes
examining, on a test basis, evidence supporting the amounts and disclosures in
that balance sheet. An audit of a balance sheet also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Inland Western Retail Real Estate
Trust, Inc. as of June 30, 2003, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Chicago, Illinois
August 15, 2003
F-1
<Page>
Inland Western Retail Real Estate Trust, Inc.
(A Maryland Corporation)
BALANCE SHEET
June 30, 2003
<Table>
ASSETS
Cash $ 200,000
Deferred offering costs 684,411
-------------
Total assets $ 884,411
=============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued offering expenses $ 691,911
Commitments and contingencies (Note 3)
Stockholder's equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, none outstanding -
Common stock, $.001 par value, 350,000,000
shares authorized, 20,000 shares issued and
outstanding 20
Additional paid in capital 202,230
Retained earnings deficit (9,750)
-------------
Total stockholders' equity 192,500
-------------
Total liabilities and stockholders' equity $ 884,411
=============
</Table>
See accompanying notes to balance sheet.
F-2
<Page>
Inland Western Retail Real Estate Trust, Inc.
(A Maryland Corporation)
NOTES TO BALANCE SHEET
June 30, 2003
(1) Organization
Inland Western Retail Real Estate Trust, Inc. (the "Company") was formed on
March 5, 2003 to acquire and manage a diversified portfolio of real estate,
primarily multi-tenant shopping centers and has not commenced operations. The
Advisory Agreement (the "Agreement") provides for Inland Western Retail Real
Estate Advisory Services, Inc. (the "Advisor"), an Affiliate of the Company, to
be the Advisor to the Company. The Company contemplates the sale of up to
250,000,000 shares of common stock ("Shares") at $10 each in an initial public
offering (the "Offering") to be registered with the Securities and Exchange
Commission (the "Registration Statement") and the issuance of 20,000,000 shares
at $9.50 each which may be distributed pursuant to the Company's distribution
reinvestment program. No shares will be sold unless subscriptions for at least
200,000 shares (the minimum offering) have been obtained within one year after
commencement of the Offering.
The Company intends to qualify as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended, for federal income tax purposes
commencing with the tax year ending December 31, 2003. If the Company qualifies
for taxation as a REIT, the Company generally will not be subject to federal
income tax to the extent it distributes its REIT taxable income to its
stockholders. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to federal income tax on its taxable income at regular
corporate tax rates. Even if the Company qualifies for taxation as a REIT, the
Company may be subject to certain state and local taxes on its income and
property and federal income and excise taxes on its undistributed income.
The Company will provide the following programs to facilitate investment in the
Company's shares and to provide limited liquidity for stockholders.
The Company will allow stockholders who purchase shares in the offering to
purchase additional shares from the Company by automatically reinvesting
distributions through the distribution reinvestment program ("DRP"), subject to
certain share ownership restrictions. Such purchases under the DRP will not be
subject to selling commissions or the marketing contribution and due diligence
expense allowance, and are made at a price of $9.50 per share.
The Company will repurchase shares under the share repurchase program
("SRP"), if requested, monthly on a first-come, first-served basis, subject
to certain restrictions. Subject to funds being available, the Company will
limit the number of shares repurchased during any calendar year to 5% of the
weighted average number of shares outstanding during the prior calendar year.
Funding for the SRP will come exclusively from proceeds that the Company
receives from the sale of shares under the DRP and such other operating
funds, if any, as the Company's Board of Directors, at its sole discretion,
may reserve for this purpose. The board, at its sole discretion, may choose
to terminate the share repurchase program after the end of the offering
period, or reduce the number of shares purchased under the program, if it
determines that the funds allocated to the share repurchase program are
needed for other purposes, such as the acquisition, maintenance or repair of
properties, or for use in making a declared distribution. A determination by
the board to eliminate or reduce the share repurchase program will require
the unanimous affirmative vote of the independent directors.
F-3
<Page>
Inland Western Retail Real Estate Trust, Inc.
(A Maryland Corporation)
NOTES TO BALANCE SHEET
(continued)
June 30, 2003
(2) Summary of Significant Accounting Policies
The preparation of a balance sheet requires management of the Company to make a
number of estimates and assumptions relating to the reported amount of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the balance sheet. Actual results could differ from those estimates.
Costs associated with the offering are deferred and charged against the gross
proceeds of the offering upon closing. Formation and organizational costs are
expensed as incurred. As of June 30, 2003, $7,500 of organizational costs were
expensed.
The Company applies the fair value method of accounting as prescribed by SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION for its stock options granted.
Under this method, the Company will report the value of granted options as a
charge against earnings ratably over the vesting period.
(3) Transactions with Affiliates
The Advisor contributed $200,000 to the capital of the Company for which it
received 20,000 shares of common stock.
As of June 30, 2003, the Company had incurred $691,911 of offering and
organization costs, all of which was advanced by the Advisor. Pursuant to the
terms of the offering, the Advisor has guaranteed payment of all public offering
expenses (excluding sales commissions and the marketing contribution and the due
diligence expense allowance) in excess of 5.5% of the gross proceeds of the
offering or all organization and offering expenses (including selling
commissions) which together exceed 15% of gross proceeds. In the event that the
minimum offering is not successful, an Affiliate of the Advisor will bear the
related costs of the Offering.
F-4
<Page>
Inland Western Retail Real Estate Trust, Inc.
(A Maryland Corporation)
NOTES TO BALANCE SHEET
(continued)
June 30, 2003
Certain compensation and fees payable to the Advisor for services to be provided
to the Company are limited to maximum amounts.
<Table>
Nonsubordinated payments:
Offering stage:
Selling commissions 7.5% of the sale price for each share
Marketing contribution 3.0% of the gross offering proceeds
and due diligence
allowance
Reimbursable expenses We will reimburse our sponsor for actual costs incurred, on our
and other expenses of behalf, in connection with the offering.
issuance
Acquisition stage:
Acquisition expenses We will reimburse an affiliate of our Advisor for costs incurred,
on our behalf, in connection with the acquisition of properties
Operational stage:
Property management fee 4.5% of the gross income from the properties.
THIS FEE TERMINATES UPON A (cannot exceed 90% of the feewhich would
be payable to BUSINESS COMBINATION an unrelated third party)
WITH THE PROPERTY MANAGEMENT COMPANY.
Loan servicing fee .08% of the total principal amount of the loans
being serviced for each full year, up to the first $100 million
and a lesser percentage on a sliding scale thereafter
Reimbursable expenses The compensation and reimbursements to our advisor and
relating to administrative its affiliates will be approved by a majority of our directors.
services
</Table>
F-5
<Page>
Inland Western Retail Real Estate Trust, Inc.
(A Maryland Corporation)
NOTES TO BALANCE SHEET
(continued)
June 30, 2003
<Table>
Liquidation stage:
Property disposition fee Lesser of 3% of sales price or 50% of the customary
THIS FEE TERMINATES UPON A commission which would be paid to a third party
BUSINESS COMBINATION WITH THE ADVISOR
Subordinated payments:
Operational stage:
Advisor asset management fee Not more than 1% per annum of our average assets;
THIS FEE TERMINATES UPON A Subordinated to a non-cumulative, non-compounded return,
BUSINESS COMBINATION WITH equal to 6% per annum
THE ADVISOR
Liquidation stage:
Incentive advisory fee After the stockholders have first received a 10% cumulative,
THIS FEE TERMINATES UPON A non-compounded return and a return on their net investment,
BUSINESS COMBINATION WITH an incentive advisory fee equal to 15% on net proceeds
THE ADVISOR from the sale of a property will be paid to the Advisor.
</Table>
(3) Commitments
The Company has adopted an Independent Director Stock Option Plan which, subject
to certain conditions, provides for the grant to each Independent Director of an
option to acquire 3,000 shares following their becoming a Director and for the
grant of additional options to acquire 500 shares on the date of each annual
stockholders' meeting. The options for the initial 3,000 shares are exercisable
as follows: 1,000 shares on the date of grant and 1,000 shares on each of the
first and second anniversaries of the date of grant. The subsequent options will
be exercisable on the second anniversary of the date of grant. The initial
options will be exercisable at $8.95 per share. The subsequent options will be
exercisable at the fair market value of a share on the last business day
preceding the annual meeting of stockholders. As of June 30, 2003, we have
issued 3,000 options to acquire shares to each of our Independent Directors, for
a total of 9,000 options, of which none have been exercised or expired.
F-6
<Page>
Inland Western Retail Real Estate Trust, Inc.
(A Maryland Corporation)
NOTES TO BALANCE SHEET
(continued)
June 30, 2003
The per share weighted average fair value of options granted was $0.60 on the
date of the grant using the Black Scholes option-pricing model with the
following assumptions: expected dividend yield of 8%, risk free interest rate of
2.0%, expected life of five years and expected volatility rate of 18.0%. The
Company has recorded $2,250 as expense for the 3,000 options (1,000 options per
director) vesting upon the date of grant and will record the remaining $3,150 in
expense ratably over the two-year vesting period.
The Company anticipates that the aggregate borrowings related to all of the
Company's properties will be limited to certain maximum amounts. See "Investment
Objectives and Policies" elsewhere in this Prospectus for a description of such
maximum borrowing amounts.
The Company has rights to purchase an investment property currently being
redeveloped, known as Peoria Station, from an unaffiliated third party for
approximately $25,867,000. This amount may be adjusted based on actual rental
rates achieved on the redeveloped square feet. The Company expects to purchase
this property by November 1, 2003, however, the seller may extend the closing
date if minimum rental rates stated in the contract have not yet been achieved.
(4) New Accounting Pronouncement
On May 15, 2003, the Financial Accounting Standards Board issued Statement No.
150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY. The Statement requires issuers to classify as
liabilities (or assets in some circumstances) three classes of freestanding
financial instruments that embody obligations for the issuer.
Generally, the Statement is effective for financial instruments entered into or
modified after May 31, 2003 and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Company adopted the
provisions of the Statement on July 1, 2003.
The Company did not enter into any financial instruments within the scope of the
Statement during June 2003. To the extent stockholders request shares to be
repurchased by the Company under the Share Repurchase Program, the Company's
obligation to repurchase such shares will be classified as a liability at the
redemption amount at the date documentation is complete and accepted by the
Company in accordance with the plan documents.
F-7
<Page>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Inland Western Retail Real Estate Trust, Inc.
We have audited the accompanying Historical Summary of Gross Income and Direct
Operating Expenses ("Historical Summary") of Peoria Station ("the Property") for
the year ended December 31, 2002. This Historical Summary is the responsibility
of the management of Inland Western Retail Real Estate Trust, Inc. Our
responsibility is to express an opinion on the Historical Summary based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the Historical
Summary is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Historical
Summary. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the Historical Summary. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission and for
inclusion in the Registration Statement on Form S-11 of Inland Western Retail
Real Estate Trust, Inc., as described in note 2. The presentation is not
intended to be a complete presentation of the Property's revenues and expenses.
In our opinion, the Historical Summary referred to above presents fairly, in all
material respects, the gross income and direct operating expenses described in
note 2 of Peoria Station for the year ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
KPMG LLP
Chicago, Illinois
March 10, 2003
F-8
<Page>
PEORIA STATION
Historical Summary of Gross Income and Direct Operating Expenses
For the year ended December 31, 2002
and the six months ended June 30, 2003 (unaudited)
<Table>
<Caption>
December 31, June 30,
2002 2003 (UNAUDITED)
---------------- ----------------
Gross income:
Base rental income $ 1,524,218 779,009
Operating expense and real estate tax recoveries 479,053 229,566
---------------- ----------------
Total gross income 2,003,271 1,008,575
---------------- ----------------
Direct operating expenses:
Operating expenses 130,419 59,264
Real estate taxes 322,362 155,379
Insurance 26,179 14,923
---------------- ----------------
Total direct operating expenses 478,960 229,566
---------------- ----------------
Excess of gross income over direct operating expenses $ 1,524,310 779,009
================ ================
</Table>
See accompanying notes to historical summary of gross income and direct
operating expense.
F-9
<Page>
PEORIA STATION
Notes to Historical Summary of Gross Income and Direct Operating Expenses
For the year ended December 31, 2002
and the six months ended June 30, 2003 (unaudited)
(1) Business
Peoria Station (the "Property") is located in Phoenix, Arizona. The Property
consists of 140,019 square feet of gross leasable area and was 100% occupied at
December 31, 2002. Three tenants account for 66% of base rental revenue. Inland
Real Estate Acquisitions, Inc., on behalf of Inland Western Retail Real Estate
Trust, Inc. ("IWRRETI"), has signed a purchase and sale agreement for the
purchase of the Property from an unaffiliated third-party ("Seller").
(2) Basis of Presentation and Combination
The Historical Summary of Gross Income and Direct Operating Expenses
("Historical Summary") has been prepared for the purpose of complying with Rule
3-14 of the Securities and Exchange Commission Regulation S-X and for inclusion
in the Registration Statement on Form S-11 of IWRRETI and is not intended to be
a complete presentation of the Property's revenues and expenses. The Historical
Summary has been prepared on the accrual basis of accounting and requires
management of the Property to make estimates and assumptions that affect the
reported amounts of the revenues and expenses during the reporting period.
Actual results may differ from those estimates.
All adjustments necessary for a fair presentation have been made to the
accompanying unaudited amounts for the six months ended June 30, 2003.
(3) Gross Income
The Property leases retail space under various lease agreements with its
tenants. All leases are accounted for as operating leases. The leases include
provisions under which the Property is reimbursed for common area, real estate,
and insurance costs. Revenue related to these reimbursed costs is recognized in
the period the applicable costs are incurred and billed tenants pursuant to the
lease agreements. Certain leases contain renewal options at various periods at
various rental rates. None of the existing leases include any contingent
rentals.
Although certain leases may provide for tenant occupancy during periods for
which no rent is due and/or increases exist in minimum lease payments over the
term of the lease, rental income accrues for the full period of occupancy on a
straight-line basis. Related adjustments increased base rental income by
$335,653 for the year ended December 31, 2002.
