===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
March 27, 2002
Federal Realty Investment Trust
--------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 1-07533 52-0782497
------------------------------- ---------------- ------------------
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) (Identification No.)
1626 East Jefferson Street, Rockville, Maryland 20852-4041
----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 998-8100
--------------------
===============================================================================
FEDERAL REALTY INVESTMENT TRUST
ITEM 5. OTHER EVENTS.
As used in this Current Report, references to "we," "our," the "Trust" and
"Federal Realty" and similar references are to Federal Realty Investment Trust,
a Maryland real estate investment trust, and its consolidated subsidiaries.
FEDERAL INCOME TAX CONSEQUENCES
The following is a description of federal income tax consequences for a
holder of Federal Realty's common shares. The following discussion is not
exhaustive of all possible tax consequences and does not provide a detailed
discussion of any state, local or foreign tax consequences. Nor does it discuss
all of the aspects of federal income taxation that may be relevant to a
prospective shareholder in light of his or her particular circumstances or to
shareholders (including insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) who are subject to special
treatment under the federal income tax laws.
The information in this section is based on the Internal Revenue Code,
current, temporary and proposed regulations, the legislative history of the
Internal Revenue Code, current administrative interpretations and practices of
the IRS and court decisions. The reference to IRS interpretations and practices
includes IRS practices and policies as endorsed in private letter rulings,
which are not binding on the IRS except with respect to the taxpayer that
receives the ruling. In each case, these sources are relied upon as they exist
on the date of this prospectus. We cannot assure you that future legislation,
regulations, administrative interpretations and court decisions will not
significantly change current law or adversely affect existing interpretations
of existing law. Any change of this kind could apply retroactively to
transactions preceding the date of the change. Therefore, we cannot assure you
that the statements made in the following discussion, which do not bind the IRS
or the courts, will not be challenged by the IRS or will be sustained by a
court if so challenged.
EACH PROSPECTIVE SHAREHOLDER IS ADVISED TO CONSULT WITH ITS OWN TAX ADVISOR
REGARDING THE SPECIFIC FEDERAL INCOME TAX CONSEQUENCES TO IT IN LIGHT OF ITS
SPECIFIC OR UNIQUE CIRCUMSTANCES OF THE ACQUISITION, OWNERSHIP AND SALE OF
SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REIT, AND ANY STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF FEDERAL REALTY
GENERAL. Federal Realty has elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code. Federal Realty believes that it is
organized and has operated in a manner so as to qualify for taxation as a REIT
under the Internal Revenue Code, and Federal Realty intends to continue to
operate in such a manner. Qualification and taxation as a REIT depends upon
Federal Realty's ability to meet on a continuing basis, through actual annual
operating results, the various requirements under the Internal Revenue Code
with regard to, among other things, the source of its gross income, the
composition of its assets, distribution levels and diversity of stock ownership.
While Federal Realty intends to operate so that it qualifies as a REIT, given
the highly complex nature of the rules governing REITs, the ongoing importance
of factual determinations and the possibility of future changes in circumstances
of Federal Realty, no assurance can be given that Federal Realty will continue
to satisfy such tests.
1
In any year in which Federal Realty qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income taxes on that portion
of its REIT taxable income or capital gain that it currently distributes to
shareholders. This treatment substantially eliminates the "double taxation," at
both the corporate and shareholder levels, that generally results from the use
of corporate investment vehicles. However, Federal Realty will be subject to
federal income tax as follows.
. Federal Realty will be taxed at regular corporate rates on any
undistributed "REIT taxable income." REIT taxable income is the taxable
income of the REIT subject to specified adjustments, including a deduction
for dividends paid by the REIT.
. Under some circumstances, Federal Realty may be subject to the
"alternative minimum tax" on its items of tax preference.
. If Federal Realty has net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in
the ordinary course of business or other non-qualifying income from
foreclosure property, it will be subject to tax at the highest corporate
rate on this income.
. Federal Realty's net income from "prohibited transactions" will be
subject to a 100% tax. In general, prohibited transactions are sales or
other dispositions of property held primarily for sale to customers in
the ordinary course of business other than foreclosure property.
. If Federal Realty fails to satisfy either the 75% gross income test or
the 95% gross income test discussed below, but nonetheless maintains its
qualification as a REIT because other requirements are met, it will be
subject to a tax equal to the gross income attributable to the greater
of either (1) the amount by which 75% of its gross income exceeds the
amount qualifying under the 75% test for the taxable year or (2) the
amount by which 90% of its gross income exceeds the amount of its income
qualifying for the 95% test, multiplied in either case by a fraction
intended to reflect Federal Realty's profitability.
. Federal Realty will be subject to a 4% excise tax on the excess of the
required distribution over the sum of amounts actually distributed and
amounts retained for which federal income tax was paid, if Federal
Realty fails to distribute during each calendar year at least the sum
of:
- 85% of its REIT ordinary income for the year;
- 95% of its REIT capital gain net income for the year; and
- any undistributed taxable income from prior taxable years.
. Federal Realty will be subject to a 100% tax on amounts received (or on
certain expenses deducted by a taxable REIT subsidiary) if arrangements
between Federal Realty, its tenants and a taxable REIT subsidiary are not
comparable to similar arrangements among unrelated parties.
