Filed Pursuant to Rule 424(b)(5)
Registration No. 333-49351
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 10, 1998)
4,500,000 SHARES
[LEXINGTON LOGO]
LEXINGTON CORPORATE PROPERTIES TRUST
COMMON SHARES OF BENEFICIAL INTEREST
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We are offering 4,500,000 common shares of beneficial interest. Our common
shares are traded on the New York Stock Exchange under the symbol "LXP." On
April 29, 2003, the last reported sale price of our common shares on the New
York Stock Exchange was $17.62 per share.
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INVESTING IN OUR COMMON SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE S-4 OF THIS PROSPECTUS SUPPLEMENT.
The underwriter has agreed to purchase the 4,500,000 common shares offered by
this prospectus supplement at a price of $16.44 per share, resulting in
aggregate proceeds to us, before deducting transactions costs payable by us, of
$73,980,000.
The underwriter proposes to offer the common shares from time to time for sale
in negotiated transactions or otherwise, at market prices prevailing at the time
of sale, at prices related to such market prices or at negotiated prices. The
common shares may be offered by the underwriter to purchasers directly, through
agents or through brokerage transactions on the New York Stock Exchange or to
dealers in negotiated transactions.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION,
NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES
ARE TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Delivery of the common shares will be made on or about May 5, 2003.
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WACHOVIA SECURITIES
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS APRIL 29, 2003.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
About This Prospectus Supplement............................ ii
Cautionary Statements Concerning Forward-Looking
Information............................................... ii
Summary..................................................... S-1
The Offering................................................ S-3
Risk Factors................................................ S-4
Use Of Proceeds............................................. S-12
Description Of Common Shares................................ S-13
Restrictions On Transfers Of Capital Shares And
Anti-Takeover Provisions.................................. S-13
Distribution Policy......................................... S-14
Price Range Of Our Common Shares And Distribution History... S-15
Federal Income Tax Considerations........................... S-15
Underwriting................................................ S-26
Legal Matters............................................... S-27
Experts..................................................... S-28
Available Information....................................... S-28
Incorporation Of Information We File With The SEC........... S-28
PROSPECTUS
Available Information....................................... 2
Incorporation Of Certain Documents By Reference............. 2
The Company................................................. 3
Risk Factors................................................ 4
Use Of Proceeds............................................. 6
Ratio Of Earnings To Fixed Charges.......................... 7
Description Of Debt Securities.............................. 7
Description Of Preferred Shares............................. 18
Description Of Common Shares................................ 24
Restrictions On Transfers Of Capital Shares And
Anti-Takeover Provisions.................................. 25
Federal Income Tax Considerations........................... 27
Plan Of Distribution........................................ 37
Experts..................................................... 38
Legal Matters............................................... 38
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS. NEITHER WE NOR ANY OF THE UNDERWRITERS HAVE
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WHEN YOU MAKE A
DECISION ABOUT WHETHER TO INVEST IN OUR COMMON SHARES, YOU SHOULD NOT RELY UPON
ANY INFORMATION OTHER THAN THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN
THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY
DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS SUPPLEMENT. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THESE COMMON SHARES IN ANY
CIRCUMSTANCES UNDER WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL OR IN ANY STATE
WHERE SUCH OFFER OR SOLICITATION IS NOT PERMITTED.
i
ABOUT THIS PROSPECTUS SUPPLEMENT
All references to "we," "our" and "us" in this prospectus supplement means
Lexington Corporate Properties Trust and all entities owned or controlled by us
except where it is made clear that the term means only the parent company. The
term "you" refers to a prospective investor.
When used in this prospectus supplement, the phrase "funds from
operations," or FFO, which is a commonly used measurement of the performance of
an equity real estate investment trust, or REIT, as defined by the National
Association of Real Estate Investment Trusts, Inc., is net income (or loss)
computed in accordance with generally accepted accounting principles, excluding
gains or losses from sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect FFO on the same basis. FFO does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available to
fund cash needs and should not be considered as an alternative to net income as
an indicator of our operating performance or as an alternative to cash flow as a
measure of liquidity.