F-10
<Page>
PEORIA STATION
Notes to Historical Summary of Gross Income and Direct Operating Expenses
For the year ended December 31, 2002
and the six months ended June 30, 2003 (unaudited)
Minimum rents to be received from tenants under operating leases, which terms
range from three to thirty-one years, in effect at December 31, 2002, are as
follows:
<Table>
<Caption>
Year Total
------------------- ------------------
2003 $ 1,563,237
2004 1,765,821
2005 1,611,422
2006 1,513,498
2007 1,331,269
Thereafter 14,420,530
------------------
Total $ 22,205,777
==================
</Table>
(4) Direct Operating Expenses
Direct operating expenses include only those costs expected to be comparable to
the proposed future operations of the Property. Repairs and maintenance expenses
are charged to operations as incurred. Costs such as depreciation, amortization,
management fees, interest expense related to mortgage debt not assumed, and
professional fees are excluded from the Historical Summary.
F-11
<Page>
APPENDIX A
PRIOR PERFORMANCE TABLES
The following prior performance tables contain information concerning real
estate programs sponsored by affiliates of our advisor which have investment
objectives similar to ours. This information has been summarized in narrative
form under "Prior Performance of Our Affiliates" in the prospectus. The tables
provide information on the performance of a number of programs. You can use the
information to evaluate the experience of our advisor's affiliates as sponsors
of the programs. The inclusion of these tables does not imply that we will make
investments comparable to those reflected in the tables or that investors in our
shares will experience returns comparable to those experienced in the programs
referred to in these tables. If you purchase our shares, you will not acquire
any ownership in any of the programs to which these tables relate. The tables
consist of:
Table I Experience in Raising and Investing Funds (unaudited)
Table II Compensation to IREIC and Affiliates (unaudited)
Table III Operating Results of Prior Programs (unaudited)
Table IV Results of Completed Programs (unaudited)
Table V Sales or Disposals of Properties (unaudited)
Table VI Acquisition of Properties by Programs* (unaudited)
* Our prospective investors may obtain copies of Table VI by contacting Inland
Western Retail Real Estate Advisory Services, Inc., our advisor.
Table VI is included in Part II of the Registration Statement filed with the
Securities and Exchange Commission of which this Prospectus is a part. Upon
written request to us or our advisor, any prospective investor may obtain,
without charge, a copy of Table VI. See also "Where You Can Find More
Information" for information on examining at, or obtaining copies from, offices
of the SEC.
Upon written request, any potential investor may obtain, without charge, the
most recent annual report on Form 10-K filed with the SEC by any public program
sponsored by any of the Inland's affiliated companies which has reported to the
SEC within the last 24 months. For a reasonable fee, the affiliated companies
will provide copies of any exhibits to such annual reports upon request.
Our investment objectives are to: (i) provide regular distributions to
stockholders in amounts which may exceed our taxable income due to the non-cash
nature of depreciation expense and, to such extent, will constitute a tax-
deferred return of capital, but in no event less than 90% of our taxable income,
pursuant to the REIT requirements; (ii) provide a hedge against inflation by
entering into leases which contain clauses for scheduled rent escalations or
participation in the growth of tenant sales, permitting us to increase
distributions and provide capital appreciation; and (iii) preserve stockholders'
capital.
The following programs have investment objectives similar to ours and are
included in the tables. Inland Retail Real Estate Trust, Inc. and Inland Real
Estate Corporation are two REITs formed primarily to invest in multi-tenant
shopping centers, Inland's Monthly Income Fund, L.P. and Inland Monthly Income
Fund II, L.P. are public real estate limited partnerships formed primarily to
acquire, operate and sell existing residential and commercial real properties.
Inland Mortgage Investors Fund, L.P., Inland Mortgage Investors Fund-II, L.P.
and Inland Mortgage Investors Fund III, L.P. were public real estate limited
partnerships formed primarily to make or acquire loans secured by mortgages on
improved, income producing multifamily residential properties.
A-1
<Page>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I is intended to present information on a dollar and percentage basis
showing the experience of Inland Real Estate Investment Corporation ("IREIC"),
of which the Advisor is a wholly owned subsidiary, in raising and investing
funds in prior programs where the offering closed in the three years prior to
December 31, 2002. The table is intended to focus on the dollar amount available
for investment in properties expressed as a percentage of total dollars raised.
However, since no offering closed in the three years prior to December 31, 2002,
Table I is not included.
TABLE II
COMPENSATION TO IREIC AND AFFILIATES (A)
Table II summarizes the amount and type of compensation paid to Inland Real
Estate Investment Corporation and its affiliates during the three years ended
December 31, 2002 in connection with the prior programs.
Some partnerships acquired their properties from affiliates of our Advisor which
had purchased such properties from unaffiliated third parties.
A-2
<Page>
TABLE II
COMPENSATION TO IREIC AND AFFILIATES (A)
(000'S OMITTED)
<Table>
<Caption>
Inland Retail Inland Real Inland's Inland Monthly
Real Estate Estate Monthly Income Income
Trust, Inc. Corporation Fund, L.P. Fund II, L. P.
---------------------------------------------------------------------
Date offering commenced 02/11/99 10/14/94 08/03/87 08/04/88
Dollar amount raised $ 1,217,656 673,860 30,000 25,324
=====================================================================
Total amounts paid to general partner or affiliates
from proceeds of offerings:
Selling commissions and underwriting fees 105,809(C) 49,869(C) 273(B) 423(B)
Other offering expenses (D) 5,786 2,350 116 230
Acquisition cost and expense 844 925 2,550(E) 1,706(E)
=====================================================================
Dollar amount of cash available from
operations before deducting payments to
general partner or affiliates (F) 78,357 201,947 4,867 4,286
=====================================================================
Amounts paid to general partner or affiliates
related to operations: (J)
Property management fees (G) 7,403 3,045 69 55
Advisor asset management fee 5,413 2,414 0 0
Accounting services 578 77 50 48
Data processing service 229 43 27 27
Legal services 94 54 14 11
Mortgage servicing fees 253 50 0 0
Mortgage interest expense 0 27 0 0
Acquisition costs expensed 33 138 0 0
Other administrative services 849 138 70 44
Property upgrades 0 0 0 0
Dollar amount of property sales and refinancings before
payments to general partner and affiliates (H):
Cash 0 1,314 4,964 0
Notes 0 0 0 0
Dollar amounts paid or payable to general partner or
affiliates from sales and refinancings (I):
Sales commissions 0 0 0 0
Participation in cash distributions 0 0 0 0
</Table>
A-3
<Page>
TABLE II
COMPENSATION TO IREIC AND AFFILIATES (A)
NOTES TO TABLE II
(A) The figures in this Table II relating to proceeds of the offerings are
cumulative and are as of December 31, 2002 and the figures relating to cash
available from operations are for the three years ending December 31, 2002.
The dollar amount raised represents the cash proceeds collected by the
partnerships or program. Amounts paid or payable to IREIC or affiliates
from proceeds of the offerings represent payments made or to be made to
IREIC and affiliates from investor capital contributions.
(B) The selling commissions paid to an affiliate is net of amounts which were
in turn paid to third party soliciting dealers.
(C) The selling commissions paid to an affiliate includes amounts which were in
turn paid to third party soliciting dealers.
(D) Consists of legal, accounting, printing and other offering expenses,
including amounts to be paid to Inland Securities Corporation to be used as
incentive compensation to its regional marketing representatives and
amounts for reimbursement of the general partner for marketing, salaries
and direct expenses of its employees while directly engaged in registering
and marketing the Units and other marketing and organization expenses.
(E) Represents acquisition fees paid to IREIC and its affiliates in connection
with the acquisition of properties.
(F) See Note (B) to Table III.
(G) An affiliate provides property management services for all properties
acquired by the partnerships or program. Management fees have not exceeded
4.5% of the gross receipts from the properties managed.
(H) See Table V and Notes thereto regarding sales and disposals of properties.
(I) Real estate sales commissions and participations in cash distributions are
paid or payable to IREIC and/or its affiliates in connection with the sales
of properties in the public partnership programs. Payments of all amounts
shown are subordinated to the receipt by the limited partners of their
original capital investment. See Table V and Notes thereto.
(J) On July 1, 2000, IREC completed the acquisition of Inland Real Estate
Advisory Services, Inc., the former advisor, and Inland Commercial Property
Management, Inc., the former property manager (the "Merger"). Each of these
entities was merged into subsidiaries that are wholly owned by IREC. As a
result of the merger, IREC is now "self-administered." IREC no longer pays
advisory or property management fees but instead has hired an internal
staff to perform these tasks.
A-4
<Page>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents operating results for programs, the offerings of which closed
during each of the five years ended December 31, 2002. The operating results
consist of:
- The components of taxable income (loss);
- Taxable income or loss from operations and property sales;
- Cash available and source, before and after cash distributions to
investors; and
- Tax and distribution data per $1,000 invested.
Based on the following termination dates of the offerings, only IREC is included
in Table III.
- Inland Retail Real Estate Trust, Inc. - currently offering shares
- Inland's Monthly Income Fund, L.P. - offering terminated in 1988
- Inland Monthly Income Fund II, L.P. - offering terminated in 1990
- Inland Mortgage Investors Fund, L.P. - offering terminated in 1987
- Inland Mortgage Investors Fund-II, L.P. - offering terminated in 1988
- Inland Mortgage Investors Fund III, L.P. - offering terminated in 1991
A-5
<Page>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
(000'S OMITTED, EXCEPT FOR AMOUNTS PRESENTED PER $1,000 INVESTED)
INLAND REAL ESTATE CORPORATION
<Table>
<Caption>
2002 2001 2000 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------
Gross revenues $ 156,358 155,048 150,892 123,788 73,302 29,422 6,328 1,180
Profit on sale of properties 1,546 467 0 0 0 0 0 0
Less:
Merger consideration costs (D) 0 0 68,775 0 0 0 0 0
Operating expenses 48,967 47,477 47,727 40,303 21,017 8,863 1,873 327
Interest expense 34,428 34,797 33,682 25,654 13,422 5,655 597 164
Program expenses 5,805 5,367 6,493 7,298 3,114 1,576 449 22
Depreciation & amortization 29,428 27,208 26,219 20,361 11,663 4,681 957 170
----------------------------------------------------------------------------------------
Net income (loss)-GAAP basis $ 39,276 40,666 (32,004) 30,172 24,086 8,647 2,452 497
========================================================================================
Taxable income (loss) (A): 0 0 0 0 0 0 0 0
========================================================================================
Cash available (deficiency) from
operations (B) 69,451 74,062 58,434 53,636 40,142 15,857 5,530 978
Cash available from sales (C) 8,175 2,364 0 0 0 0 0 0
----------------------------------------------------------------------------------------
Total cash available before
distributions and special items 77,626 76,426 58,434 53,636 40,142 15,857 5,530 978
Less distributions to investors:
From operations 61,913 62,367 54,368 48,773 33,454 11,899 3,286 607
From sales and refinancings 0 467 0 0 0 0 0 0
----------------------------------------------------------------------------------------
Cash available after distributions
before special items 15,713 13,592 4,066 4,863 6,688 3,958 2,244 371
Special items: 0 0 0 0 0 0 0 0
----------------------------------------------------------------------------------------
Cash available after distributions
and special items $ 15,713 13,592 4,066 4,863 6,688 3,958 2,244 371
========================================================================================
Tax data per $1,000 invested (A): 0 0 0 0 0 0 0 0
Distribution data per $1,000
invested:
Cash distributions to investors:
Source (on GAAP basis):
Investment income 94 93 90 89 88 86 82 78
Source (on cash basis):
Sales 0 0 0 0 0 0 0 0
Operations (E) 94 93 90 89 88 86 82 78
Percent of properties remaining
unsold(F) 100.00%
==========
</Table>
A-6
<Page>
TABLE III--(CONTINUED)
OPERATING RESULTS OF PRIOR PROGRAMS
NOTES TO TABLE III
(A) Inland Real Estate Corporation qualified as a real estate investment trust
("REIT") under the Internal Revenue Code for federal income tax purposes
commencing with the tax year ending December 31, 1995. Since it qualified
for taxation as a REIT, it generally will not be subject to federal income
tax to the extent it distributes its REIT taxable income to its
stockholders. If Inland Real Estate Corporation fails to qualify as a REIT
in any taxable year, it will be subject to federal income tax on its
taxable income at regular corporate tax rates. However, even if the program
qualifies for taxation as a REIT, it may be subject to certain state and
local taxes on its income and property and federal income and excise taxes
on its undistributed income.
(B) "Cash Available (Deficiency) from Operations," represents all cash revenues
and funds received by the programs, including but not limited to operating
income less operating expenses, and interest income. These amounts do not
include payments made by the programs from offering proceeds nor do they
include proceeds from sales or refinancings. These amounts also exclude
advances from or repayments to IREIC and affiliates which are disclosed
elsewhere in the table and include principal payments on long-term debt.
For example:
<Table>
<Caption>
Inland Real Estate Corporation
(000's omitted)
2002 2001 2000 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------
Net cash provided by $ 69,500 74,091 58,505 53,724 40,216 15,924 5,530 978
operating activities per
the Form 10-K annual
report or 10-Q quarterly
report
Principal payments on
long-term debt (49) (29) (71) (88) (74) (67) - -
-----------------------------------------------------------------------------------------------
$ 69,451 74,062 58,434 53,636 40,142 15,857 5,530 978
===============================================================================================
</Table>
(C) See Table V and Notes thereto regarding sales and disposals of properties.
(D) On July 1, 2000, IREC completed the acquisition of Inland Real Estate
Advisory Services, Inc., the former advisor, and Inland Commercial Property
Management, Inc., the former property manager (the "Merger"). Each of these
entities was merged into subsidiaries that are wholly owned by IREC. IREC
issued an aggregate of 6,181,818 shares of its common stock valued at
$11.00 per share to Inland Real Estate Investment Corporation and The
Inland Property Management Group, Inc. The expense of these shares and
additional costs relating to the merger are reported as an operational
expense on IREC's Consolidated Statements of Operations.