In addition, if Federal Realty acquires any assets from a taxable "C"
corporation in a carry-over basis transaction, it could be liable for specified
tax liabilities inherited from the "C" corporation. If Federal Realty
recognizes gain on the disposition of such assets during the ten year period
beginning on the date on which such assets were acquired by it, then to the
extent of such assets' "Built-In Gain" (i.e., the excess of (a) the fair market
value of such asset at the time of the acquisition by Federal Realty over
(b) the adjusted basis in such asset, determined at the time of such
acquisition), such gain will be subject to tax at the highest regular corporate
rate applicable. For acquisitions prior to January 2, 2002, the results
described herein with respect to the recognition of Built-In Gain assume that
Federal Realty made or will make an election pursuant to Notice 88-19 or
Treasury Regulations that were promulgated in 2000. Federal Realty acquired
assets from a "C" corporation in a carry-over basis transaction in 1995 and made
the required election with respect to any Built-In Gain. Federal Realty also
acquired assets from a "C" corporation in a carry-over basis transaction in 2001
and intends to make the required election with respect to any Built-In Gain. For
acquisitions on or after January 2, 2002, new Treasury Regulations provide that
the results described herein with respect to the recognition of Built-In Gain
will automatically apply without Federal Realty making a separate election as
required for acquisitions prior to January 2, 2002.
2
REQUIREMENTS FOR QUALIFICATION AS A REIT. The Internal Revenue Code defines
a REIT as a corporation, trust or association
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares
or by transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation, but for Sections 856
through 859 of the Internal Revenue Code;
(4) that is neither a financial institution nor an insurance company
subject to specified provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) of which not more than 50% in value of the outstanding stock is owned,
directly or indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include specified entities) during the last
half of each taxable year;
(7) that makes an election to be taxable as a REIT for the current taxable
year, or has made such an election for a previous taxable year which
has not been revoked or terminated; and
(8) that meets certain other tests, described below, regarding the nature
of its income and assets and the amount of its distributions.
Conditions (1) through (4), inclusive, must be met during the entire taxable
year. Condition (5) must be met during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year of less than 12
months other than the first taxable year for which an election is made.
Condition (6) must be met during the last half of each taxable year other than
the first taxable year for which an election to become a REIT is made. For
purposes of determining stock ownership under condition (6), a supplemental
unemployment compensation benefits plan, a private foundation or a portion of a
trust permanently set aside or used exclusively for charitable purposes
generally is considered an individual. However, a trust that is a qualified
trust under Internal Revenue Code Section 401(a) generally is not considered an
individual, and beneficiaries of a qualified trust are treated as holding
shares of a REIT in proportion to their actuarial interests in the trust for
purposes of condition (6).
Federal Realty believes that it has issued sufficient shares of beneficial
interest with sufficient diversity of ownership to allow it to satisfy
conditions (5) and (6) above. In addition, Federal Realty's Declaration of
Trust contains restrictions regarding the transfer of its common shares that
are intended to assist Federal Realty in continuing to satisfy the share
ownership requirements described in (5) and (6) above. These restrictions,
however, may not ensure that Federal Realty will be able to satisfy these share
ownership requirements. If Federal Realty fails to satisfy these share
ownership requirements, it will fail to qualify as a REIT.
To monitor its compliance with condition (6) above, a REIT is required to
send annual letters to its shareholders requesting information regarding the
actual ownership of its shares. If Federal Realty complies with the annual
letters requirement and it does not know, and exercising reasonable diligence
would not have known, whether it failed to meet condition (6) above, Federal
Realty will be treated as having met condition (6).
In addition, the corporation, trust or association must satisfy all relevant
filing and other administrative requirements established by the IRS that must
be met to elect and maintain REIT status, use a calendar year for federal
income tax purposes, and comply with the recordkeeping requirements of the
Internal Revenue Code and the regulations promulgated thereunder.
To qualify as a REIT, Federal Realty cannot have at the end of any taxable
year any undistributed earnings and profits that are attributable to a non-REIT
taxable year. Federal Realty has elected to be taxed as a REIT beginning with
its first taxable year. Therefore, Federal Realty has not had any undistributed
non-REIT earnings and profits of its own. In 1995 and 2001, Federal Realty
acquired the assets of a "C" corporation through a reorganization under Section
368 of the Code. Federal Realty does not believe that it acquired any
undistributed non-REIT earnings and profits in connection with these
acquisitions. However, the Internal Revenue Service could determine otherwise.
3
TAXABLE REIT SUBSIDIARIES. A taxable REIT subsidiary of Federal Realty is a
corporation other than a REIT in which Federal Realty directly or indirectly
holds stock and that has made a joint election with Federal Realty to be
treated as a taxable REIT subsidiary. A taxable REIT subsidiary also includes
any corporation other than a REIT with respect to which a taxable REIT
subsidiary of Federal Realty owns securities possessing more than 35% of the
total voting power or value of the outstanding securities of such corporation.
However, a taxable REIT subsidiary does not include certain health care and
lodging facilities. A taxable REIT subsidiary is subject to regular federal
income tax, and state and local income tax where applicable, as a regular "C"
corporation.
Generally, a taxable REIT subsidiary can perform some impermissible tenant
services without causing Federal Realty to receive impermissible tenant services
income under the REIT income tests discussed below. However, several provisions
regarding the arrangements between a REIT and its taxable REIT subsidiaries
ensure that a taxable REIT subsidiary will be subject to an appropriate level of
federal income taxation. For example, a taxable REIT subsidiary is limited in
its ability to deduct interest payments made to Federal Realty. In addition,
Federal Realty will be obligated to pay a 100% penalty tax on some payments that
it receives or on certain expenses deducted by the taxable REIT subsidiary if
the economic arrangements between the REIT, the REIT's tenants and the taxable
REIT subsidiary are not comparable to similar arrangements among unrelated
parties.
QUALIFIED REIT SUBSIDIARIES. If a REIT owns a corporate subsidiary that is a
"qualified REIT subsidiary," the separate existence of that subsidiary will be
disregarded for federal income tax purposes. Generally, a qualified REIT
subsidiary is a corporation, other than a taxable REIT subsidiary, all of the
capital stock of which is owned by the REIT. All assets, liabilities and items
of income, deduction and credit of the qualified REIT subsidiary will be
treated as assets, liabilities and items of income, deduction and credit of the
REIT itself. A qualified REIT subsidiary of Federal Realty will not be subject
to federal corporate income taxation, although it may be subject to state and
local taxation in some states.