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-3, of which the accompanying prospectus forms a part, under
the Securities Act of 1933, as amended. As permitted by the rules and
regulations of the Commission, and as stated in the accompanying prospectus,
this prospectus supplement sets forth the specific terms of the common shares
being offered and updates certain information included in the accompanying
prospectus. TO THE EXTENT THAT ANY SUBJECT MATTER IS ADDRESSED IN BOTH THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, THE INFORMATION CONTAINED
IN THIS PROSPECTUS SUPPLEMENT SUPERSEDES THE INFORMATION CONTAINED IN THE
ACCOMPANYING PROSPECTUS.
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING INFORMATION
Certain information included or incorporated by reference in this
prospectus supplement and the accompanying prospectus may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from future results, performance or achievements
expressed or implied by these forward-looking statements. Forward-looking
statements, which are based on certain assumptions and describe our future
plans, strategies and expectations, are generally identifiable by use of the
words "may," "will," "should," "expect," "anticipate," "estimate," "believe,"
"intend," "project," or the negative of these words or other similar words or
terms. Factors which could have a material adverse effect on our operations and
future prospects include, but are not limited to, changes in economic conditions
generally and the real estate market specifically, adverse developments with
respect to our tenants, legislative/regulatory changes including changes to laws
governing the taxation of REITs, availability of debt and equity capital,
interest rates, competition, supply and demand for properties in our current and
proposed market areas, policies and guidelines applicable to REITs and the other
factors described under the heading "Risk Factors" beginning on page S-4 of this
prospectus supplement. These risks and uncertainties should be considered in
evaluating any forward-looking statements contained or incorporated by reference
in this prospectus supplement.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed or incorporated by reference in this prospectus supplement and
the accompanying prospectus may not occur and actual results could differ
materially from those anticipated or implied in the forward-looking statements.
ii
SUMMARY
This summary highlights information contained elsewhere in this prospectus
supplement and the accompanying prospectus. Because this is a summary, it may
not contain all of the information that is important to you. You should
carefully read this entire prospectus supplement and the accompanying
prospectus, especially "Risk Factors" beginning on page S-4 of this prospectus
supplement and "Available Information" beginning on page S-28 of this prospectus
supplement, as well as the documents incorporated by reference in this
prospectus supplement and the accompanying prospectus, as provided in
"Incorporation of Information We File With the SEC" beginning on page S-28 of
this prospectus supplement, before making an investment decision. Unless
otherwise indicated, all financial and property information is presented as of
March 31, 2003.
THE COMPANY
We are a self-managed and self-administered real estate investment trust,
commonly referred to as a REIT. Our common shares are traded on the New York
Stock Exchange under the symbol "LXP." Our primary business is the acquisition,
ownership and management of a geographically diverse portfolio of net leased
office, industrial and retail properties.
As of March 31, 2003, we had ownership interests in 104 properties, located
in 30 states and Canada and containing an aggregate of approximately 19.8
million net rentable square feet of space. Thirteen of these properties,
containing approximately 4.7 million net rentable square feet of space, were
held through joint ventures with third parties. Approximately 99.2% of the net
rentable square feet was leased.
We grow our portfolio primarily by acquiring properties from corporations
and other entities in sale-leaseback transactions and from developers of
newly-constructed properties built to suit the needs of a corporate tenant.
Additionally, we enter into joint ventures with third-party investors as a means
of creating additional growth and expanding the revenue realized from advisory
and asset management activities. In 1999, we entered into a joint venture
agreement with The Comptroller of the State of New York as trustee of The Common
Retirement Fund, or "CRF", to acquire properties in an aggregate amount of up to
approximately $400 million. As of the date of this prospectus supplement, this
joint venture has made investments in eleven properties for $363.8 million. We
have a 33 1/3% equity interest in this joint venture. In December 2001, we
formed a second joint venture with CRF to acquire additional properties in an
aggregate amount of up to $560 million. We have a 25% equity interest in this
joint venture. To date, this joint venture has made no investments.
The principal executive offices of the Company are located at 355 Lexington
Avenue, New York, New York 10017, and its telephone number is (212) 692-7260.