A-7
<Page>
TABLE III--(CONTINUED)
OPERATING RESULTS OF PRIOR PROGRAMS
NOTES TO TABLE III
(E) Distributions by IREC to the extent of its current and accumulated earnings
and profits for federal income tax purposes are taxable to stockholders as
ordinary income. Distributions in excess of these earnings and profits
generally are treated as a non-taxable reduction of the stockholder's basis
in the shares to the extent thereof, and thereafter as taxable gain (a
return of capital). These distributions in excess of earnings and profits
will have the effect of deferring taxation of the amount of the
distribution until the sale of the stockholder's shares.
<Table>
<Caption>
2002 2001 2000 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------
% of Distribution
representing:
Ordinary income 69.52 78.33 76.37 73.67 76.22 74.19 83.50 94.24
Return of Capital 30.48 21.67 23.63 26.33 23.78 25.81 16.50 5.76
--------------------------------------------------------------------------------------------
100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
</Table>
(F) Percent of properties remaining unsold represents original total
acquisition costs of properties retained divided by original total
acquisition cost of all properties in the program, plus the total of
uninvested offering proceeds (if any). Sales proceeds from the sale of
three properties were used to acquire new properties.
A-8
<Page>
TABLE IV
RESULTS OF COMPLETED PROGRAMS
(000'S OMITTED, EXCEPT FOR AMOUNTS PRESENTED PER $1,000 INVESTED)
Table IV is a summary of operating and disposition results of prior programs
sponsored by affiliates of our advisor, which during the five years ended prior
to December 31, 2002 have sold their properties and either hold notes with
respect to such sales or have liquidated. Three programs with investment
objectives similar to ours have disposed of all of their properties during the
five years ended prior to December 31, 2002.
<Table>
<Caption>
PROGRAM NAME INLAND MORTGAGE INLAND MORTGAGE INLAND MORTGAGE
INVESTORS FUND, L.P. INVESTORS FUND L.P.- II INVESTORS FUND III, L.P.
Dollar amount raised 10,065 9,388 2,837
Number of properties/loans purchased 15 13 7
Date of closing of offering 02/87 08/88 01/91
Date of first sale of property 12/88 09/89 06/93
Date of final sale of property 03/99 12/98 10/98
Tax and distribution data per
$1,000 invested (A):
Federal income tax results:
Ordinary income (loss):
Operations 547 633 419
Recapture 0 0 0
Capital Gain 30 0 0
Deferred Gain:
Capital 0 0 0
Ordinary 0 0 0
Cash distributions to investors (cash basis):
Source (on GAAP basis)
Investment income 624 631 421
Return of capital 745 809 827
Source (on cash basis)
Sales 745 809 827
Operations 624 631 421
</Table>
(A) Data per $1,000 invested is presented as of December 31, 2002. See Table V
and Notes thereto regarding sales and disposals of properties.
A-9
<Page>
TABLE V
SALES OR DISPOSALS OF PROPERTIES
Table V presents information on the results of the sale or disposals of
properties in programs with investment objectives similar to ours during the
three years ended December 31, 2002. Since January 1, 2000, programs sponsored
by affiliates of our advisor had five sales transactions. The table provides
certain information to evaluate property performance over the holding period
such as:
- Sales proceeds received by the partnerships in the form of cash down
payments at the time of sale after expenses of sale and secured notes
received at sale;
- Cash invested in properties;
- Cash flow (deficiency) generated by the property; - Taxable gain
(ordinary and total); and - Terms of notes received at sale.
The entities listed in Table V are Inland's Monthly Income Fund, L.P. and IREC.
- Inland Real Estate Corporation - offering terminated in 1999.
SALES OR DISPOSALS OF PROPERTIES (A)
(000'S OMITTED)
<Table>
<Caption>
Selling Mortgage Secured
Cash Received, Commissions at Notes
Date Date of net of Closing Paid or Payable Time of Received
Acquired Sale Costs(B) to Inland Sale at Sale
- ---------------------------------------------------------------------------------------------------------------------------
Monthly Income Fund I - McHenry Plaza 10/19/87 07/19/00 3,249 69 0 0
Monthly Income Fund I - Rantoul Walmart 08/05/88 11/17/00 1,715 83 985 0
IREC - Lincoln Park Place 01/24/97 04/17/01 1,314 0 1,050 0
IREC - Antioch Plaza 12/95 03/28/02 943 0 875 0
IREC - Shorecrest Plaza 07/97 06/12/02 3,107 0 2,989 0
<Caption>
Adjust
Resulting Partnership
from Net Original Capital
Application Selling Mortgage Invested
of GAAP Price Financing (C) Total
- --------------------------------------------------------------------------------------------------------------
Monthly Income Fund I - McHenry Plaza 0 3,180 0 1,967 1,967
Monthly Income Fund I - Rantoul Walmart 0 2,617 0 2,656 2,656
IREC - Lincoln Park Place 0 2,364 0 1,897 1,897
IREC - Antioch Plaza 0 1,818 875 753 1,628
IREC - Shorecrest Plaza 0 6,085 2,978 2,947 5,925
</Table>
<Table>
<Caption>
Excess (deficiency) Amount of
of property subsidies
operating cash included in Total Taxable
receipts over cash operating cash Gain (loss) Ordinary Income Capital
expenditures (D) receipts from Sale from Sale Gain (loss)
- -----------------------------------------------------------------------------------------------------------------------------------
Monthly Income Fund I - McHenry Plaza 1,092 0 374 0 374
Monthly Income Fund I - Rantoul Walmart 2,534 0 787 0 787
IREC - Lincoln Park Place 218 0 467 0 467
IREC - Antioch Plaza 130 0 0(E) 0 0
IREC - Shorecrest Plaza 1,556 0 0(E) 0 0
</Table>
A-10
<Page>
TABLE V - (CONTINUED)
SALES OR DISPOSALS OF PROPERTIES
NOTES TO TABLE V
(A) The table includes all sales of properties by the programs with investment
objectives similar to ours during the three years ended December 31, 2002.
All sales have been made to parties unaffiliated with the partnerships.
(B) Consists of cash payments received from the buyers and the assumption of
certain liabilities by the buyers at the date of sale, less expenses of
sale.
(C) Amounts represent the dollar amount raised from the offerings, less sales
commissions and other offering expenses plus additional costs incurred on
the development of the land parcels.
(D) Represents "Cash Available (Deficiency) from Operations (including
subsidies)" as adjusted for applicable "Fixed Asset Additions" through the
year of sale.
(E) For tax purposes, this sale qualified as part of a tax-deferred exchange.
As a result, no taxable gain will be recognized until the replacement
property is disposed of in a subsequent taxable transaction.
A-11
<Page>
APPENDIX B
DIVIDEND REINVESTMENT PLAN
INLAND WESTERN RETAIL REAL ESTATE TRUST, INC.
DISTRIBUTION REINVESTMENT PROGRAM
Inland Western Retail Real Estate Trust, Inc., a Maryland corporation (the
"Company"), pursuant to its Articles of Incorporation (the "Articles") has
adopted a Distribution Reinvestment Program (the "DRP"), the terms and
conditions of which are set forth below. Capitalized terms shall have the same
meaning as set forth in the Company's Prospectus dated ____________ (as the same
may be supplemented or modified from time to time) unless otherwise defined
herein.
i. Distributions. As agent for the Stockholders who purchase Shares from
the Company pursuant to the prospectus dated ___________ (the "Offering") and
elect to participate in the DRP (the "Participants"), the Company will apply all
distributions, paid with respect to the Shares held by each Participant (the
"Distributions"), including Distributions paid with respect to any full or
fractional Shares acquired under the DRP, to the purchase of the Shares for said
Participants directly, if permitted under state securities laws and, if not,
through the Dealer Manager or Soliciting Dealers registered in the Participant's
state of residence. Neither the Company nor its Affiliates will receive a fee
for selling Shares under the DRP.
ii. Procedure for Participation. Any Stockholder who purchases Shares
pursuant to the Company's Offering may elect to become a Participant by
completing and executing the Subscription Agreement or other appropriate
authorization form as may be available from the Company, the Dealer Manager or
the Soliciting Dealer. Participation in the DRP will begin with the next
Distribution payable after receipt of a Participant's subscription or
authorization. Shares will be purchased under the DRP on the record date for the
Distribution used to purchase the Shares. Distributions for Shares acquired
under the DRP will be paid at the same time as Distributions are paid on Shares
purchased outside the DRP and are calculated with a daily record and
Distribution declaration date. Each Participant agrees that if, at any time
prior to listing of the Shares on a national stock exchange or inclusion of the
Shares for quotation on a national market system, he or she fails to meet the
suitability requirements for making an investment in the Company or cannot make
the other representations or warranties set forth in the Subscription Agreement,
he or she will promptly so notify the Company in writing.
iii. Purchase of Shares. Participants will acquire Shares from the Company
at a fixed price of $10.00 per Share until the first to occur of (i) the
termination of the Offering, or (ii) the public offering price per Share in the
Offering is increased above $10.00 per share. Thereafter, Participants will
acquire Shares from the Company at a price equal to 95% of the Market Price of a
Share on the date of purchase until such time as the Company's Shares are listed
on a national stock exchange or included for quotation on a national market
system. In the event of such listing or inclusion, Shares purchased by the
Company for the DRP will be purchased on such exchange or market, at the
prevailing market price, and will be sold to Stockholders at such price. The
discount per Share is never intended to exceed 5% of the current Market Price of
a Share on the date of purchase. Participants in the DRP may also purchase
fractional Shares so that 100% of the Distributions will be used to acquire
Shares. However, a Participant will not be able to acquire Shares under the DRP
to the extent such purchase would cause it to exceed the Ownership Limit or
other Share ownership restrictions imposed by the Articles.
It is possible that a secondary market will develop for the Shares, and
that the Shares may be bought and sold on the secondary market at prices lower
or higher than the $10.00 per Share price which will be paid under the DRP.
The Company shall endeavor to acquire Shares on behalf of Participants at
the lowest price then available. However, the Company does not guarantee or
warrant that the Participant will be acquiring Shares at the lowest possible
price.
If the Company's Shares are listed on a national stock exchange or
included for quotation on a national market system, the reservation of any
Shares from the Offering for issuance under the DRP, which have not been
B-1
<Page>
issued as of the date of such listing or inclusion, will be canceled, and such
Shares will continue to have the status of authorized but unissued Shares. Those
unissued Shares will not be issued unless they are first registered with the
Securities and Exchange Commission (the "Commission") under the Act and under
appropriate state securities laws or are otherwise issued in compliance with
such laws.
It is understood that reinvestment of Distributions does not relieve a
Participant of any income tax liability which may be payable on the
Distributions.
iv. Share Certificates. Within 90 days after the end of the Company's
fiscal year, the Company will issue certificates evidencing ownership of Shares
purchased through the DRP during the prior fiscal year. The ownership of the
Shares will be in book-entry form prior to the issuance of such certificates.
v. Reports. Within 90 days after the end of the Company's fiscal year, the
Company will provide each Participant with an individualized report on his or
her investment, including the purchase date(s), purchase price and number of
Shares owned, as well as the dates of distribution and amounts of Distributions
received during the prior fiscal year. The individualized statement to
Stockholders will include receipts and purchases relating to each Participant's
participation in the DRP including the tax consequences relative thereto.
vi. Termination by Participant. A Participant may terminate participation
in the DRP at any time, without penalty, by delivering to the Company a written
notice. Prior to listing of the Shares on a national stock exchange or inclusion
of the Shares for quotation on a national market system, any transfer of Shares
by a Participant to a non-Participant will terminate participation in the DRP
with respect to the transferred Shares. If a Participant terminates DRP
participation, the Company will provide the terminating Participant with a
certificate evidencing the whole shares in his or her account and a check for
the cash value of any fractional share in such account. Upon termination of DRP
participation, Distributions will be distributed to the Stockholder in cash.
vii. Amendment or Termination of DRP by the Company. The Directors of the
Company may by majority vote (including a majority of the Independent Directors)
amend or terminate the DRP for any reason upon 30 days' written notice to the
Participants.
viii. Liability of the Company. The Company shall not be liable for any act
done in good faith, or for any good faith omission to act, including, without
limitation, any claims or liability: (a) arising out of failure to terminate a
Participant's account upon such Participant's death prior to receipt of notice
in writing of such death; and (b) with respect to the time and the prices at
which Shares are purchased or sold for a Participant's account. To the extent
that indemnification may apply to liabilities arising under the Act or the
securities laws of a state, the Company has been advised that, in the opinion of
the Commission and certain state securities commissioners, such indemnification
is contrary to public policy and, therefore, unenforceable.
ix. Governing Law. This DRP shall be governed by the laws of the State of
Maryland.
B-2
<Page>
APPENDIX C
INLAND WESTERN RETAIL REAL ESTATE TRUST, INC.
INSTRUCTIONS TO SUBSCRIBERS. Any person desiring to subscribe for our
common shares carefully read and review the Prospectus, as supplemented to
date, and if he/she desires to subscribe for shares, complete the
Subscription Agreement/Signature Page which follows these instructions.
Follow the appropriate instruction listed below for the items indicated.
Please print in ballpoint pen or type the information.
<Table>
MAKE CHECK PLEASE MAIL THE GREEN COPY, THE PINK COPY, AND YOUR CHECK MADE PAYABLE TO "LBNA/ESCROW AGENT FOR
PAYABLE TO: IWRRET" TO: Inland Securities Corporation, 2901 Butterfield Road, Oak Brook, Illinois 60523, Attn:
Investor Services. Please use ballpoint pen or type the information. If you have questions, please
call 800-826-8228.
FOR CUSTODIAL ACCOUNTS CHECKS SHOULD BE MADE PAYABLE TO THE CUSTODIAN AND SENT ALONG WITH THIS
FORM DIRECTLY TO CUSTODIAN.