INCOME TESTS. In order to maintain qualification as a REIT, there are two
gross income requirements that must be satisfied annually. First, at least 75%
of the REIT's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property, including
"rents from real property," gains on the disposition of real estate, dividends
paid by another REIT and interest on obligations secured by mortgages on real
property or on interests in real property, or from certain types of temporary
investments. Second, at least 95% of the REIT's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
the same items which qualify under the 75% income test, and from dividends,
interest, some payments under hedging instruments and gain from the sale or
disposition of stock, securities or some hedging instruments.
Rents received by Federal Realty will qualify as rents from real property in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. These conditions relate to the identity of the
tenant, the computation of the rent payable and the nature of the property
leased. First, the amount of rent must not be based in whole or in part on the
income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "rents from real property" solely
by reason of being based on a fixed percentage or percentages of receipts or
sales. Second, rents received from a "related party tenant" will not qualify as
rents from real property in satisfying the gross income tests unless
(1) the tenant is a taxable REIT subsidiary,
(2) at least 90% of the property is leased to unrelated tenants and
(3) the rent paid by the taxable REIT subsidiary is substantially
comparable to the rent paid by the unrelated tenants for comparable
space.
A tenant is a related party tenant if the REIT, or an actual or constructive
owner of 10% or more of the REIT, actually or constructively owns 10% or more
of the tenant. Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to the personal
property will not qualify as rents from real property.
4
Generally, for rents to qualify as rents from real property for the purposes
of the gross income tests, Federal Realty is allowed to provide directly only an
insignificant amount of services, unless the services are both "usually or
customarily rendered" in connection with the rental of real property and not
otherwise considered "rendered to the occupant." Income received from any other
services will be treated as "impermissible tenant service income" unless the
services are provided through an independent contractor that bears the expenses
of providing the services and from whom Federal Realty derives no revenue or
through a taxable REIT subsidiary, subject to specified limitations. The amount
of impermissible tenant service income is deemed to be the greater of the amount
actually received by the REIT or 150% of Federal Realty's direct cost of
providing the service. If the impermissible tenant service income exceeds 1% of
Federal Realty's total income from a property, then all of the income from that
property will fail to qualify as rents from real property. If the total amount
of impermissible tenant service income from a property does not exceed 1% of
Federal Realty's total income from that property, the income will not cause the
rent paid by tenants of that property to fail to qualify as rents from real
property, but the impermissible tenant service income itself will not qualify as
rents from real property.
Federal Realty may receive fees in consideration of the performance of
property management services with respect to certain properties not owned
entirely by Federal Realty. A portion of such fees, corresponding to that
portion of a property owned by a third party, will not qualify under the 75% or
95% gross income test. Federal Realty also may receive certain other types of
income with respect to the properties it owns that will not qualify for the 75%
or 95% gross income test. In addition, dividends on Federal Realty's stock in
any taxable REIT subsidiaries will not qualify under the 75% gross income test.
Federal Realty believes, however, that the aggregate amount of such fees and
other non-qualifying income in any taxable year will not cause Federal Realty to
exceed the limits on non-qualifying income under the 75% and 95% gross income
tests.
Federal Realty owns stock interests in taxable REIT subsidiaries. Each of
these taxable REIT subsidiaries is taxable as a regular "C corporation." Federal
Realty's share of any dividends received from these taxable REIT subsidiaries
(and from any other corporation in which it owns an interest) should qualify for
purposes of the 95% gross income test but not for purposes of the 75% gross
income test. Federal Realty does not anticipate that it will receive sufficient
dividends to cause it to exceed the limit on non-qualifying income under the 75%
gross income test.
If Federal Realty fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
that year if it is entitled to relief under the Internal Revenue Code. These
relief provisions generally will be available if Federal Realty's failure to
meet the tests is due to reasonable cause and not due to willful neglect,
Federal Realty attaches a schedule of the sources of its income to its federal
income tax return and any incorrect information on the schedule is not due to
fraud with the intent to evade tax. It is not possible, however, to state
whether in all circumstances Federal Realty would be entitled to the benefit of
these relief provisions. For example, if Federal Realty fails to satisfy the
gross income tests because non-qualifying income that Federal Realty
intentionally incurs exceeds the limits on non-qualifying income, the Internal
Revenue Service could conclude that the failure to satisfy the tests was not
due to a reasonable cause. If Federal Realty fails to satisfy the 75% or 95%
gross income test and these relief provisions do not apply, Federal Realty will
fail to qualify as a REIT. Even if these relief provisions were to apply,
Federal Realty would be subject to a penalty tax based upon the amount of non-
qualifying income.
ASSET TESTS. At the close of each quarter of its taxable year, Federal
Realty must satisfy six tests relating to the nature of its assets.
(1) At least 75% of the value of Federal Realty's total assets must be
represented by real estate assets, cash, cash items and government
securities. Federal Realty's real estate assets include, for this
purpose, its allocable share of real estate assets held by the
partnerships in which it owns an interest and the non-corporate
subsidiaries of those partnerships, as well as stock or debt
instruments held for less than one year purchased with the proceeds of
an offering of shares or long-term debt of Federal Realty.
5
(2) Not more than 25% of Federal Realty's total assets may be represented
by securities, other than those in the 75% asset class.
(3) Except for equity investments in REITs, qualified REIT subsidiaries,
taxable REIT subsidiaries or investments secured by real estate, the
value of any one issuer's securities owned by Federal Realty may not
exceed 5% of the value of Federal Realty's total assets.