RECENT DEVELOPMENTS
PROPERTY ACQUISITIONS. In March 2003, our joint venture with CRF acquired
an office property in Farmington Hills, Michigan for $32.7 million. The property
is net leased to Motorola, Inc. through December 2016 for annual net rent of
$3.1 million. The tenant has the ability to terminate the lease as of December
2011 with 18 months notice and a payment of approximately $6.6 million. The
acquisition was partially funded through a $24.0 million non-recourse mortgage
note which bears interest at 30-day LIBOR plus 3.00% and becomes prepayable
without penalty in August 2003. We have arranged for a $21.4 million fixed rate
non-recourse mortgage note, along with an additional equity contribution of $2.6
million, to satisfy the current LIBOR based note in August 2003. The replacement
note bears interest at 5.42%, provides for annual debt service of $1.5 million
and matures in August 2012 when a balloon payment of $17.5 million is due.
In January 2003, we purchased an office property in Boca Raton, Florida for
$23.5 million. The property is net leased to OCE Printing Systems USA, Inc.
through February 2020 for annual net rent of
S-1
$2.2 million. The acquisition was partially funded through a $15.3 million
interest only, non-recourse, 5.25% fixed-rate mortgage note which matures in
March 2008. The note requires annual debt service payments of $0.8 million and a
balloon payment of $15.3 million at maturity.
FIRST QUARTER RESULTS. On April 23, 2003, we announced our operating
results for the first quarter ended March 31, 2003. Funds from operations were
$17.01 million, or $0.48 per diluted common share, for the first quarter of
2003, compared to $14.92 million, or $0.47 per diluted common share, for the
first quarter of 2002. Revenues for the quarter totaled $29.08 million, compared
with revenues of $24.81 million for the same period last year. Net income was
$8.76 million, which included $0.89 million in gains on sale, in the first
quarter of 2003, or $0.29 per diluted common share, compared to $7.96 million,
which included $0.85 million in gains on sale, or $0.29 per diluted common
share, for the same period last year.
QUARTERLY DIVIDEND DECLARED. On April 15, 2003, we announced a dividend of
$0.335 per share, payable on May 15, 2003 to shareholders of record on April 30,
2003.
KMART LEASE. On April 23, 2003, the bankruptcy court entered an order
approving the confirmation of the plan of reorganization of Kmart Corporation,
our largest tenant based upon rental revenues. In a separate order also entered
on April 23, 2003, the bankruptcy court approved an agreement between us and
Kmart which will only become effective if Kmart successfully emerges from
bankruptcy, assumes its lease with us pursuant to its plan of reorganization and
satisfies the other conditions discussed below. In a press release subsequent to
confirmation of its plan of reorganization, Kmart announced that it anticipates
emerging from bankruptcy on May 5, 2003. Under the agreement, Kmart has agreed
to make monthly rent payments in advance rather than the currently stipulated
semi-annual payments in arrears. In turn, we have agreed to pay Kmart a monthly
management fee of approximately $41,667 per month provided we receive (i)
payment in full of all past due pre-petition rent and other past due amounts
(approximately $2,950,464) and (ii) current monthly payment of future rent
(approximately $779,948 per month). There can be no assurance that Kmart will
emerge from bankruptcy or that it will make the required payments under this
agreement and its lease. The agreement will be void if any of the conditions are
not met.
DIVIDEND REINVESTMENT PLAN. On February 12, 2003, we filed a registration
statement on Form S-3 to register an additional 2,000,000 common shares for
issuance pursuant to our dividend reinvestment plan.
RESALE REGISTRATION. On January 27, 2003, we filed an amendment to a
registration statement on Form S-3 we previously filed on December 31, 2002, to
register for resale up to 17,901 of the common shares we may issue in exchange
for the redemption of an equal number of units of limited partnership issued by
our controlled operating partnership subsidiary, Lepercq Corporate Income Fund,
L.P.
S-2
THE OFFERING
Common Shares offered by
Lexington Corporate Properties
Trust......................... 4,500,000 shares
Common Shares outstanding
immediately prior to the
Offering...................... 30,482,838 shares(1)
Common Shares to be
outstanding after the
Offering...................... 34,982,838 shares(1)
Use of Proceeds............... We intend to use the proceeds from the sale of
common shares (i) to repay indebtedness, (ii)
to fund future acquisitions, and (iii) for
general business purposes. See "Use of
Proceeds" on page S-12 of this prospectus
supplement.
Risk Factors.................. See "Risk Factors" beginning on page S-4 of
this prospectus supplement for a discussion of
factors you should carefully consider before
deciding to invest in our common shares.