INVESTMENT Item 1(a) - Enter the number of shares to be purchased and the dollars and cents amount of the
A purchase. Minimum purchase 300 shares ($3,000). Qualified Plans 100 shares ($1,000). (Iowa
requires 300 shares ($3,000) for IRA accounts; Minnesota
requires 200 shares ($2,000) for IRA and qualified
accounts).
Check the box to indicate whether this is an initial or an additional investment. The "Additional
Investment" box must be checked in order for this subscription to be combined with another
subscription for purposes of a volume discount. COMPLETED SUBSCRIPTION AGREEMENT IS REQUIRED FOR
EACH INITIAL AND ADDITIONAL INVESTMENT.
Item 1(b) - Deferred Commission Option: Please check the box if you have agreed with your
Soliciting Dealer to elect the Deferred Commission Option, as described in the prospectus, as
supplemented to date. By electing the Deferred Commission Option, you are required to pay only
$9.40 per share purchased upon subscription. For the next six years, following the year of
subscription, you will have a sales commission of $0.10 per share deducted from and paid out of
cash distributions otherwise distributable to you. Election of the Deferred Commission Option
shall authorize the Company to withhold such amounts from case distributions otherwise payable to
you and to pay them as described in the "Plan of Distribution-Deferred Commission Option" section
of the prospectus, as supplemented to date.
REGISTRATION Item 2 - Enter the exact name in which the shares are to be held. For co-owners, enter the names of
INFORMATION all owners. For investments by qualified plans, include the exact name of the plan. For
B investments by qualified plans, enter the name of the custodian or trustee on the first line and
FBO the name of the investor on the second line. IF THIS IS AN ADDITIONAL PURCHASE BY A QUALIFIED
PLAN, PLEASE USE THE SAME EXACT PLAN NAME AS PREVIOUSLY USED.
Item 3 - Enter mailing address, state of residence and telephone number of owner. For qualified
investments, please enter mailing address of custodian or trustee.
Item 4 - Enter the residence address if different than the mailing address. For qualified
investments, please enter the residence address of the investor.
Item 5 - Enter birth date(s) or date of incorporation.
Item 6 - Check the appropriate box. If the owner is a non-resident alien, he must apply to the
United States Internal Revenue Service for an identification number via Form SS-4 for an
individual or SS-5 for a corporation, and supply the number to the Company as soon as it is
available.
Item 7 - Check this box if the owner is an employee of Inland or an individual who has been
continuously affiliated with Inland as an independent contractor.
Item 8 - Enter the Social Security number or Taxpayer I.D. number. The owner is certifying that
this number is correct. For qualified investments please enter both the investor's social
security number (for identification purposes) and the custodian or trustee's Taxpayer I.D. number
(for tax purposes).
TYPE OF Item 9 - Check the appropriate box to indicate the type of entity which is subscribing. If this
OWNERSHIP is an additional purchase, this should be completed exactly the same as previous investment. If
C the subscriber is a pension or profit sharing plan, indicate whether it is taxable or exempt
from taxation under Section 501A of the Internal Revenue Code. If you check the Individual
Ownership box and you wish to designate a Transfer on Death beneficiary, you may check the "TOD"
box and you must fill out the Transfer on Death Form in order to effect the designation.
DISTRIBUTION Item 10 - Check the appropriate box to indicate distribution options.
OPTIONS
D Item 10(a) - Check if you desire distributions to be mailed to address of record in Section B, Item 2
above.
Item 10(b) - Check if you desire to participate in Distribution Reinvestment Program.
Item 10(c) - If owner desires direct deposit of his/her/their cash distributions to an account or
address other than as set forth in the Subscription Agreement/Signature Page, please check
preferred option; Mail or Electronic Funds Transfer (EFT) and complete the information needed.
For EFT, please enclose a voided check and provide the Bank ABA number in addition to the account
number.
</Table>
C-1
<Page>
<Table>
SIGNATURE Item 11 - The Subscription Agreement/Signature Page MUST BE EXECUTED by the
owner(s), and if applicable, E the trustee or custodian.
BROKER/DEALER Item 12 - Enter the name of the broker/dealer and the name of the Registered Representative, along with the
REGISTERED street address, city, state, zip code, telephone number, fax and e-mail of the Registered Representative.
REPRESENTATIVE By executing the Subscription Agreement/Signature Page, the Registered Representative
substantiates compliance with the conduct rules of the NASD, by certifying that the Registered
Representative has reasonable grounds to believe, based on information obtained from the investor
concerning his, her or its investment objectives, other investments, financial situation and
needs and any other information known by such Registered Representative, that investment in the
Company is suitable for such investor in light of his, her or its financial position, net worth
and other suitability characteristics and that the Registered Representative has informed the
investor of all pertinent facts relating to the liability, liquidity and marketability of an
investment in the Company during its term. The Registered Representative (authorized signature)
should sign where provided.
Item 12(a) - Check the box to indicate whether the broker-dealer agrees to the Deferred
Compensation Option if the subscriber has elected the Deferred Commission Option; the
broker-dealer must sign to acknowledge that agreement.
Item 12(b) - Check the box to indicate whether the Registered Representative chooses to purchase
common stock net of selling commissions.
REGISTERED Item 13 - Check the box to indicate whether its subscription was solicited or recommended by an investment
INVESTMENT ADVISOR advisor/broker-dealer whose agreement with the subscriber includes a fixed or "wrap" fee feature for
(RIA) advisory and related brokerage services, and, accordingly, may not charge the regular selling
G commission. That box must be checked in order for such subscribers to purchase shares net of
the selling commissions.
SUBMISSION OF The properly completed and executed Green and Pink copies of the Subscription Agreement/Signature Page
SUBSCRIPTION together with a CHECK MADE PAYABLE TO "LBNA/ESCROW AGENT FOR IWRRET" should be returned to the
owner's Registered Representative or the offices of Inland Securities Corporation, 2901
Butterfield Road, Oak Brook, Illinois 60523. FOR CUSTODIAL ACCOUNTS CHECKS SHOULD BE MADE PAYABLE
TO THE CUSTODIAN AND SENT ALONG WITH THIS FORM DIRECTLY TO CUSTODIAN.
</Table>
NOTE: If a person other than the person in whose name the shares will be held
is reporting the income received from the Company, you must notify the
Company in writing of that person's name, address and Social Security
number.
ALL INVESTORS AND THEIR REGISTERED REPRESENTATIVES MUST SIGN THE SUBSCRIPTION
AGREEMENT/SIGNATURE PAGE PRIOR TO TENDING ANY FUNDS FOR INVESTMENT IN SHARES.
CALIFORNIA INVESTORS
All Certificates representing shares which are sold in the State of California
will bear the following legend conditions. IT IS UNLAWFUL TO CONSUMMATE A SALE
OR TRANSFER OF THIS SECURITY OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFORE, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE
COMMISSIONER'S RULES.
Any subscriber seeking to purchase shares pursuant to a discount offered by the
Company must submit such request in writing and set forth the basis for the
request. Any such request will be subject to verification by the Company.
Lack of Liquidity: There is no current market for the shares and the investors
may not be able to sell the securities.
C-2
<Page>
[LOGO]
INLAND WESTERN RETAIL REAL ESTATE TRUST, INC.
2901 BUTTERFIELD ROAD, OAK BROOK, ILLINOIS 60523 ~ 800.826.8228
SUBSCRIPTION AGREEMENT/SIGNATURE PAGE FOR PROSPECTUS DATED ______________
PLEASE READ THIS SUBSCRIPTION AGREEMENT/SIGNATURE PAGE
AND THE TERMS AND CONDITIONS BEFORE SIGNING.
SUBSCRIBER MUST READ THE SUBSCRIPTION INSTRUCTIONS.
A - INVESTMENT
(1)a This subscription is in the amount of $_________________ for the purchase
of ________________ shares of Inland Western Retail Real Estate Trust, Inc.
at $10 per share. Minimum initial investment: 300 shares (100 shares for
IRA, Keogh and qualified plan accounts-Iowa requires 300 Shares for IRA
accounts; Minnesota requires 200 shares for IRA and qualified plan
accounts).
THIS IS AN: / / INITIAL INVESTMENT / / ADDITIONAL INVESTMENT A completed
Subscription Agreement is required for each initial and additional
investment.
(1)b / / CHECK THE BOX TO ELECT THE DEFERRED COMMISSION OPTION.(This election
must be agreed to by the broker/dealer listed on the following page)
(1)c / / REGISTERED REPRESENTATIVE NAV PURCHASE
B - TYPE OF OWNERSHIP
NON-CUSTODIAL OWNERSHIP
MAKE CHECK PAYABLE TO: LBNA/ESCROW AGENT FOR IWRRET
(2)a / / INDIVIDUAL OWNERSHIP - one signature required
/ / TOD (FILL OUT TOD FORM TO EFFECT DESIGNATION)
/ / JOINT TENANTS WITH RIGHT OF SURVIVORSHIP - all parties must sign
/ / COMMUNITY PROPERTY - all parties must sign
/ / TENANTS IN COMMON - all parties must sign
/ / TENANTS BY THE ENTIRETY - all parties must sign
/ / CORPORATE OWNERSHIP - authorized signature required
/ / PARTNERSHIP OWNERSHIP - authorized signature required
/ / LLC OWNERSHIP - authorized signature required
/ / UNIFORM GIFTS TO MINORS ACT - custodian signature required
STATE OF ________________ A CUSTODIAN FOR___________________________
/ / PENSION OR PROFIT SHARING PLAN - trustee signature(s) required
/ / TAXABLE / / EXEMPT UNDER Section 501A
NAME OF TRUSTEE OR OTHER ADMINISTRATOR______________________________
____________________________________________________________________
/ / TRUST _ trustee or grantor signature(s) required
/ / TAXABLE / / GRANTOR A OR B DATE TRUST ESTABLISHED _____________
NAME OF TRUSTEE OR OTHER ADMINISTRATOR______________________________
____________________________________________________________________
/ / ESTATE - personal representative signature required
/ / OTHER (SPECIFY) ____________________________________________________
CUSTODIAL OWNERSHIP
MAKE CHECK PAYABLE TO THE CUSTODIAN LISTED BELOW AND SEND ALL
PAPERWORK DIRECTLY TO THE CUSTODIAN
(2)a / / TRADITIONAL IRA - custodian signature required
/ / ROTH IRA - custodian signature required
/ / KEOGH - trustee signature required
/ / SIMPLIFIED EMPLOYEE PENSION/TRUST (S.E.P.) - trustee signature required
/ / PENSION OR PROFIT SHARING PLAN - custodian signature required
/ / TAXABLE / / EXEMPT UNDER Section 501A
NAME OF TRUSTEE OR OTHER ADMINISTRATOR______________________________
____________________________________________________________________
/ / OTHER (SPECIFY) ____________________________________________________
(2)b
-------------------------------------------------------------------------
NAME OF CUSTODIAN OR TRUSTEE
-------------------------------------------------------------------------
MAILING ADDRESS
-------------------------------------------------------------------------
CITY,STATE, ZIP
(2)c CUSTODIANINFORMATION TO BE COMPLETED BY CUSTODIAN LISTED ABOVE
CUSTODIAN TAX ID # ____-_____________________
CUSTODIAL ACCOUNT # _____________________________________
CUSTODIAN TELEPHONE ____-________-________________
C - SUBSCRIBER INFORMATION
(3) SUBSCRIBER
/ / Mr. / / Mrs. / / Ms. _________________________________________________
CO-SUBSCRIBER
/ / Mr. / / Mrs. / / Ms. _________________________________________________
(4) MAILING ADDRESS _________________________________________________
CITY, STATE & ZIP CODE _________________________________________________
(5) RESIDENCE ADDRESS
(if different from above) _________________________________________________
CITY, STATE & ZIP CODE
_________________________________________________
(6) HOME TELEPHONE ____-____-_____
BUSINESS TELEPHONE ____-____-_____
EMAIL ADDRESS _________________________________________________
(7) BIRTH DATE/DATE
OF INCORPORATION ____/_____/_______ MM/DD/YYYY
CO-SUBSCRIBER BIRTH
DATE ____/_____/_______ MM/DD/YYYY
(8) SOCIAL SECURITY # ____-____-_____
CO-SUBSCRIBER SOCIAL
SECURITY # ____-____-_____
TAX ID # ____-__________
(9) PLEASE INDICATE CITIZENSHIP STATUS
/ / U.S. CITIZEN / / RESIDENT ALIEN / / NON-RESIDENT ALIEN
(10) / / EMPLOYEE OR AFFILIATE
C-3
<Page>
D - DISTRIBUTION OPTIONS
DISTRIBUTION OPTIONS FOR NON_CUSTODIAL ACCOUNTS
(11)a/ / MAIL TO ADDRESS OF RECORD
(11)b/ / DISTRIBUTION REINVESTMENT PROGRAM: Subscriber elects to participate in
the Distribution Reinvestment Program described in the Prospectus.
(11)c/ / DISTRIBUTIONS DIRECTED TO:
/ / VIA MAIL COMPLETE INFORMATION BELOW.
/ / VIA ELECTRONIC DEPOSIT (ACH) COMPLETE INFORMATION BELOW. See ACH
language on page 2 of the instructions. MUST ENCLOSE VOIDED CHECK
/ / CHECKING / / SAVINGS
-------------------------------------------------------------------------
NAME OF BANK, BROKERAGE FIRM OR INDIVIDUAL
-------------------------------------------------------------------------
MAILING ADDRESS
-------------------------------------------------------------------------
CITY, STATE, ZIP
---------------------------- ----------------------------------------
BANK ABA # (FOR ACH ONLY) ACCOUNT NUMBER-MUST BE FILLED IN
MUST ENCLOSE VOIDED CHECK
DISTRIBUTION OPTIONS FOR CUSTODIAL ACCOUNTS
(12)a/ / MAIL TO CUSTODIAL ACCOUNT
(12)b/ / DISTRIBUTION REINVESTMENT PROGRAM: Subscriber elects to participate in
the Distribution Reinvestment Program described in the Prospectus.