(4) Except for equity investments in REITs, qualified REIT subsidiaries,
taxable REIT subsidiaries or investments secured by real estate, Federal
Realty may not own more than 10% of any one issuer's outstanding voting
securities.
(5) Except for equity investments in REITs, qualified REIT subsidiaries,
taxable REIT subsidiaries or investments secured by real estate, Federal
Realty may not own more than 10% of the total value of the outstanding
securities of any one issuer.
(6) Not more than 20% of the value of Federal Realty's total assets may be
represented by the securities of one or more taxable REIT subsidiaries.
Securities for purposes of the asset tests may include debt securities.
However, debt of an issuer will not count as a security for purposes of the 10%
value test if the debt securities meet the "straight debt" safe harbor and
(1) the issuer is an individual, (2) the only securities of the issuer that the
REIT holds are straight debt or (3) if the issuer is a partnership, the REIT
holds at least a 20% profits interest in the partnership.
Federal Realty currently owns stock interests in taxable REIT subsidiaries.
So long as these subsidiaries qualify as taxable REIT subsidiaries, Federal
Realty will not be subject to the 5% asset test, 10% voting securities
limitation or 10% value limitation with respect to these subsidiaries. Federal
Realty may acquire securities in other taxable REIT subsidiaries in the future.
Federal Realty believes that the aggregate value of its taxable REIT
subsidiaries will not exceed 20% of the aggregate value of its gross assets.
With respect to each issuer in which Federal Realty currently owns an
interest that does not qualify as a REIT, a qualified REIT subsidiary or a
taxable REIT subsidiary, Federal Realty believes that its pro rata share of the
value of the securities, including unsecured debt, of any such issuer does not
exceed 5% of the total value of Federal Realty's assets and that it complies
with the 10% voting securities limitation and 10% value limitation, taking into
account the "straight debt" exceptions with respect to certain issuers. With
respect to its compliance with each of these asset tests, however, Federal
Realty cannot assure you that the Internal Revenue Service might not disagree
with Federal Realty's determinations.
After initially meeting the asset tests at the close of any quarter, Federal
Realty will not lose its status as a REIT if it fails to satisfy the 25%, 20%
or 5% asset tests or the 10% value limitation at the end of a later quarter
solely by reason of changes in the relative values of its assets. If the
failure to satisfy the 25%, 20% or 5% asset tests or the 10% value limitation
results from an acquisition of securities or other property during a quarter,
the failure can be cured by disposition of sufficient non-qualifying assets
within 30 days after the close of that quarter. Federal Realty intends to
maintain adequate records of the value of its assets to ensure compliance with
the asset tests and to take any available actions within 30 days after the
close of any quarter as may be required to cure any noncompliance with the 25%
20%, or 5% asset tests or 10% value limitation. If Federal Realty were to fail
to cure noncompliance with the asset tests within this time period, Federal
Realty would cease to qualify as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS. Federal Realty, in order to qualify for
taxation as a REIT, is required to make dividend distributions (other than
capital gain dividends) to its shareholders each year in an amount at least
equal to
(1) the sum of
(a) 90% of Federal Realty's REIT taxable income (computed without
regard to the dividends paid deduction and Federal Realty's net
capital gain) and
6
(b) 90% of the net income (after tax), if any, from foreclosure
property,
minus
(2) the sum of certain items of non-cash income.
Distributions must generally be made during the taxable year to which they
relate. Dividends may be paid in the following year in two circumstances.
First, dividends may be declared in the following year if the dividends are
declared before Federal Realty timely files its tax return for the year and if
made before the first regular dividend payment made after such declaration.
Second, if Federal Realty declares a dividend in October, November, or December
of any year with a record date in one of these months and pays the dividend on
or before January 31 of the following year, Federal Realty will be treated as
having paid the dividend on December 31 of the year in which the dividend was
declared. To the extent that Federal Realty does not distribute all of its net
capital gain or distributes at least 90%, but less than 100%, of its REIT
taxable income, as adjusted, it will be subject to tax on the undistributed
amount at regular capital gains or ordinary corporate tax rates, as the case
may be.
A REIT may elect to retain rather than distribute all or a portion of its
net capital gains and pay the tax on the gains. In that case, a REIT may elect
to have its shareholders include their proportionate share of the undistributed
net capital gains in income as long-term capital gains and receive a credit for
their share of the tax paid by the REIT. For purposes of the 4% excise tax
described above under TAXATION OF FEDERAL REALTY -- GENERAL, any retained
amounts would be treated as having been distributed.
Federal Realty believes that it has made, and intends to continue to make,
timely distributions sufficient to satisfy the annual distribution
requirements. It is possible, however, that Federal Realty, from time to time,
may not have sufficient cash or other liquid assets to meet the distribution
requirements. In that event, Federal Realty may arrange for short-term, or
possibly long-term, borrowing to permit the payments of required dividends.
Under some circumstances, Federal Realty may be able to rectify a failure to
meet the distribution requirement for a year by paying deficiency dividends to
shareholders in a later year, which may be included in Federal Realty's
deduction for dividends paid for the earlier year. Thus, Federal Realty may be
able to avoid being taxed on amounts distributed as deficiency dividends.
However, Federal Realty will be required to pay interest based upon the amount
of any deduction taken for deficiency dividends.
RECORD-KEEPING REQUIREMENTS. Federal Realty is required to comply with
applicable record-keeping requirements. Failure to comply could result in
monetary fines.
FAILURE TO QUALIFY. If Federal Realty fails to qualify for taxation as a
REIT in any taxable year and the relief provisions do not apply, Federal Realty
will be subject to tax, including any applicable alternative minimum tax, on
its taxable income at regular corporate rates. Distributions to shareholders in
any year in which Federal Realty fails to qualify will not be required and, if
made, will not be deductible by Federal Realty. Unless entitled to relief under
specific statutory provisions, Federal Realty also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all
circumstances Federal Realty would be entitled to such statutory relief.