New York Stock Exchange
Symbol........................ LXP
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(1) Does not include an aggregate of approximately 5,950,553 common shares
issuable, as of the date of this prospectus supplement, upon (i) the
exchange of all outstanding units of limited partnership interests in our
operating partnership subsidiaries (approximately 5,207,306 common shares)
and (ii) the exercise of outstanding options (including unvested options)
under our equity-based award plans (743,247 common shares).
S-3
RISK FACTORS
In evaluating an investment in our common shares, you should carefully
consider the following factors, in addition to other information set forth or
incorporated by reference in this prospectus supplement or in the accompanying
prospectus. See "Incorporation of Information We File With the SEC" on page S-28
of this prospectus supplement.
RISKS INVOLVED IN SINGLE TENANT LEASES. We focus our acquisition
activities on real properties that are net leased to single tenants. Therefore,
the financial failure of, or other default by, a single tenant resulting in the
termination of a lease is likely to cause a significant reduction in the
operating cash flow generated by the property leased to that tenant and might
decrease the value of that property.
DEPENDENCE ON MAJOR TENANTS; IMPACT OF KMART BANKRUPTCY. Revenues from
several of our tenants and/or their guarantors constitute a significant
percentage of our rental revenues. As of March 31, 2003, our fifteen largest
tenants/guarantors, which occupied 29 properties, represented $14.8 million, or
47.8%, of our rental revenue for the three months ended March 31, 2003,
including our proportionate share of rental revenue from non-consolidated
entities and rental revenue recognized from properties sold through date of
sale. The default, financial distress or bankruptcy of any of the tenants of
these properties could cause interruptions in the receipt of lease revenues from
these tenants and/or result in vacancies, which would reduce our revenues and
increase operating costs until the affected property is re-let, and could
decrease the ultimate sales value of that property. Upon the expiration or other
termination of the leases that are currently in place with respect to these
properties, we may not be able to re-lease the vacant property at a comparable
lease rate or without incurring additional expenditures in connection with the
re-leasing.
Kmart Corporation, our largest tenant based upon rental revenues, filed for
Chapter 11 bankruptcy protection on January 22, 2002. Kmart leases a 1.7 million
square foot distribution facility in Warren, Ohio. We have no retail properties
leased to Kmart. The Kmart lease expires on September 30, 2007. Annual net cash
rents are currently $9.4 million ($5.50 per square foot) and annual net rents on
a straight-line basis are $8.9 million, which represents approximately 7.2% of
our rental revenue for the three months ended March 31, 2003, including our
proportionate share of rental revenue from non-consolidated entities and rental
revenue recognized from properties sold through date of sale. Rent is currently
payable semi-annually in arrears on April 1 and October 1; however, if the
agreement described under "Summary -- Recent Developments -- Kmart Lease"
becomes effective, rent will be payable monthly in advance. At March 31, 2003,
we had $9.6 million in accounts receivable from Kmart, including $3.0 million in
pre-bankruptcy petition rent for the period from October 1, 2001 through January
21, 2002 and other past due amounts, plus $1.9 million in straight line rents
receivable. Kmart is current in its post-bankruptcy petition rental obligation
to the Company. On April 1, 2003, Kmart made its scheduled semi-annual rental
payment of $4.7 million.
The Kmart facility is subject to a 7% imputed interest rate non-recourse
mortgage note with an outstanding balance of $23.4 million as of the date of
this prospectus supplement, which fully amortizes by maturity on October 1,
2007. The property is also subject to an interest-only second mortgage loan,
which is a recourse obligation to us, with a variable interest rate of 90-day
LIBOR plus 3.75% and an outstanding principal balance of $12.5 million as of the
date of this prospectus supplement. Annual debt service on the non-recourse
first mortgage note is $6.2 million, and the next debt service payment is due
October 1, 2003. There can be no assurance that Kmart will emerge from
bankruptcy. If Kmart does not emerge from bankruptcy, it would result in a
significant decrease in our rental revenue, funds from operations (as defined by
the National Association of Real Estate Investment Trusts, Inc.) and funds
available for distribution to shareholders, and we cannot predict if or when we
would be able to re-lease the property or negotiate the terms of any new lease.