E - SIGNATURE
(13) THE UNDERSIGNED CERTIFIES, under penalties of perjury (i) that the taxpayer
identification number shown on the Subscription Agreement/Signature Page is
true, correct and complete, and (ii) that he is not subject to backup
withholding either because he has not been notified that he is subject to
backup withholding as a result of a failure to report all interest or
distributions, or the Internal Revenue Service has notified him that he is
no longer subject to backup withholding.
The undersigned further acknowledges and/or represents (or in the case of
fiduciary accounts, the person authorized to sign on such Investor's
behalf) the following:
(a) acknowledges receipt, not less than five (5) business days prior to
the signing of this Subscription Agreement, of the Prospectus of the
COMPANY RELATING TO THE SHARES, WHEREIN THE TERMS AND CONDITIONS OF
THE OFFERING OF THE SHARES ARE DESCRIBED, including among other
things, the restrictions on ownership and transfer of shares, which
require, under certain circumstances, that a holder of shares shall
give written notice and provide certain information to the Company.
(Does not apply to Minnesota residents.)
(b) represents that I (we) either: (i) have a net worth (excluding home,
home furnishings and automobiles) of at least $45,000 and estimate
that (without regard to investment in the Company) I (we) have gross
income due in the current year of at least $45,000; or (ii) have a net
worth (excluding home, home furnishings and automobiles) of at least
$150,000 or such higher suitability as may be required by certain
states and set forth on page 2 hereof; IN THE CASE OF SALES TO
FIDUCIARY ACCOUNTS, THE SUITABILITY STANDARDS MUST BE MET BY THE
BENEFICIARY, THE FIDUCIARY ACCOUNT OR BY THE DONOR OR GRANTOR WHO
DIRECTLY OR INDIRECTLY SUPPLIES THE FUNDS FOR THE PURCHASE OF THE
SHARES.
(c) represents that the investor is purchasing the shares for his or her
own account and if I am (we are) purchasing shares on behalf of a
trust or other entity of which I am (we are) trustee(s) or authorized
agent(s) I (we) have due authority to execute the Subscription
Agreement/Signature Page and do hereby legally bind the trust or other
entity of which I am (we are) trustee(s) or authorized agent(s).
(d) acknowledges that the shares are not liquid; (not required for
Minnesota or Maine residents) (e) if an Affiliate of the Company,
represents that the shares are being purchased for investment purposes
only and not for immediate resale.
X
- ---------------------------------------- ----------------------------------
SIGNATURE -- REGISTERED OWNER DATE
X X
- ---------------------------------------- ----------------------------------
SIGNATURE -- CO-OWNER (IF APPLICABLE) AUTHORIZED SIGNATURE (CUSTODIAN OR
TRUSTEE IF APPLICABLE)
A SALE OF THE SHARES MAY NOT BE COMPLETED UNTIL AT LEAST FIVE BUSINESS DAYS
AFTER THE DATE THE SUBSCRIBER RECEIVES THE PROSPECTUS.
F - BROKER/DEALER-REGISTERED REPRESENTATIVE
(14) BROKER/DEALER DATA--COMPLETED BY SELLING REGISTERED REPRESENTATIVE (PLEASE
USE REP'S ADDRESS--NOT HOME OFFICE)
NAME OF REGISTERED
REPRESENTATIVE
/ / Mr. / / Mrs. / / Ms.
___________________________________________
MAILING ADDRESS ___________________________________________
CITY, STATE
& ZIP CODE ___________________________________________
BROKER/DEALER
NAME ___________________________________________
HOME OFFICE
MAILING ADDRESS ___________________________________________
CITY, STATE &
ZIP CODE ___________________________________________
B/D CLIENT #
ACCOUNT NUMBER ___________________________________________
B/D REP ID NUMBER #
___________________________
____-____-________
REGISTERED REPRESENTATIVE'S TELEPHONE
HAVE YOU CHANGED BROKER/DEALERS? / / YES / / NO
- ---------------------------------------------
REGISTERED REPRESENTATIVE'S E-MAIL
X
- ---------------------------------------------
SIGNATURE - REGISTERED REPRESENTATIVE
X
- ---------------------------------------------
SIGNATURE - BROKER/DEALER (IF APPLICABLE)
(14)a/ / DEFERRED COMMISSION OPTION: Requires broker/dealer signature:
(14)b/ / REGISTERED REPRESENTATIVE NAV PURCHASE
G - REGISTERED INVESTMENT ADVISOR (RIA)
(15) REGISTERED INVESTMENT ADVISOR (RIA) NO SALES COMMISSIONS ARE PAID ON THESE
ACCOUNTS. ?CHECK ONLY IF investment is made through the RIA in its capacity
as an RIA and not in its capacity as a Registered Representative, if
applicable, whose agreement with the subscriber includes a fixed or "wrap"
fee feature for advisory and related brokerage services. If an owner or
principal or any member of the RIA firm is an NASD licensed Registered
Representative affiliated with a broker/dealer, the transaction should be
conducted through that broker/dealer, not through the RIA.
C-4
<Page>
SUBSCRIPTION AGREEMENT/SIGNATURE PAGE
Certain states have imposed special financial suitability standards for
subscribers who purchase shares.
If the subscriber is a resident of Maine, the subscriber must have either:
(i) a minimum net worth (excluding home, home furnishings and automobiles) of
$200,000; or (ii) a minimum annual gross income of $50,000 and a minimum net
worth (exclusive of home, home furnishings and automobiles) of $50,000.
If the subscriber is a resident of Arizona, California, Iowa,
Massachusetts, Michigan, Missouri, Oregon or Tennessee, the subscriber must have
either: (i) a minimum net worth (excluding home, home furnishings and
automobiles) of $225,000; or (ii) a minimum annual gross income of $60,000 and a
minimum net worth (exclusive of home, home furnishings and automobiles) of
$60,000.
In addition, if the subscriber is a resident of Kansas, Missouri, Ohio or
Pennsylvania, the investment may not exceed 10% of the investor's liquid net
worth.
We intend to assert the foregoing representations as a defense in any
subsequent litigation where such assertion would be relevant. We have the right
to accept or reject this subscription in whole or in part, so long as such
partial acceptance or rejection does not result in an investment of less than
the minimum amount specified in the prospectus. As used above, the singular
includes the plural in all respects if shares are being acquired by more than
one person. As used in this Subscription Agreement, "Inland" refers to the
Inland Group, Inc. and its affiliates. This Subscription Agreement and all
rights hereunder shall be governed by, and interpreted in accordance with, the
laws of the State of Illinois.
By executing this Subscription Agreement, the subscriber is not waiving any
rights under the federal securities laws.
EFT LANGUAGE
I (we) hereby authorize Inland Western Retail Real Estate Trust, Inc.
("Company") to deposit distributions from (our) interest in stock of the Company
into the account listed in Section D of Subscription Agreement at the financial
institution indicated in Section D of Subscription Agreement. I further
authorize the Company to debit my account noted in Section D of Subscription
Agreement in the event that the Company erroneously deposits additional funds to
which I am not entitled, provided that such debit shall not exceed the original
amount of the erroneous deposit. In the event that I withdraw funds erroneously
deposited into my account before the Company reverses such deposit, I agree that
the Company has the right to retain any future distributions that I am entitled
until the erroneously deposited amounts are recovered by the Company.
This authorization is to remain in full force and effect until the Company has
received written notice from me of the termination of this authorization in time
to allow reasonable opportunity to act on it, or until Company has sent me
written notice of termination of this authorization.
C-5
<Page>
APPENDIX D
[LOGO]
INLAND WESTERN RETAIL REAL ESTATE TRUST, INC.
TRANSFER ON DEATH FORM (T.O.D.)
THIS FORM IS NOTVALID FOR TRUST OR IRA ACCOUNTS.
Please mail this form to:
Inland Securities Corporation,
Use this form to designate a Attn: Investor Services
T.O.D. beneficiary (ies) 2901 Butterfield Road,
Oak Brook, Illinois 60523
800.826.8228
A - INVESTOR INFORMATION
1. Name of registered owner(s), exactly as 3. Daytime phone number:
name(s) appear(s) on
stock certificate or subscription
agreement:
______________________________________ ___-____-_______
______________________________________
2. Social Security number(s) 4. State of Residence:
of registered owner(s):
___-____-_______ ___-____-_______ ______________________________
Not accepted from residents of
Louisiana, New York or
North Carolina
B - TRANSFER ON DEATH DESIGNATION
I authorize Inland Western Retail Real Estate Trust, Inc. to register all of my
shares of its common stock in beneficiary form, assigning ownership on my death
to my beneficiary(ies). I understand that if more than one beneficiary is
listed, percentages for each must be designated. If percentages are not
designated, the shares will be divided equally. Percentages must equal 100%.
Additional beneficiaries may be listed on a separate page.
1. Name of Primary Beneficiary:
________________________________________
2. Social Security Number: ___-____-_______
OR Tax Identification Number: ___-___________
3. Percentage: ______%
1. Name of Primary Beneficiary:
________________________________________
2. Social Security Number: ___-____-_______
OR Tax Identification Number: ___-___________
3. Percentage: ______%
1. Name of Primary Beneficiary:
________________________________________
2. Social Security Number: ___-____-_______
OR Tax Identification Number: ___-___________
3. Percentage: ______%
1. Name of Primary Beneficiary:
________________________________________
2. Social Security Number: ___-____-_______
OR Tax Identification Number: ___-___________
3. Percentage: ______%
C - SIGNATURE
By signing below, I (we) authorize Inland Western Retail Real Estate Trust, Inc.
to register all of my (our) shares of its common stock in T.O.D. form. The
designation(s) will be effective on the date of receipt. Accordingly, I (we)
hereby revoke any beneficiary designation(s) made previously with respect to my
(our) Inland shares. I (we) have reviewed the information set forth below. I
(we) agree on behalf of myself (ourselves) and my (our) heirs, assigns,
executors, administrators and beneficiaries to indemnify and hold harmless
Inland Western Retail Real Estate Trust, Inc. and any and all of its affiliates,
agents, successors and assigns, and their respective directors, officers and
employees, from and against any and all claims, liability, damages, actions and
expenses arising directly or indirectly out of or resulting from the transfer of
my (our) shares in accordance with this T.O.D. designation.
I (we) further understand that Inland Western Retail Real Estate Trust, Inc.
cannot provide any legal advice and I (we) agree to consult with my (our)
attorney, if necessary, to make certain that the T.O.D. designation is
consistent with my (our) estate and tax planning. Sign exactly as the name(s)
appear(s) on the stock certificate or subscription agreement. All registered
owners must sign. THIS AUTHORIZATION FORM IS SUBJECT TO THE ACCEPTANCE OF INLAND
WESTERN RETAIL REAL ESTATE TRUST, INC.
X X
--------------------------------- ---------------------------------
Signature Date Signature Date
TRANSFER ON DEATH INFORMATION
- - A Transfer on Death (T.O.D.) designation transfers ownership of shares to
the registered owner`s beneficiary(ies) upon death; provided that Inland
Western Retail Real Estate Trust, Inc. receives proof of death and other
documentation it deems necessary or appropriate.
- - Until the death of the account owner(s), the T.O.D. beneficiary(ies) has
(have) no present interest in, or authority over, the T.O.D. account.
- - A T.O.D. designation will be accepted only where (1) shares are owned by a
natural person and registered in that individual's name or (2) by two or
more natural persons as joint tenants with rights of survivorship.
- - Accounts registered to trusts, corporations, charities, and other such
entities may not declare a T.O.D. designation because they are considered
perpetual. These entities, however, may be listed as a beneficiary on a
T.O.D. for accounts registered to a natural person.
- - A T.O.D. designation made by joint tenants with rights of survivorship does
not take effect until the last of all multiple owners dies. The surviving
owners may revoke or change the T.O.D. designation at any time.
- - If the beneficiary(ies) does (do) not survive the registered owner(s), the
shares will be treated as belonging to the decedent's estate.
- - A minor may not be named as a beneficiary.
- - A T.O.D. designation will not be accepted from residents of Louisiana, New
York or North Carolina.
- - A T.O.D. designation and all rights related thereto shall be governed by
the laws of the state of Illinois.
- - A T.O.D. designation may be voided at any time by Inland Western Retail
Real Estate Trust, Inc., in its sole discretion, if there is any doubt as
to the validity or effectiveness of a T.O.D. designation.
D-1
<Page>
APPENDIX E1
LETTER OF DIRECTION
_________________, 2003
Inland Real Estate Investment Corporation
2901 Butterfield Road
Oak Brook, Illinois 60523
RE: Registered Investment Advisory Fees
Account No. ______________ ("Account")
You are hereby instructed and authorized by me to deduct advisory fees payable
to ________________, my registered investment advisor, in the following amount
from my Account, and to pay such amount by wire transfer in immediately
available funds to my registered investment advisor, upon each distribution by
Inland Western Retail Real Estate Trust, Inc. (the "Company") on my Account, as
payment for my registered investment advisor's advisory fees (select only one).
(1) $________________; OR
(2) _______________% Annual Fee (calculated on a monthly basis)
of the Asset Value to be paid by the Company on my Account.
I understand and acknowledge that any and all advisory fees payable to my
registered investment advisor are my sole responsibility and you are paying the
amounts directed by me as an accommodation.
This letter shall serve as an irrevocable instruction to you to pay such
advisory fees from my Account until such time as I provide you with written
notice of my election to revoke this instruction.
Sincerely,
E1-1
<Page>
APPENDIX E2
NOTICE OF REVOCATION
__________________, 20__
Inland Real Estate Investment Corporation
2901 Butterfield Road
Oak Brook, Illinois 60523
RE: Revocation of Instruction
Account No. _________ ("Account")
This letter shall serve as notice to you of my revocation of my instruction to
you to deduct advisory fees from my Account any pay such fees directly to
_________________, my registered investment advisor, pursuant to my letter to
you dated _____________.
I hereby instruct you to cease any and all future deductions from my Account for
the purpose of such advisory fee payments. I understand and acknowledge that
this revocation will be effective within one business day of receipt by you.