TAX ASPECTS OF FEDERAL REALTY'S INVESTMENTS IN PARTNERSHIPS
GENERAL. Federal Realty holds direct or indirect interests in a number of
partnerships and limited liability companies (each individually, a
"partnership" and, collectively, the "partnerships"). Federal Realty believes
that each of the partnerships, other than wholly owned limited liability
companies, which are disregarded for tax purposes, qualifies as a partnership,
as opposed to an association taxable as a corporation, for federal income tax
purposes. If any of the partnerships were to be treated as an association, it
would be taxable as a corporation and therefore subject to an entity-level tax
on its income. In such a situation, the character of Federal Realty's assets
and items of gross income would change, which could preclude Federal Realty
from satisfying the asset tests and possibly the income tests and, in turn,
could prevent Federal Realty from qualifying as a REIT.
7
OWNERSHIP OF PARTNERSHIP INTERESTS BY A REIT. A REIT that is a partner in a
partnership will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to earn its proportionate share of the
partnership's income. In addition, the assets and gross income of the
partnership retain the same character in the hands of the REIT for purposes of
the gross income and asset tests applicable to REITs. Thus, Federal Realty's
proportionate share of the assets and items of income of the partnerships,
including the partnership's share of assets and items of income of any
subsidiaries that are partnerships or limited liability companies, are treated
as assets and items of income of Federal Realty for purposes of applying the
asset and income tests. Federal Realty has control over substantially all of
the partnerships and limited liability companies in which it holds interests
and intends to operate them in a manner that is consistent with the
requirements for qualification of Federal Realty as a REIT.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Pursuant to Section 704(c)
of the Internal Revenue Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated in a manner such
that the contributing partner is charged with, or benefits from, respectively,
the unrealized gain or unrealized loss associated with the property at the time
of the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value and the
adjusted tax basis of contributed property at the time of contribution (a
"Book-Tax Difference"). Such allocations are solely for federal income tax
purposes and do not affect the book capital accounts or other economic or legal
arrangements among the partners. These allocations will tend to eliminate the
Book-Tax Difference over the life of the partnerships. However, the special
allocation rules of Section 704(c) as applied by Federal Realty do not always
entirely rectify the Book-Tax Difference on an annual basis or with respect to
a specific taxable transaction such as a sale. Thus, the carryover basis of the
contributed assets in the hands of the Partnerships will cause Federal Realty
to be allocated lower depreciation and other deductions, and possibly greater
amounts of taxable income in the event of a sale of contributed assets in
excess of the economic or book income allocated to it as a result of such sale.
This may cause Federal Realty to recognize taxable income in excess of cash
proceeds, which might adversely affect Federal Realty's ability to comply with
the REIT distribution requirements.
PROHIBITED TRANSACTIONS TAX
Federal Realty's share of any gain realized by the sale of any dealer
property generally will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. Under existing law, whether property is
dealer property is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. Federal Realty and
its partnership subsidiaries have held and intend to continue to hold the
properties for investment with a view to long-term appreciation, to engage in
the business of acquiring, developing, owning and operating the properties and
to make such occasional sales of the properties as are consistent with Federal
Realty's investment objectives. Based upon such investment objectives, Federal
Realty believes that, in general, the properties should not be considered
dealer property and that the amount of income from prohibited transactions, if
any, will not be material.
TAXATION OF TAXABLE DOMESTIC HOLDERS OF COMMON SHARES
As used in the remainder of this discussion, the term "U.S. shareholder"
means a beneficial owner of a common share of Federal Realty that is, for
United States federal income tax purposes:
. a citizen or resident, as defined in Section 7701(b) of the Internal
Revenue Code, of the United States;
. a corporation or partnership, or other entity treated as a corporation
or partnership for federal income tax purposes, created or organized in or
under the laws of the United States or any state or the District of
Columbia;
. an estate the income of which is subject to United States federal income
taxation regardless of its source; or
. a trust (i) if it is subject to the primary supervision of a court within
the United States and one or more United States persons have the authority
to control all substantial decisions of the trust or (ii) that has a valid
election under applicable Treasury Regulations to be treated as a United
States person.
8
Generally, in the case of a partnership that holds common shares of Federal
Realty, any partner that would be a U.S. shareholder if it held the common
shares directly is also a U.S. shareholder. A "non-U.S. shareholder" is a
holder, including any partner in a partnership that holds common shares, that
is not a U.S. shareholder.
DISTRIBUTIONS. As long as Federal Realty qualifies as a REIT, distributions
made to Federal Realty's taxable U.S. shareholders out of current or
accumulated earnings and profits, and not designated as capital gain dividends,
will be taken into account by them as ordinary income. Corporate shareholders
will not be eligible for the dividends received deduction with respect to these
distributions.
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a U.S. shareholder to the extent that the distributions do
not exceed the adjusted basis of the U.S. shareholder's common shares. Rather,
such distributions will reduce the adjusted basis of such common shares. To the
extent that such distributions exceed the adjusted basis of a U.S.
shareholder's common shares, they will be taxable as capital gains, assuming
the common shares are a capital asset in the hands of the U.S. shareholder. If
Federal Realty declares a dividend in October, November or December of any year
with a record date in one of these months and pays the dividend on or before
January 31 of the following year, Federal Realty will be treated as having paid
the dividend, and the shareholder will be treated as having received the
dividend, on December 31 of the year in which the dividend was declared.