If we are unable to re-lease promptly or if any new rental rates are
significantly lower than Kmart's current rent, our rental revenue, funds from
operations and funds available for distribution to shareholders would decrease
significantly. We would also risk loss of the property to lender foreclosure in
the event we do not continue to make all required debt service payments with
respect to the mortgage debt on the
S-4
property. In addition, a default by us on the first mortgage would also be
considered a default of the second mortgage whereby the entire $12.5 million
second mortgage plus a 3% prepayment penalty would be immediately payable to the
lender. The prepayment penalty decreases by 1% each March 8th until March 8,
2006, after which no prepayment penalty would be due.
LEVERAGE. We have incurred, and expect to continue to incur, indebtedness
(secured and unsecured) in furtherance of our activities. Neither our
Declaration of Trust nor any policy statement formally adopted by our Board of
Trustees limits either the total amount of indebtedness or the specified
percentage of indebtedness that we may incur. Accordingly, we could become more
highly leveraged, resulting in increased risk of default on our obligations and
in an increase in debt service requirements which could adversely affect our
financial condition and results of operations and our ability to pay
distributions. Our current unsecured revolving credit facility with Fleet
National Bank contains various covenants which limit the amount of secured,
unsecured and variable-rate indebtedness we may incur.
RISKS RELATING TO INTEREST RATE INCREASES. We have exposure to market
risks relating to increases in interest rates due to our variable-rate debt. An
increase in interest rates may increase our costs of borrowing on existing
variable-rate indebtedness, leading to a reduction in our net income.
Specifically, as of March 31, 2003, we had $22.5 million in outstanding
borrowings under our $60.0 million unsecured credit facility and an additional
$58.0 million in variable-rate indebtedness, which does not include $24.0
million for non-consolidated entities.
As of March 31, 2003, our consolidated variable-rate indebtedness
represented 14.6% of total mortgages and notes payable and had a weighted
average interest rate of 4.4%. The level of our variable-rate indebtedness,
along with the interest rate associated with such variable-rate indebtedness,
may change in the future and materially affect our interest costs and net
income.
In addition, our interest costs on our fixed-rate indebtedness can increase
if we are required to refinance our fixed-rate indebtedness at maturity at
higher interest rates.
RISKS ASSOCIATED WITH REFINANCING. A significant number of our properties
are subject to mortgage notes with balloon payments due at maturity. As of March
31, 2003, the scheduled balloon payments, including those to be made by
non-consolidated entities and balances due on our credit facility, for the next
five calendar years are as follows:
- 2003-$24.0 million;
- 2004-$47.5 million;
- 2005-$76.5 million;
- 2006-$0; and
- 2007-$12.5 million.
Our ability to make the scheduled balloon payments will depend upon our
ability either to refinance the related mortgage debt or to sell the related
property. Our ability to accomplish these goals will be affected by various
factors existing at the relevant time, such as the state of the national and
regional economies, local real estate conditions, available mortgage rates, the
lease terms of the mortgaged properties, our equity in the mortgaged properties,
our financial condition, the operating history of the mortgaged properties and
tax laws.
UNCERTAINTIES RELATING TO LEASE RENEWALS AND RE-LETTING OF SPACE. Upon the
expiration of current leases for space located in our properties, we may not be
able to re-let all or a portion of that space, or the terms of re-letting
(including the cost of concessions to tenants) may be less favorable to us than
current lease terms. If we are unable to re-let promptly all or a substantial
portion of the space located in our properties or if the rental rates we receive
upon re-letting are significantly lower than current rates, our net income and
ability to make expected distributions to our shareholders will be adversely
affected due to the resulting reduction in rent receipts and increasing our
property
S-5
operating costs. There can be no assurance that we will be able to retain
tenants in any of our properties upon the expiration of their leases. As of the
date of this prospectus supplement, our scheduled lease maturities for the next
five years are as follows:
CURRENT
NUMBER ANNUAL PERCENTAGE
OF RENT OF TOTAL
LEASES MATURING IN: LEASES ($000) ANNUAL RENT
------------------- ------ ------- -----------
2003.......................................... 1 $ 1,742 1.4%
2004.......................................... 2 687 0.5
2005.......................................... 7 8,074 6.4
2006.......................................... 14 14,142 11.3
2007.......................................... 10 17,511 13.9
-- ------- ----
Total....................................... 34 $42,156 33.5%
== ======= ====
DEFAULTS ON CROSS-COLLATERALIZED PROPERTIES. As of the date of this
prospectus supplement, the mortgages on two of our properties, in Canton, Ohio
and Spartansburg, South Carolina, are cross-collateralized and seventeen of our
properties are part of a segregated pool of assets with respect to which
commercial mortgage pass-through certificates were issued. To the extent that
any of our properties are cross-collateralized, any default by us under the
mortgage note relating to one property will result in a default under the
financing arrangements relating to any other property that also provides
security for that mortgage note.
POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL MATTERS. Under various
federal, state and local environmental laws, statutes, ordinances, rules and
regulations, as an owner of real property, we may be liable for the costs of
removal or remediation of certain hazardous or toxic substances at, on, in or
under our property, as well as certain other potential costs relating to
hazardous or toxic substances (including government fines and penalties and
damages for injuries to persons and adjacent property). These laws may impose
liability without regard to whether we knew of, or were responsible for, the
presence or disposal of those substances. This liability may be imposed on us in
connection with the activities of an operator of, or tenant at, the property.
The cost of any required remediation, removal, fines or personal or property
damages and our liability therefor could exceed the value of the property and/or
our aggregate assets. In addition, the presence of those substances, or the
failure to properly dispose of or remove those substances, may adversely affect
our ability to sell or rent that property or to borrow using that property as
collateral, which, in turn, would reduce our revenues and ability to make
distributions.
A property can also be adversely affected either through physical
contamination or by virtue of an adverse effect upon value attributable to the
migration of hazardous or toxic substances, or other contaminants that have or
may have emanated from other properties. Although our tenants are primarily
responsible for any environmental damages and claims related to the leased
premises, in the event of the bankruptcy or inability of any of our tenants to
satisfy any obligations with respect to the property leased to that tenant, we
may be required to satisfy such obligations. In addition, we may be held
directly liable for any such damages or claims irrespective of the provisions of
any lease.
From time to time, in connection with the conduct of our business, and
prior to the acquisition of any property from a third party or as required by
our financing sources, we authorize the preparation of Phase I environmental
reports and, when necessary, Phase II environmental reports, with respect to our
properties. Based upon these environmental reports and our ongoing review of our
properties, as of the date of this prospectus supplement, we are not aware of
any environmental condition with respect to any of our properties that we
believe would be reasonably likely to have a material adverse effect on us.
There can be no assurance, however, that the environmental reports will reveal
all
S-6
environmental conditions at our properties or that the following will not expose
us to material liability in the future:
- the discovery of previously unknown environmental conditions;
- changes in law;
- activities of tenants; or
- activities relating to properties in the vicinity of our properties.
Changes in laws increasing the potential liability for environmental
conditions existing on properties or increasing the restrictions on discharges
or other conditions may result in significant unanticipated expenditures or may
otherwise adversely affect the operations of our tenants, which could adversely
affect our financial condition or results of operations.
UNINSURED LOSS. We carry comprehensive liability, fire, extended coverage
and rent loss insurance on most of our properties, with policy specifications
and insured limits customarily carried for similar properties. However, with
respect to those properties where the leases do not provide for abatement of
rent under any circumstances, we generally do not maintain rent loss insurance.
In addition, there are certain types of losses, such as losses resulting from
wars, terrorism or acts of God that generally are not insured because they are
either uninsurable or not economically insurable. Should an uninsured loss or a
loss in excess of insured limits occur, we could lose capital invested in a
property, as well as the anticipated future revenues from a property, while
remaining obligated for any mortgage indebtedness or other financial obligations
related to the property. Any loss of these types would adversely affect our
financial condition.
RISKS RELATING TO TERRORISM. The terrorist attacks which occurred in New
York City, Pennsylvania and Washington, D.C. on September 11, 2001, and the
subsequent military actions taken by the United States and its allies in
response, including the military conflicts in Afghanistan and Iraq, have caused
significant uncertainty in the global financial markets. While the short-term
and long-term effects of these events and their potential consequences are
uncertain, they could have a material adverse effect on general economic
conditions, consumer confidence and market liquidity. Among other things, it is
possible that interest rates may be affected by these events. An increase in
interest rates may increase our costs of borrowing on existing variable-rate
indebtedness, leading to a reduction in our net income.