Sincerely,
E2-1
<Page>
APPENDIX F
PRIVACY POLICY NOTICE
INLAND WESTERN RETAIL REAL ESTATE TRUST, INC.
PRIVACY POLICY
OUR COMMITMENT TO PROTECTING YOUR PRIVACY. We consider customer privacy to be
fundamental to our relationship with our shareholders. In the course of
servicing your account, we collect personal information about you ("NONPUBLIC
PERSONAL information"). We collect this information to know who you are so that
we can provide you with products and services that meet your particular
financial and investing needs, and to meet our obligations under the laws and
regulations that govern us.
Throughout our history we have been, and we remain, committed to maintaining the
confidentiality, integrity and security of our shareholders' personal
information. It is our policy to respect the privacy of our current and former
shareholders and to protect the personal information entrusted to us. This
Privacy Policy (the "POLICY") describes the standards we follow for handling
your personal information, with the dual goals of meeting your financial needs
while respecting your privacy.
This Policy applies to the Inland family of companies, which includes Inland
Western Retail Real Estate Trust, Inc.
1. Information We May Collect
We may collect nonpublic personal information about you from three sources:
- Information on applications, subscription agreements or other forms.
This category may include your name, address, tax identification
number, age, marital status, number of dependents, assets, debts,
income, employment history, beneficiary information and personal
bank account information.
- Information about your transactions with us, our affiliates and
others such as: the types of products you purchase, your account
balances, margin loan history and payment history.
- Information obtained from others, such as from consumer credit
reporting agencies. This may include information about your
creditworthiness, financial circumstances and credit history,
including any bankruptcies and foreclosures.
2. Persons to Whom We May Disclose Information
We may disclose all three types of nonpublic personal information about you to
the unaffiliated third parties and in the circumstances described below, as
permitted by applicable laws and regulations.
- Companies with whom we have contracted to provide account-related
services, such as statement preparation, execution services,
custodial services, and report preparation. (Every contract with
each of these service providers prohibits the service provider from
disclosing or using your nonpublic personal information for any
purpose except to provide the service for which we have contracted.)
- Our lawyers, accountants, auditors, regulators, advisors, and
quality-control consultants.
- If we suspect fraud.
- To protect the security of our records, Web site and telephone
customer service center.
- Information you have authorized us to disclose.
3. Protecting Your Information
F-1
<Page>
Our employees are required to follow the procedures we have developed to protect
the integrity of your information. These procedures include:
- Restricting physical and other access to your nonpublic personal
information to persons with a legitimate business need to know the
information in order to service your account.
- Contractually obligating third parties doing business with us to
comply with all applicable privacy and security laws.
- Providing information to you only after we have used reasonable
efforts to assure ourselves of your identity by asking for and
receiving from you information only you should know.
- Maintaining reasonably adequate physical, electronic and procedural
safeguards to protect your information.
4. Former Customers
We treat information concerning our former customers the same way we treat
information about our current customers.
5. Keeping You Informed
We will send you a copy of this Policy annually. We will also send you all
changes to this Policy as they occur. You have the right to "opt out" of this
policy by notifying us in writing.
QUESTIONS? If you have any questions about this Policy, please do not hesitate
to call Roberta Matlin at 630-218-8000.
F-2
<Page>
Up to 270,000,000 shares
Inland Western Retail Real Estate Trust, Inc.
Common Stock
----------
PROSPECTUS
----------
__________, 2003
INLAND SECURITIES CORPORATION
You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to make any representations
other than those contained in the prospectus and supplemental literature
authorized by Inland Western Retail Real Estate Trust, Inc. and referred to in
this prospectus, and, if given or made, such information and representations
must not be relied upon. This prospectus is not an offer to sell nor is it
seeking an offer to buy these securities in any jurisdiction where the offer or
sale is not permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or any sale of these securities. You should not assume that the
delivery of this prospectus or that any sale made pursuant to this prospectus
implies that the information contained in this prospectus will remain fully
accurate and correct as of any time subsequent to the date of this prospectus.
Until , 2003 (40 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealer's obligation to deliver a prospectus when acting as
soliciting dealers with respect to their unsold allotments or subscriptions.
<Page>
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<Table>
<Caption>
Maximum Minimum
Securities and Exchange Commission registration fee............................... $ 217,621 $ 1,334
NASD filing fee................................................................... 30,500 187
Printing and mailing expenses..................................................... 3,500,000 21,452
Blue Sky fees and expenses........................................................ 136,000 834
Legal fees and expenses........................................................... 650,000 3,984
Accounting fees and expenses...................................................... 650,000 3,984
Advertising and sales literature.................................................. 5,000,000 30,645
Due diligence..................................................................... 3,000,000 18,387
Transfer agent fees............................................................... 800,000 4,903
Data processing fees.............................................................. 500,000 3,065
Bank fees and other administrative expenses....................................... 200,000 1,225
Total........................................................................... $ 17,684,121 $ 90,000
------------ ------------
</Table>
ITEM 32. SALES TO SPECIAL PARTIES.
Our employees and associates and those of our affiliates are permitted
to purchase shares net of sales commissions and the marketing contribution and
due diligence expense allowance fee or for $8.95 per share.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
As of March 5, 2003, the Company has sold the following securities for
the following aggregate offering prices: In March 2003, Inland Western Retail
Real Estate Advisory Services, Inc., the advisor, purchased from us 20,000
shares for $10 per share, for an aggregate purchase price of $200,000 in
connection with our organization. No sales commissions or other consideration
was paid in connection with such sales. The sales were consummated without
registration under the Act in reliance upon Rule 506 of Regulation D and the
exemption from registration in Section 4(2) of the Securities Act as
transactions not involving any public offering.
Options to purchase an aggregate of 9,000 shares at an exercise price
of $8.95 per share have been granted to the Independent Directors pursuant to
the Independent Director Stock Option Plan (options to purchase 3,000 shares as
to each of the three independent directors plus options for 1,500 shares each on
the date of the first annual meeting). None of such options have been exercised.
Therefore, no shares have been issued in connection with such options.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XV of the Company's articles of incorporation provides as
follows:
Section 3. Indemnification
(a) Subject to paragraphs (b), (c) and (d) of this Section 3, the
Company shall, to the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted and, without limiting the generality
of the foregoing, in accordance with Section 2-418 of the Maryland General
Corporation Law, indemnify and pay, advance, or reimburse reasonable expenses to
any Director, officer, employee and agent of the Company and the Advisor and its
Affiliates (each an "Indemnified Party").
(b) As long as the Company qualifies as a REIT, it shall not indemnify
nor pay, advance or reimburse expenses to an Indemnified Party unless: (i)
Directors have determined, in good faith, that the course of conduct which
caused the loss or liability was in the best interest of the Company; (ii) the
Indemnified Party was acting on behalf of or performing services on the part of
the Company; (iii) such liability or loss was not the result of negligence or
misconduct on the part of the Indemnified Party except that in the event the
Indemnified Party is or was an Independent Director, such liability or loss
shall not have been the result of gross negligence or willful
II-1
<Page>
misconduct; and (iv) such indemnification or agreement to be held harmless is
recoverable only out of the Net Assets of the Company and not from the
Stockholders.
(c) As long as the Company qualifies as a REIT and notwithstanding
anything to the contrary in Section 3(b) of this Article XV, the Company shall
not indemnify a Director, officer, employee or agent of the Company or the
Advisor or its Affiliates for losses, liabilities or expenses arising from or
out of an alleged violation of federal or state securities laws by such party
unless one or more of the following conditions are met: (i) there has been a
successful adjudication on the merits of each count involving alleged securities
law violations as to the particular Indemnified Party; (ii) such claims have
been dismissed with prejudice on the merits by a court of competent jurisdiction
as to the particular Indemnified Party; or (iii) a court of competent
jurisdiction approves a settlement of the claims and finds that indemnification
of the settlement and related costs should be made and the court considering the
request has been advised of the position of the Securities and Exchange
Commission (the "Commission") and the published opinions of any state securities
regulatory authority in which securities of the Company were offered or sold as
to indemnification for violations of securities laws.
(d) The Company may advance amounts to an Indemnified Party for legal
and other expenses and costs incurred as a result of any legal action for which
indemnification is being sought only in accordance with Section 2-418 of the
Maryland General Corporation Law, and, as long as the Company qualifies as a
REIT, only if all of the following conditions are satisfied: (i) the legal
action relates to acts or omissions with respect to the performance of duties or
services by the Indemnified Party for or on behalf of the Company; (ii) the
legal action is initiated by a third party who is not a Stockholder or the legal
action is initiated by a Stockholder acting in his or her capacity as such and a
court of competent jurisdiction specifically approves such advancement; and
(iii) the Indemnified Party receiving such advances undertakes in writing to
repay the advanced funds to the Company, together with the applicable legal rate
of interest thereon, in cases in which such party is found not to be entitled to
indemnification.
(e) The Company shall have the power to purchase and maintain
insurance or provide similar protection on behalf of an Indemnified Party
against any liability asserted which was incurred in any such capacity with the
Company or arising out of such status; provided, however, that the Company shall
not incur the costs of any liability insurance which insures any person against
liability for which he, she or it could not be indemnified under these articles
of incorporation. Nothing contained herein shall constitute a waiver by any
Indemnified Party of any right which he, she or it may have against any party
under federal or state securities laws. The Company shall also have power to
enter into any contract for indemnity and advancement of expenses with a
Director, officer, employee or agent to such further extent consistent with law.
Our articles of incorporation authorize and direct us to indemnify,
and pay or reimburse reasonable expenses to, any director, officer, employee or
agent we employ to the fullest extent provided by Maryland law. The Maryland
General Corporation Law provides that a Maryland corporation may indemnify a
director, officer, employee or agent made a party to any proceeding by reason of
service in that capacity unless it has been established that (1) the act or
omission was material to the matter giving rise to the proceeding and (a) was
committed in bad faith or (b) was the result of active and deliberate
dishonesty; or (2) the individual actually received an improper personal benefit
in money, property, or services; or (3) in the case of a criminal proceeding,
the individual had reasonable cause to believe that the act or omission was
unlawful.
The Bylaws provide that neither the amendment, nor the repeal, nor the
adoption of any other provision of the articles of incorporation or the bylaws
will apply to or affect, in any respect, the Indemnitee's right to
indemnification for actions or failures to act which occurred prior to such
amendment, repeal or adoption.
To the extent that the indemnification may apply to liabilities
arising under the Act, the Company has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is contrary to public
policy and, therefore, unenforceable.
We entered into separate indemnification agreements with each of our
directors and some of our executive officers. The indemnification agreements
require, among other things, that we indemnify the directors and officers to the
fullest extent permitted by law, and advance to the directors and officers all
related expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. We must also indemnify and
II-2
<Page>
advance all expenses incurred by directors and officers seeking to enforce their
rights under the indemnification agreements and cover directors and officers
under our Directors' and officers' liability insurance, if any. Although the
form of indemnification agreement offers substantially the same scope of
coverage afforded by provisions in the articles of incorporation and the Bylaws,
as a contract, it cannot be unilaterally modified by the board or by the
stockholders to eliminate the rights it provides.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Inapplicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
The following financial statements are included as part of the
registration statement in the prospectus:
1. Inland Western Retail Real Estate Trust, Inc.:
(a) Independent Auditors' Report
(b) Balance Sheet at June 30, 2003
(c) Notes to Balance Sheet at June 30, 2003
2. Peoria Station:
(a) Independent Auditors' Report
(b) Historical Summary of Gross Income and Direct Operating
Expenses for the year ended December 31, 2002 and six months
ended June 30, 2003 (unaudited)
(c) Notes to the Historical Summary of Gross Income and Direct
Operating Expenses for the year ended December 31, 2002 and
six months ended June 30, 2003 (unaudited)
(b) Exhibits
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
1.1 Form of Dealer Manager Agreement by and between Inland Western Retail Real Estate Trust,
Inc. and Inland Securities Corporation.
1.2 Form of Soliciting Dealers Agreement by and between Inland Securities Corporation and the
Soliciting Dealers.
3.1 First Amended and Restated Articles of Incorporation of Inland Western Retail Real Estate
Trust, Inc.
3.2* Bylaws of Inland Western Retail Real Estate Trust, Inc.
4.1* Specimen Certificate for the Shares.
5* Opinion of Duane Morris LLP as to the legality of the Shares being registered.
8* Opinion of Duane Morris LLP as to tax matters.
10.1* Form of Escrow Agreement by and among Inland Western Retail Real Estate Trust, Inc.,
Inland Securities Corporation and LaSalle Bank National Association.
10.2* Form of Advisory Agreement by and between Inland Western Retail Real Estate Trust, Inc.
</Table>
II-3
<Page>
<Table>
and Inland Western Retail Real Estate Advisory Services, Inc.
10.3* Form of Master Management Agreement, including the form of Management Agreement for each
Property by and between Inland Western Retail Real Estate Trust, Inc. and Inland Western
Property Management Corp.
10.4* Form of Property Acquisition Service Agreement by and among Inland Western Retail Real
Estate Trust, Inc., Inland Western Retail Real Estate Advisory Services, Inc., Inland Real
Estate Corporation, Inland Real Estate Advisory Services, Inc., and Inland Real Estate
Acquisitions, Inc.
10.5* Independent Director Stock Option Plan.
10.6* Indemnification Agreement by and between Inland Western Retail Real Estate Trust, Inc. and
its directors and executive officers.
10.7* Purchase and Sale Agreement (Re: Peoria Station) dated January 31, 2003.
10.8* Assignment of Purchase and Sale Agreement (Re: Peoria Station) dated June 3, 2003
10.9 Share Repurchase Plan
23.1 Consent of KPMG LLP dated August 20, 2003.
23.2* Consent of Duane Morris LLP (included in Exhibit 5).
23.3* Consent of Duane Morris LLP (included in Exhibit 8).
24* Power of Attorney (included on signature page to the Registration Statement).
</Table>
- ----------
*Previously filed.
ITEM 37. UNDERTAKINGS.