Federal Realty may elect to designate distributions of its net capital gain
as "capital gain dividends." Capital gain dividends are taxed to U.S.
shareholders as gain from the sale or exchange of a capital asset held for more
than one year. This tax treatment applies regardless of the period the
shareholder has held its shares. If Federal Realty designates any portion of a
dividend as a capital gain dividend, a U.S. shareholder will receive an
Internal Revenue Service Form 1099-DIV indicating the amount that will be
taxable to the shareholder as capital gain. Corporate shareholders, however,
may be required to treat up to 20% of capital gain dividends as ordinary
income.
Federal Realty may elect to require shareholders to include Federal Realty's
undistributed net capital gains in their income. If Federal Realty makes such
an election, U.S. shareholders
(1) will include in their income as long-term capital gains their
proportionate share of such undistributed capital gains and
(2) will be deemed to have paid their proportionate share of the tax paid
by Federal Realty on such undistributed capital gains and thereby
receive a credit or refund for such amount.
A U.S. shareholder will increase the basis in its common shares by the
difference between the amount of capital gain included in its income and the
amount of tax it is deemed to have paid. The earnings and profits of Federal
Realty will be adjusted appropriately.
Federal Realty will classify portions of any designated capital gain
dividend as either:
. a 20% gain distribution, which would be taxable to non-corporate U.S.
shareholders at a maximum rate of 20%; or
. an "unrecaptured Section 1250 gain" distribution, which would be taxable
to non-corporate U.S. shareholders at a maximum rate of 25%.
Federal Realty must determine the maximum amounts that it may designate as
20% and 25% capital gain dividends by performing the computation required by
the Internal Revenue Code as if the REIT were an individual whose ordinary
income were subject to a marginal tax rate of at least 28%. Designations made
by Federal Realty only will be effective to the extent that they comply with
Revenue Ruling 89-81, which requires that distributions made to different
classes of shares not be composed disproportionately of a particular type of
dividends.
Distributions made by Federal Realty and gain arising from the sale or
exchange by a U.S. shareholder of common shares will not be treated as passive
activity income, and as a result, U.S. shareholders generally will not be able
to apply any "passive losses" against this income or gain. In addition, taxable
distributions from Federal Realty generally will be treated as investment
income for purposes of the investment interest limitations. A U.S. shareholder
9
may elect to treat capital gain dividends and capital gains from the disposition
of common shares as investment income for purposes of the investment interest
limitation, in which case the applicable capital gains will be taxed at ordinary
income rates. Federal Realty will notify shareholders regarding the portions of
distributions for each year that constitute ordinary income, return of capital
and capital gain. U.S. shareholders may not include in their individual income
tax returns any net operating losses or capital losses of Federal Realty.
Federal Realty's operating or capital losses would be carried over by Federal
Realty for potential offset against future income, subject to applicable
limitations.
SALES OF SHARES. Upon any taxable sale or other disposition of common
shares, a U.S. shareholder will recognize gain or loss for federal income tax
purposes on the disposition in an amount equal to the difference between:
(1) the amount of cash and the fair market value of any property received
on such disposition; and
(2) the holder's adjusted basis in the common shares for tax purposes.
Gain or loss will be capital gain or loss if the shares have been held by
the U.S. shareholder as a capital asset. The applicable tax rate will depend on
the shareholder's holding period in the asset (generally, if an asset has been
held for more than one year, it will produce long-term capital gain) and the
shareholder's tax bracket. The Internal Revenue Service has the authority to
prescribe, but has not yet prescribed, regulations that would apply a capital
gain tax rate of 25%, which is generally higher than the long-term capital gain
tax rates for non-corporate shareholders, to a portion of capital gain realized
by a non-corporate shareholder on the sale of REIT shares that would correspond
to the REIT's "unrecaptured Section 1250 gain." Shareholders are advised to
consult with their own tax advisors with respect to their capital gain tax
liability.
In general, any loss recognized by a U.S. shareholder upon the sale or other
disposition of shares that have been held for six months or less, after
applying certain holding period rules, will be treated as a long-term capital
loss, but only to the extent of distributions received by the U.S. shareholder
from Federal Realty that are required to be treated by such U.S. shareholder as
long-term capital gains.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Provided that a tax-exempt shareholder has not held its common shares as
"debt financed property" within the meaning of the Internal Revenue Code, the
dividend income from Federal Realty will not be unrelated business taxable
income, referred to as UBTI, to a tax-exempt shareholder. Similarly, income
from the sale of common shares will not constitute UBTI unless the tax-exempt
shareholder has held its share as debt financed property within the meaning of
the Internal Revenue Code or has used the common shares in a trade or business.
However, for tax-exempt shareholders that are social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts and
qualified group legal services plans exempt from federal income taxation under
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code,
respectively, income from an investment in Federal Realty will constitute UBTI
unless the organization properly sets aside or reserves such amounts for
purposes specified in the Internal Revenue Code. These tax-exempt shareholders
should consult their own tax advisors concerning these "set aside" and reserve
requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension-held REIT" are treated as UBTI as to any trust which is described in
Section 401(a) of the Internal Revenue Code, is tax-exempt under Section 501(a)
of the Internal Revenue Code, and holds more than 10%, by value, of the
interests in the REIT. Tax-exempt pension funds that are described in Section
401(a) of the Internal Revenue Code are referred to below as "pension trusts."
A REIT is a pension-held REIT if it meets the following two tests:
(1) it would not have qualified as a REIT but for the provisions of Section
856(h)(3) of the Internal Revenue Code, which provide that stock owned
by pension trusts will be treated, for purposes of determining whether
10
the REIT is closely held, as owned by the beneficiaries of the trust rather
than by the trust itself; and
(2) either
(a) at least one pension trust holds more than 25% of the value of
the interests in the REIT, or
(b) a group of pension trusts each individually holding more than 10%
of the value of the REIT's shares, collectively owns more than
50% of the value of the REIT's shares.