1. The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
II-4
<Page>
2. The Registrant undertakes to send to each Stockholder at least on an annual
basis a detailed statement of any transactions with the Advisor or its
Affiliates, and of fees, commissions, compensation and other benefits paid or
accrued to the Advisor or its Affiliates for the fiscal year completed, showing
the amount paid or accrued to each recipient and the services performed.
3. The Registrant undertakes to provide to the Stockholders the financial
statements required by Form 10-K for the first full fiscal year of operations of
the Company.
4. The Registrant hereby undertakes to send to the Stockholders, within 60 days
after the close of each quarterly fiscal period, the information specified by
Form 10-Q, if such report is required to be filed with the Securities and
Exchange Commission.
5. The Registrant undertakes to file a sticker supplement pursuant to Rule
424(c) under the Act during the distribution period describing each Property not
identified in the Prospectus at such time as there arises a reasonable
probability that such Property will be acquired and to consolidate all such
stickers into a post-effective amendment filed at least once every three months,
with the information contained in such amendment provided simultaneously to the
existing Stockholders. Each sticker supplement should also disclose all
compensation and fees received by the Advisor and its Affiliates in connection
with any such acquisition. The post-effective amendment shall include audited
financial statements meeting the requirements Rule 3-14 of Regulation S-X only
for Properties acquired during the distribution period.
The Registrant also undertakes to file, after the end of the
distribution period, a current report on Form 8-K containing the financial
statements and additional information required by Rule 3-14 of Regulation S-X,
to reflect each commitment (i.e., the signing of a binding purchase agreement)
made after the end of the distribution period involving the use of 10% or more
(on a cumulative basis) of the net proceeds of the offering and to provide the
information contained in such report to the Stockholders at least once each
quarter after the distribution period of the offering has ended.
6. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions and otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<Page>
TABLE VI
ACQUISITION OF PROPERTIES BY PROGRAMS (A)
(000'S OMITTED, EXCEPT FOR SQUARE FEET OR ACRES)
Table VI presents information concerning the acquisition of real properties
by programs with similar investment objectives, sponsored by Inland Real Estate
Investment Corporation ("IREIC"), in the three years ended December 31, 2002.
The detail provided with respect to each acquisition includes the property size,
location, purchase price and the amount of mortgage financing. This information
is intended to assist the prospective investor in evaluating the property mix as
well as the terms involved in acquisitions by programs sponsored by IREIC.
II-6
<Page>
TABLE VI- (CONTINUED)
ACQUISITIONS OF PROPERTIES BY PROGRAMS (A)
(000'S OMITTED, EXCEPT FOR NUMBER OF SQUARE FEET)
<Table>
<Caption>
PURCHASE PRICE MORTGAGE
NUMBER OF DATE OF PLUS ACQUISITION FINANCING AT DATE
PROPERTY SQUARE FEET PURCHASE FEE OF PURCHASE
- ------------------------------------------------------------------------------------------------------------------------------
Inland Real Estate Corporation:
Rose Plaza East, Naperville, IL 11,658 01/13/00 2,205 -
Chatham Ridge, Chicago, IL 175,774 02/01/00 19,545 9,738
Joliet Commons Phase II, Joliet, IL 40,395 02/08/00 4,809 -
Riverdale Commons Outlot, Coon Rapids, MN 6,566 03/03/00 1,150 -
Bohl Farm Marketplace, Crystal Lake, IL 97,287 12/01/00 15,688 7,833
PETsMART, Gurnee, IL 25,692 04/01 3,304 -
Eckerd Drug Store, Chattanooga, TN 10,908 05/02 2,367 -
Michael's, Coon Rapids, MN 24,317 07/02 2,808 -
Deer Trace, Kohler, WI 149,881 07/02 13,281 -
Disney, Celebration, FL 166,131 07/02 27,281 13,600
Townes Crossing, Oswego, IL 105,989 08/02 12,194 -
Park Square, Brooklyn Park, MN 137,116 08/02 9,873 5,850
Forest Lake Marketplace, Forest Lake, MN 93,853 09/02 11,856 -
Naper West Ph II, Naperville, IL 50,000 10/02 3,116 -
Walgreens, Jennings, MO 15,120 10/02 2,706 -
Four Flaggs Annex, Niles, IL 21,790 11/02 3,289 -
Four Flaggs, Niles, IL 325,102 11/02 20,087 12,510
Brunswick Market Center, Brunswick, OH 119,540 12/02 13,423 -
Medina Marketplace, Medina, OH 72,781 12/02 9,511 -
Shakopee Valley, Shakopee, MN 146,436 12/02 14,700 -
Shops at Orchard Place, Skokie, IL 164,542 12/02 42,752 -
Total for Inland Real Estate Corporation 1,960,978 $ 235,945 $ 49,531
========= ========= ========
<Caption>
OTHER CASH
CASH DOWN EXPENDITURES TOTAL ACQUISITION
PROPERTY PAYMENT CAPITALIZED(A) COST(B)
- -----------------------------------------------------------------------------------------------------------
Inland Real Estate Corporation:
Rose Plaza East, Naperville, IL 2,205 0 2,205
Chatham Ridge, Chicago, IL 9,807 356 19,901
Joliet Commons Phase II, Joliet, IL 4,809 0 4,809
Riverdale Commons Outlot, Coon Rapids, MN 1,150 0 1,150
Bohl Farm Marketplace, Crystal Lake, IL 7,855 0 15,688
PETsMART, Gurnee, IL 3,304 0 3,304
Eckerd Drug Store, Chattanooga, TN 2,367 2 2,369
Michael's, Coon Rapids, MN 2,808 0 2,808
Deer Trace, Kohler, WI 13,281 0 13,281
Disney, Celebration, FL 13,681 0 27,281
Townes Crossing, Oswego, IL 12,194 (49) 12,145
Park Square, Brooklyn Park, MN 4,023 15 9,888
Forest Lake Marketplace, Forest Lake, MN 11,856 (18) 11,838
Naper West Ph II, Naperville, IL 3,116 0 3,116
Walgreens, Jennings, MO 2,706 0 2,706
Four Flaggs Annex, Niles, IL 3,289 0 3,289
Four Flaggs, Niles, IL 7,577 (25) 20,062
Brunswick Market Center, Brunswick, OH 13,423 0 13,423
Medina Marketplace, Medina, OH 9,511 0 9,511
Shakopee Valley, Shakopee, MN 14,700 0 14,700
Shops at Orchard Place, Skokie, IL 42,752 (3) 42,749
Total for Inland Real Estate Corporation $ 186,414 $ 278 $ 236,223
========= ===== =========
</Table>
II-7
<Page>
<Table>
<Caption>
PURCHASE PRICE MORTGAGE
NUMBER OF DATE OF PLUS ACQUISITION FINANCING AT DATE
PROPERTY SQUARE FEET PURCHASE FEE OF PURCHASE
- -------------------------------------------------------------------------------------------------------------------------------
Inland Retail Real Estate Trust, Inc.:
Conway Plaza, Orlando, FL 119,106 02/00 8,548 -
Pleasant Hill, Duluth, GA 282,137 05/00 34,332 17,120
Gateway Market Center, St. Petersburg, FL 231,449 09/00 20,929 13,538
Columbia Promenade, Kissimmee, FL 65,870 01/01 7,440 -
K-Mart, Macon, GA 102,098 02/01 9,031 -
Lowe's Home Improvement Center, Warner Robbins, GA 131,575 02/01 9,431 -
West Oaks, Ocoee, FL 66,539 03/01 11,221 -
PETsMART - Chattanooga, Chattanooga, TN 26,040 04/01 3,103 -
PETsMART - Daytona Beach, Daytona Beach, FL 26,194 04/01 3,238 -
PETsMART - Fredricksburg, Fredricksburg, VA 26,067 04/01 3,410 -
Sand Lake Corners, Orlando, FL 189,741 05/01 22,256 -
Jo-Ann Fabrics, Alpharetta, GA 44,418 06/01 4,911 -
Woodstock Square, Atlanta, GA 218,819 06/01 27,596 -
Chickasaw Trails Shopping Center, Orlando, FL 75,492 08/01 8,631 -
Just for Feet - Daytona, Daytona Beach, FL 22,255 08/01 3,901 -
Skyview Plaza, Orlando, FL 281,247 09/01 21,332 -
Aberdeen Square, Boynton Beach, FL 70,555 10/01 6,717 -
Anderson Central, Anderson, SC 223,211 11/01 15,863 11,000
Brandon Blvd. Shoppes, Brandon, FL 85,377 11/01 9,482 -
Creekwood Crossing, Bradenton, FL 227,052 11/01 23,616 -
Eckerd Drug Store - Greenville, Greenville, SC 10,908 11/01 2,828 -
Abernathy Square, Atlanta, GA 131,649 12/01 24,131 -
Citrus Hills, Citrus Hills, FL 68,927 12/01 6,027 -
Douglasville Pavilion, Douglasville, GA 267,764 12/01 27,377 20,000
Eckerd Drug Store - Spartanburg, Spartanburg, SC 10,908 12/01 2,807 -
Fayetteville Pavilion, Fayetteville, NC 272,385 12/01 26,898 20,133
Southlake Pavilion, Morrow, GA 525,162 12/01 56,377 39,740
Steeplechase Plaza, Ocala, FL 87,380 12/01 8,647 -
Venture Pointev, Duluth, GA 334,620 12/01 26,533 13,334
<Caption>
OTHER CASH
CASH DOWN EXPENDITURES TOTAL ACQUISITION
PROPERTY PAYMENT CAPITALIZED(A) COST(B)
- ----------------------------------------------------------------------------------------------------------------
Inland Retail Real Estate Trust, Inc.:
Conway Plaza, Orlando, FL 8,548 220 8,768
Pleasant Hill, Duluth, GA 17,212 (285) 34,047
Gateway Market Center, St. Petersburg, FL 7,391 115 21,044
Columbia Promenade, Kissimmee, FL 7,440 (6) 7,434
K-Mart, Macon, GA 9,031 - 9,031
Lowe's Home Improvement Center, Warner Robbins, GA 9,431 - 9,431
West Oaks, Ocoee, FL 11,221 28 11,249
PETsMART - Chattanooga, Chattanooga, TN 3,103 - 3,103
PETsMART - Daytona Beach, Daytona Beach, FL 3,238 - 3,238
PETsMART - Fredricksburg, Fredricksburg, VA 3,410 - 3,410
Sand Lake Corners, Orlando, FL 22,256 (106) 22,150
Jo-Ann Fabrics, Alpharetta, GA 4,911 - 4,911
Woodstock Square, Atlanta, GA 27,596 (51) 27,545
Chickasaw Trails Shopping Center, Orlando, FL 8,631 14 8,645
Just for Feet - Daytona, Daytona Beach, FL 3,901 4 3,905
Skyview Plaza, Orlando, FL 21,332 387 21,719
Aberdeen Square, Boynton Beach, FL 6,717 (45) 6,672
Anderson Central, Anderson, SC 4,863 (111) 15,752
Brandon Blvd. Shoppes, Brandon, FL 9,482 (53) 9,429
Creekwood Crossing, Bradenton, FL 23,616 96 23,712
Eckerd Drug Store - Greenville, Greenville, SC 2,828 (15) 2,813
Abernathy Square, Atlanta, GA 24,131 94 24,225
Citrus Hills, Citrus Hills, FL 6,027 (136) 5,891
Douglasville Pavilion, Douglasville, GA 7,377 (156) 27,221
Eckerd Drug Store - Spartanburg, Spartanburg, SC 2,807 13 2,820
Fayetteville Pavilion, Fayetteville, NC 6,765 896 27,794
Southlake Pavilion, Morrow, GA 16,637 3,976 60,353
Steeplechase Plaza, Ocala, FL 8,647 455 9,102
Venture Pointev, Duluth, GA 13,199 (149) 26,384
</Table>
II-8
<Page>
<Table>
<Caption>
PURCHASE PRICE MORTGAGE
NUMBER OF DATE OF PLUS ACQUISITION FINANCING AT DATE
PROPERTY SQUARE FEET PURCHASE FEE OF PURCHASE
- ----------------------------------------------------------------------------------------------------------------------------------
Sarasota Pavilion, Sarasota, FL 324,140 01/02 42,100 -
Turkey Creek Phase I, Knoxville, TN 187,760 01/02 21,762 -
Universal Plaza, Lauderhill, FL 49,816 01/02 9,872 -
Hairston Crossing, Decatur, GA 57,884 02/02 6,630 -
Just for Feet - Augusta, Augusta, GA 22,115 02/02 3,054 -
Just For Feet - Covington, Covington, LA 20,116 02/02 3,447 -
Logger Head Junction, Sarasota, FL 4,711 02/02 665 -
Shoppes of Golden Acres, Newport Richey, FL 76,371 02/02 10,831 -
Newnan Pavilion, Newnan, GA 481,004 03/02 33,114 -
Eisenhower Crossing I & II, Macon, GA 403,013 11/01 03/02 43,292 -
Acworth Avenue Retail Shopping Center, Acworth, GA 16,130 12/00 03/02 2,834 -
Crystal Springs Shopping Center, Crystal Springs, FL 67,021 04/02 7,478 -
Eckerd Drug Store - Concord, Concord, NC 10,908 04/02 2,039 -
Eckerd Drug Store - Tega Cay, Tega Cay, SC 13,824 04/02 2,544 -
Melbourne Shopping Center, Melbourne, FL 209,217 04/02 9,842 5,949
Riverstone Plaza, Canton, GA 302,024 04/02 31,943 -
Target Center, Columbia, SC 79,253 04/02 7,673 -
Hampton Point, Taylors, SC 58,316 05/02 4,526 -