The percentage of any REIT dividend treated as UBTI is equal to the ratio
of the UBTI earned by the REIT, treating the REIT as if it were a pension
trust and therefore subject to tax on UBTI, to the total gross income of the
REIT. An exception applies where the percentage is less than 5% for any year.
The provisions requiring pension trusts to treat a portion of REIT
distributions as UBTI will not apply if the REIT is able to satisfy the "not
closely held requirement" without relying upon the "look-through" exception
with respect to pension trusts. Based on both its current share ownership and
the limitations on transfer and ownership of shares contained in its
Declaration of Trust, Federal Realty does not expect to be classified as a
pension-held REIT.
TAXATION OF NON-U.S. SHAREHOLDERS
DISTRIBUTIONS BY FEDERAL REALTY. Distributions by Federal Realty to a non-
U.S. shareholder that are neither attributable to gain from sales or exchanges
by Federal Realty of "U.S. real property interests" nor designated by Federal
Realty as capital gains dividends will be treated as dividends of ordinary
income to the extent that they are made out of Federal Realty's current or
accumulated earnings and profits. These distributions ordinarily will be
subject to U.S. federal income tax on a gross basis at a rate of 30%, or a
lower rate as permitted under an applicable income tax treaty, unless the
dividends are treated as effectively connected with the conduct by the non-
U.S. shareholder of a U.S. trade or business. Under some treaties, however,
lower tax and withholding rates generally applicable to dividends do not apply
to dividends from REITs. Dividends that are effectively connected with a trade
or business will be subject to tax on a net basis, that is, after allowance
for deductions, at graduated rates, in the same manner as U.S. shareholders
are taxed with respect to these dividends and are generally not subject to
withholding. Applicable certification and disclosure requirements must be
satisfied to be exempt from withholding under the effectively connected income
exemption. Any dividends received by a corporate non-U.S. shareholder that is
engaged in a U.S. trade or business also may be subject to an additional
branch profits tax at a 30% rate, or lower applicable treaty rate.
Federal Realty expects to withhold U.S. income tax at the rate of 30% on
any dividend distributions, not designated as (or deemed to be) capital gain
dividends, made to a non-U.S. shareholder unless:
(1) a lower treaty rate applies and the non-U.S. shareholder files an
Internal Revenue Service Form W-8BEN evidencing eligibility for that
reduced rate with Federal Realty; or
(2) the non-U.S. shareholder files an Internal Revenue Service Form W-8ECI
with Federal Realty claiming that the distribution is effectively
connected with the non-U.S. shareholder's trade or business.
Distributions in excess of Federal Realty's current or accumulated earnings
and profits that do not exceed the adjusted basis of the non-U.S. shareholder
in its common shares will reduce the non-U.S. shareholder's adjusted basis in
its Federal Realty's common shares and will not be subject to U.S. federal
income tax. Distributions in excess of current and accumulated earnings and
profits of Federal Realty that do exceed the adjusted basis of the non-U.S.
shareholder in its common shares will be treated as gain from the sale of its
common shares, the tax treatment of which is described below. See "Taxation of
Non-U.S. Shareholders--Sale of Common Shares."
Federal Realty may be required to withhold at least 10% of any distribution
in excess of its current and accumulated earnings and profits, even if a lower
treaty rate applies or the non-U.S. shareholder is not liable for tax on the
receipt of that distribution. However, a non-U.S. shareholder may seek a
refund of these amounts from the Internal Revenue Service if the non-U.S.
11
shareholder's U.S. tax liability with respect to the distribution is less than
the amount withheld.
Distributions to a non-U.S. shareholder that are designated by Federal
Realty at the time of the distribution as capital gain dividends, other than
those arising from the disposition of a U.S. real property interest, generally
should not be subject to U.S. federal income taxation unless:
. the investment in the common shares is effectively connected with the
non-U.S. shareholder's U.S. trade or business, in which case the non-U.S.
shareholder will be subject to the same treatment as U.S. shareholders
with respect to any gain, except that a shareholder that is a foreign
corporation also may be subject to the 30% branch profits tax, as
discussed above, or
. the non-U.S. shareholder is a nonresident alien individual who is
present in the U.S. for 183 days or more during the taxable year and has
a "tax home" in the U.S., in which case the nonresident alien individual
will be subject to a 30% tax on the individual's capital gains.
Federal Realty will be required to withhold and remit to the Internal
Revenue Service 35% of any distributions to foreign shareholders that are
designated as capital gain dividends, or, if greater, 35% of a distribution
that could have been designated as a capital gain dividend. Distributions can
be designated as capital gains to the extent of Federal Realty's net capital
gain for the taxable year of the distribution. The amount withheld is
creditable against the non-U.S. shareholder's United States federal income tax
liability.
Although the law is not clear on the matter, it appears that amounts
designated by Federal Realty as undistributed capital gains in respect of the
common shares held by U.S. shareholders generally should be treated with
respect to non-U.S. shareholders in the same manner as actual distributions by
Federal Realty of capital gain dividends. Under that approach, the non-U.S.
shareholders would be able to offset as a credit against their United States
federal income tax liability resulting therefrom their proportionate share of
the tax paid by Federal Realty on the undistributed capital gains, and to
receive from the Internal Revenue Service a refund to the extent their
proportionate share of this tax paid by Federal Realty were to exceed their
actual United States federal income tax liability.
Under the Foreign Investment in Real Property Tax Act, which is referred to
as "FIRPTA," distributions to a non-U.S. shareholder that are attributable to
gain from sales or exchanges by Federal Realty of U.S. real property interests,
whether or not designated as a capital gain dividend, will cause the non-U.S.
shareholder to be treated as recognizing gain that is income effectively
connected with a U.S. trade or business. Non-U.S. shareholders will be taxed on
this gain at the same rates applicable to U.S. shareholders, subject to a
special alternative minimum tax in the case of nonresident alien individuals.
Also, this gain may be subject to a 30% branch profits tax in the hands of a
non-U.S. shareholder that is a corporation.
SALE OF COMMON SHARES. Gain recognized by a non-U.S. shareholder upon the
sale or exchange of Federal Realty common shares generally would not be subject
to United States taxation unless:
. the investment in Federal Realty common shares is effectively connected
with the non-U.S. shareholder's U.S. trade or business, in which case
the non-U.S. shareholder will be subject to the same treatment as
domestic shareholders with respect to any gain;
. the non-U.S. shareholder is a nonresident alien individual who is
present in the United States for 183 days or more during the taxable
year and has a tax home in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the
individual's net capital gains for the taxable year; or
. Federal Realty common shares constitute a U.S. real property interest
within the meaning of FIRPTA, as described below.
12
Federal Realty's common shares will not constitute a United States real
property interest if Federal Realty is a domestically controlled REIT. Federal
Realty will be a domestically controlled REIT if, at all times during a
specified testing period, less than 50% in value of its stock is held directly
or indirectly by non-U.S. shareholders.
Federal Realty believes that, currently, it is a domestically controlled
REIT and, therefore, that the sale of Federal Realty's common shares would not
be subject to taxation under FIRPTA. Because Federal Realty's common shares are
publicly traded, however, Federal Realty cannot guarantee that it is or will
continue to be a domestically controlled REIT.
Even if Federal Realty does not qualify as a domestically controlled REIT at
the time a non-U.S. shareholder sells its Federal Realty common shares, gain
arising from the sale still would not be subject to FIRPTA tax if:
. the class or series of shares sold is considered regularly traded under
applicable Treasury regulations on an established securities market,
such as the NYSE; and
. the selling non-U.S. shareholder owned, actually or constructively, 5%
or less in value of the outstanding class or series of shares being sold
throughout the five-year period ending on the date of the sale or
exchange.
If gain on the sale or exchange of Federal Realty common shares were subject
to taxation under FIRPTA, the non-U.S. shareholder would be subject to regular
U.S. income tax with respect to any gain in the same manner as a taxable U.S.
shareholder, subject to any applicable alternative minimum tax and special
alternative minimum tax in the case of nonresident alien individuals.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
U.S. SHAREHOLDERS
In general, information reporting requirements will apply to payments of
distributions on common shares and payments of the proceeds of the sale of
common shares to some shareholders, unless an exception applies. Further, the
payer will be required to withhold backup withholding tax at the rate of 30%
(currently scheduled to be reduced to 28% by 2006) if:
. the payee fails to furnish a taxpayer identification number, or TIN, to
the payer or to establish an exemption from backup withholding;
. the Internal Revenue Service notifies the payer that the TIN furnished
by the payee is incorrect;
. there has been a notified payee under reporting with respect to
interest, dividends or original issue discount described in Section
3406(c) of the Internal Revenue Code; or
. there has been a failure of the payee to certify under the penalty of
perjury that the payee is not subject to backup withholding under the
Internal Revenue Code.
Some shareholders, including corporations, will be exempt from
backup withholding. Any amounts withheld under the backup withholding rules from
a payment to a shareholder will be allowed as a credit against the shareholder's
United States federal income tax and may entitle the shareholder to a refund,
provided that the required information is furnished to the Internal Revenue
Service.
NON-U.S. SHAREHOLDERS
Generally, information reporting will apply to payments of distributions on
common shares, and backup withholding at a rate of 30% (currently scheduled to
be reduced to 28% by 2006) may apply, unless the payee certifies that it is not
a U.S. person or otherwise establishes an exemption.
13
The payment of the proceeds from the disposition of common shares to or
through the U.S. office of a U.S. or foreign broker will be subject to
information reporting and, possibly, backup withholding unless the non-U.S.
shareholder certifies as to its non-U.S. status or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
shareholder is a U.S. person or that the conditions of any other exemption are
not, in fact, satisfied. The proceeds of the disposition by a non-U.S.
shareholder of common shares to or through a foreign office of a broker
generally will not be subject to information reporting or backup withholding.
However, if the broker is a U.S. person, a controlled foreign corporation for
U.S. tax purposes, or a foreign person 50% or more of whose gross income from
all sources for specified periods is from activities that are effectively
connected with a U.S. trade or business, information reporting generally will
apply unless the broker has documentary evidence as to the non-U.S.
shareholder's foreign status and has no actual knowledge to the contrary.
Applicable Treasury regulations provide presumptions regarding the status of
shareholders when payments to the shareholders cannot be reliably associated
with appropriate documentation provided to the payer. Under these Treasury
regulations, some shareholders are required to have provided new certifications
with respect to payments made after December 31, 2000. Because the application
of these Treasury regulations varies depending on the shareholder's particular
circumstances, you are advised to consult your tax advisor regarding the
information reporting requirements applicable to you.
OTHER TAX CONSIDERATIONS
A portion of Federal Realty's income is earned through the taxable REIT
subsidiaries. The taxable REIT subsidiaries are regular "C corporations" and
thus pay federal, state and local income taxes on their net income at normal
corporate rates. Furthermore, a taxable REIT subsidiary may be limited in its
ability to deduct interest payments made to Federal Realty.
Federal Realty and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of
Federal Realty and its shareholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the common shares of Federal Realty.
Any federal, state or local income taxes that Federal Realty and the
taxable REIT subsidiaries are required to pay will reduce the cash available for
distribution by Federal Realty to its shareholders.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FEDERAL REALTY INVESTMENT TRUST
Date: March 27, 2002 By: /s/ NANCY J. HERMAN
------------------------------
Nancy J. Herman
Senior Vice President--General
Counsel and Secretary