Northpoint Marketplace, Spartanburg, SC 101,982 05/02 8,269 -
Oleander Shopping Center, Wilmington, NC 51,888 05/02 5,221 3,000
Sharon Greens, Cumming, GA 98,317 05/02 13,062 -
Bass Pro Outdoor World, Dania Beach, FL 165,000 06/02 18,220 -
Chesterfield Crossings, Richmond, VA, 68,898 06/02 10,982 -
Circuit City-Rome, Rome, GA 33,056 06/02 4,476 -
Circuit City-Vero Beach, Vero Beach, FL 33,243 06/02 5,648 -
Hillsboro Square, Deerfield Beach, FL 145,647 06/02 18,985 -
Stonebridge Square, Roswell, GA 160,104 06/02 19,529 -
Ward's Crossing, Lynchburg, VA 80,918 06/02 11,100 -
Circuit City Plaza, Orlando, FL 78,625 07/02 11,518 -
Eckerd Drug Store - Woodruff, Woodruff, SC 13,824 07/02 2,475 -
McFarland Plaza, Tuscaloosa, AL 221,807 07/02 15,259 -
Sycamore Commons, Matthews, NC 247,513 07/02 38,184 -
Walk at Highwoods I, Tampa, FL 133,940 07/02 23,999 -
<Caption>
OTHER CASH
CASH DOWN EXPENDITURES TOTAL ACQUISITION
PROPERTY PAYMENT CAPITALIZED(A) COST(B)
- --------------------------------------------------------------------------------------------------------------------
Sarasota Pavilion, Sarasota, FL 42,100 162 42,262
Turkey Creek Phase I, Knoxville, TN 21,762 442 22,204
Universal Plaza, Lauderhill, FL 9,872 2 9,874
Hairston Crossing, Decatur, GA 6,630 68 6,698
Just for Feet - Augusta, Augusta, GA 3,054 3 3,057
Just For Feet - Covington, Covington, LA 3,447 - 3,447
Logger Head Junction, Sarasota, FL 665 - 665
Shoppes of Golden Acres, Newport Richey, FL 10,831 474 11,305
Newnan Pavilion, Newnan, GA 33,114 1,650 34,764
Eisenhower Crossing I & II, Macon, GA 43,292 (259) 43,033
Acworth Avenue Retail Shopping Center, Acworth, GA 2,834 11 2,845
Crystal Springs Shopping Center, Crystal Springs, FL 7,478 (2) 7,476
Eckerd Drug Store - Concord, Concord, NC 2,039 197 2,236
Eckerd Drug Store - Tega Cay, Tega Cay, SC 2,544 419 2,963
Melbourne Shopping Center, Melbourne, FL 3,893 352 10,194
Riverstone Plaza, Canton, GA 31,943 (8) 31,935
Target Center, Columbia, SC 7,673 14 7,687
Hampton Point, Taylors, SC 4,526 20 4,546
Northpoint Marketplace, Spartanburg, SC 8,269 (152) 8,117
Oleander Shopping Center, Wilmington, NC 2,221 12 5,233
Sharon Greens, Cumming, GA 13,062 (221) 12,841
Bass Pro Outdoor World, Dania Beach, FL 18,220 16 18,236
Chesterfield Crossings, Richmond, VA, 10,982 43 11,025
Circuit City-Rome, Rome, GA 4,476 6 4,482
Circuit City-Vero Beach, Vero Beach, FL 5,648 9 5,657
Hillsboro Square, Deerfield Beach, FL 18,985 2,437 21,422
Stonebridge Square, Roswell, GA 19,529 1,181 20,710
Ward's Crossing, Lynchburg, VA 11,100 (69) 11,031
Circuit City Plaza, Orlando, FL 11,518 - 11,518
Eckerd Drug Store - Woodruff, Woodruff, SC 2,475 407 2,882
McFarland Plaza, Tuscaloosa, AL 15,259 - 15,259
Sycamore Commons, Matthews, NC 38,184 40 38,224
Walk at Highwoods I, Tampa, FL 23,999 (77) 23,922
</Table>
II-9
<Page>
<Table>
<Caption>
PURCHASE PRICE MORTGAGE
NUMBER OF DATE OF PLUS ACQUISITION FINANCING AT DATE
PROPERTY SQUARE FEET PURCHASE FEE OF PURCHASE
- --------------------------------------------------------------------------------------------------------------------------------
Eckerd Drug Store - Blackstock, Spartanburg, SC 10,908 08/02 2,723 -
Forestdale Plaza, Jamestown, NC 53,239 08/02 6,670 -
Sexton Commons, Fuquay Varina, NC 49,097 08/02 8,023 -
Shoppes at Lake Mary, Lake Mary, FL 69,843 08/02 11,140 -
Wakefield Crossing, Raleigh, NC 75,929 08/02 10,794 -
Circuit City-Cary, Cary, NC 27,891 09/02 5,650 -
Cox Creek, Florence, AL 173,934 09/02 19,231 15,287
Forest Hills Centre, Wilson, NC 73,280 09/02 6,675 -
Golden Gate, Greensboro, NC 153,114 10/02 10,545 -
Goldenrod Groves, Orlando, FL 108,944 10/02 9,177 -
City Crossing, Warner Robins, GA 187,099 11/02 14,644 -
Clayton Corners, Clayton, NC 125,656 11/02 14,994 9,740
CompUSA Retail Center, Newport News, VA 47,134 11/02 7,324 -
Duvall Village, Bowie, MD 82,522 11/02 13,046 -
Gateway Plaza - Jacksonville, Jacksonville, NC 101,682 11/02 11,865 -
Harundale Plaza, Glen Burnie, MD 274,160 11/02 24,752 -
Jones Bridge Plaza, Norcross, GA 83,363 11/02 7,525 -
Lakewood Ranch, Bradenton, FL 69,472 11/02 9,494 4,400
North Aiken Bi-Lo Center, Aiken, SC 59,204 11/02 5,816 -
Plant City Crossing, Plant City, FL 85,252 11/02 10,879 -
Presidential Commons, Snellville, GA 372,149 11/02 45,032 26,113
Rainbow Foods - Garland, Garland, TX 70,576 11/02 5,098 -
Rainbow Foods - Rowlett, Rowlett, TX 63,117 11/02 4,604 -
River Ridge, Birmingham, AL 158,755 11/02 26,492 -
Rosedale Shopping Center, Huntersville, NC 94,248 11/02 19,544 13,300
Shoppes on the Circle, Dothan, AL 149,085 11/02 15,013 12,210
Southlake Shopping Center, Cornelius, NC 131,247 11/02 13,633 7,962
Village Square at Golf, Boynton Beach, FL 134,894 11/02 18,537 -
Chatham Crossing, Siler City, NC 32,000 12/02 3,964 -
Columbiana Station, Columbia, SC 270,649 12/02 46,615 -
Gateway Plaza - Conway, Conway, SC 62,428 12/02 6,295 -
Lakeview Plaza, Kissimmee, FL 54,788 12/02 6,188 3,613
Meadowmont Village Center, Chapel Hill, NC 133,471 12/02 26,808 -
<Caption>
OTHER CASH
CASH DOWN EXPENDITURES TOTAL ACQUISITION
PROPERTY PAYMENT CAPITALIZED(A) COST(B)
- -------------------------------------------------------------------------------------------------------------------
Eckerd Drug Store - Blackstock, Spartanburg, SC 2,723 - 2,723
Forestdale Plaza, Jamestown, NC 6,670 (42) 6,628
Sexton Commons, Fuquay Varina, NC 8,023 (58) 7,965
Shoppes at Lake Mary, Lake Mary, FL 11,140 18 11,158
Wakefield Crossing, Raleigh, NC 10,794 (58) 10,736
Circuit City-Cary, Cary, NC 5,650 4 5,654
Cox Creek, Florence, AL 3,944 (26) 19,205
Forest Hills Centre, Wilson, NC 6,675 12 6,687
Golden Gate, Greensboro, NC 10,545 - 10,545
Goldenrod Groves, Orlando, FL 9,177 - 9,177
City Crossing, Warner Robins, GA 14,644 - 14,644
Clayton Corners, Clayton, NC 5,254 - 14,994
CompUSA Retail Center, Newport News, VA 7,324 - 7,324
Duvall Village, Bowie, MD 13,046 - 13,046
Gateway Plaza - Jacksonville, Jacksonville, NC 11,865 - 11,865
Harundale Plaza, Glen Burnie, MD 24,752 - 24,752
Jones Bridge Plaza, Norcross, GA 7,525 - 7,525
Lakewood Ranch, Bradenton, FL 5,094 - 9,494
North Aiken Bi-Lo Center, Aiken, SC 5,816 - 5,816
Plant City Crossing, Plant City, FL 10,879 - 10,879
Presidential Commons, Snellville, GA 18,919 - 45,032
Rainbow Foods - Garland, Garland, TX 5,098 - 5,098
Rainbow Foods - Rowlett, Rowlett, TX 4,604 - 4,604
River Ridge, Birmingham, AL 26,492 - 26,492
Rosedale Shopping Center, Huntersville, NC 6,244 - 19,544
Shoppes on the Circle, Dothan, AL 2,803 - 15,013
Southlake Shopping Center, Cornelius, NC 5,671 - 13,633
Village Square at Golf, Boynton Beach, FL 18,537 - 18,537
Chatham Crossing, Siler City, NC 3,964 - 3,964
Columbiana Station, Columbia, SC 46,615 - 46,615
Gateway Plaza - Conway, Conway, SC 6,295 - 6,295
Lakeview Plaza, Kissimmee, FL 2,575 - 6,188
Meadowmont Village Center, Chapel Hill, NC 26,808 - 26,808
</Table>
II-10
<Page>
<Table>
<Caption>
PURCHASE PRICE MORTGAGE
NUMBER OF DATE OF PLUS ACQUISITION FINANCING AT DATE
PROPERTY SQUARE FEET PURCHASE FEE OF PURCHASE
- --------------------------------------------------------------------------------------------------------------------------------
Shoppes at Citiside, Charlotte, NC 75,478 12/02 9,706 -
Shoppes at New Tampa, Wesley Chapel, FL 158,342 12/02 19,196 -
Total acquisitions 12,116,280 1,364,878 236,439
DEVELOPMENT PROJECTS
Citrus Hills - Blockbuster, Citrus Hills, FL N/A 12/01 172 -
Eckerd Drug Store - Gaffney, Gaffney, SC N/A 12/02 1,173 -
Eckerd Drug Store - Perry Creek, Raleigh, NC N/A 09/02 1,775 -
Shoppes at Chalet Suzanne, Lake Wales, FL N/A 12/02 3,297 -
Southampton Village, Tyrone, GA N/A 11/02 2,762 -
Southwood Plantation, Tallahassee, FL N/A 10/02 1,937 -
Total for Development projects 11,115 -
Total for Inland Retail Real Estate Trust, Inc. 13,550,686 1,375,994 236,439
<Caption>
OTHER CASH
CASH DOWN EXPENDITURES TOTAL ACQUISITION
PROPERTY PAYMENT CAPITALIZED(A) COST(B)
- -------------------------------------------------------------------------------------------------------------------
Shoppes at Citiside, Charlotte, NC 9,706 - 9,706
Shoppes at New Tampa, Wesley Chapel, FL 19,196 - 19,196
Total acquisitions 1,128,439 12,212 1,377,090
DEVELOPMENT PROJECTS
Citrus Hills - Blockbuster, Citrus Hills, FL 172 - 172
Eckerd Drug Store - Gaffney, Gaffney, SC 1,173 - 1,173
Eckerd Drug Store - Perry Creek, Raleigh, NC 1,775 - 1,775
Shoppes at Chalet Suzanne, Lake Wales, FL 3,297 - 3,29
Southampton Village, Tyrone, GA 2,762 - 2,762
Southwood Plantation, Tallahassee, FL 1,937 - 1,937
Total for Development projects 11,115 - 11,115
Total for Inland Retail Real Estate Trust, Inc. 1,139,555 12,212 1,384,909
</Table>
II-11
<Page>
TABLE VI-(CONTINUED)
ACQUISITION OF PROPERTIES BY PROGRAMS
NOTES TO TABLE VI
(A) "Other Cash Expenditures Capitalized" consists of improvements to the
property and acquisition expenses which are capitalized and paid or to be paid
from the proceeds of the offering. As part of several purchases, rent is
received under master lease agreements on the spaces currently vacant for
periods ranging from one to two years or until the spaces are leased. As these
payments are received, they are recorded as a reduction in the purchase price of
the properties and have been netted against other cash expenditures capitalized.
(B) "Total Acquisition Cost" is the sum of columns captioned "Purchase Price
Plus Acquisition Fee" and "Other Cash Expenditures Capitalized."
II-12
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on this Amendment No. 3 on Form S-11 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Oak Brook, State of
Illinois, on the 18th day of August, 2003.
INLAND WESTERN RETAIL REAL ESTATE TRUST, INC.
By: /s/ Robert D. Parks
--------------------------------------
Title: ROBERT D. PARKS
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHIEF OPERATING OFFICER
II-13
<Page>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<Table>
<Caption>
NAME CAPACITY DATE
- ----------------------------------- ---------------------------------------- -----------------------------
/s/ Chairman and Director August 18 , 2003
- -----------------------------------
Robert D. Parks
/s/ Principal financial and accounting August 18 , 2003
- ----------------------------------- officer
Kelly E. Tucek
/s/
- ----------------------------------- Director August 18 , 2003
Brenda Gujral
* Independent Director August 18 , 2003
- -----------------------------------
Frank Catalano
* Independent Director August 18 , 2003
- -----------------------------------
Ken Beard
* Independent Director August 18 , 2003
- -----------------------------------
Paul R. Gauvreau
* Independent Director August 18 , 2003
- -----------------------------------
Gerald M. Gorski
* Independent Director August 18 , 2003
- -----------------------------------
Barbara A. Murphy
</Table>
*By: /s/ Roberta S. Matlin
---------------------------
Power of Attorney
II-14
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1.1 Form of Dealer Manager Agreement
1.2 Form of Soliciting Dealer Agreement
3.1 First Amended and Restated Articles of Incorporation
of Inland Western Retail Real Estate Trust, Inc.
10.9 Share Repurchase Plan
23.1 Consent of KPMG LLP dated August 20, 2003.
</Table>