In addition, we and our tenants may be unable to obtain adequate insurance
coverage on acceptable economic terms for losses resulting from acts of
terrorism. Our lenders may require that we carry terrorism insurance even if we
do not believe this insurance is necessary or cost effective. We may also be
prohibited under the applicable lease from passing all or a portion of the cost
of such insurance through to the tenant. Should an act of terrorism result in an
uninsured loss or a loss in excess of insured limits, we could lose capital
invested in a property, as well as the anticipated future revenues from a
property, while remaining obligated for any mortgage indebtedness or other
financial obligations related to the property. Any loss of these types would
adversely affect our financial condition.
COMPETITION. There are numerous commercial developers, real estate
companies, financial institutions and other investors with greater financial
resources than we have that compete with us in seeking properties for
acquisition and tenants who will lease space in our properties. Due to our focus
on net-lease properties located throughout the United States, and because most
competitors are locally and/or regionally focused, we do not encounter the same
competitors in each region of the United States. Our competitors include other
REITs, financial institutions, insurance companies, pension funds, private
companies and individuals. This competition may result in a higher cost for
properties that we wish to purchase.
FAILURE TO QUALIFY AS A REIT. We believe that we have met the requirements
for qualification as a REIT for federal income tax purposes beginning with our
taxable year ended December 31, 1993, and
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we intend to continue to meet these requirements in the future. However,
qualification as a REIT involves the application of highly technical and complex
provisions of the Internal Revenue Code, for which there are only limited
judicial or administrative interpretations. No assurance can be given that we
have qualified or will remain qualified as a REIT. The Internal Revenue Code
provisions and income tax regulations applicable to REITs are more complex than
those applicable to corporations. The determination of various factual matters
and circumstances not entirely within our control may affect our ability to
continue to qualify as a REIT. In addition, no assurance can be given that
legislation, regulations, administrative interpretations or court decisions will
not significantly change the requirements for qualification as a REIT or the
federal income tax consequences of such qualification. If we do not qualify as a
REIT, we would not be allowed a deduction for distributions to shareholders in
computing our income. In addition, our income would be subject to tax at the
regular corporate rates. We also could be disqualified from treatment as a REIT
for the four taxable years following the year during which qualification was
lost. Cash available for distribution to our shareholders would be significantly
reduced for each year in which we do not qualify as a REIT. In that event, we
would not be required to continue to make distributions. Although we currently
intend to continue to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause us, without the consent of
the shareholders, to revoke the REIT election or to otherwise take action that
would result in disqualification.
DISTRIBUTION REQUIREMENTS IMPOSED BY LAW LIMIT OUR FLEXIBILITY. To
maintain our status as a REIT for federal income tax purposes, we are generally
required to distribute to our shareholders at least 90% of our taxable income
for that calendar year. Our taxable income is determined without regard to any
deduction for dividends paid and by excluding net capital gains. To the extent
that we satisfy the distribution requirement, but distribute less than 100% of
our taxable income, we will be subject to federal corporate income tax on our
undistributed income. In addition, we will incur a 4% nondeductible excise tax
on the amount, if any, by which our distributions in any year are less than the
sum of (i) 85% of our ordinary income for that year, (ii) 95% of our capital
gain net income for that year and (iii) 100% of our undistributed taxable income
from prior years. We intend to continue to make distributions to our
shareholders to comply with the distribution requirements of the Internal
Revenue Code and to reduce exposure to federal income and nondeductible excise
taxes. Differences in timing between the receipt of income and the payment of
expenses in determining our income and the effect of required debt amortization
payments could require us to borrow funds on a short-term basis in order to meet
the distribution requirements that are necessary to achieve the tax benefits
associated with qualifying as a REIT.
INTEREST RATE FLUCTUATIONS. It is likely that the public valuation of our
common shares will be based primarily on the earnings that we derive from rental
income with respect to our properties and not from the underlying appraised
value of the properties themselves. As a result, interest rate fluctuations and
capital market conditions can affect the market value of our common shares. For
instance, if interest rates rise, it is likely that the market price of our
common shares will decrease because potential investors may require a higher
dividend yield on our common shares as market rates on interest-bearing
securities, such as bonds, rise.
INABILITY TO CARRY OUT GROWTH STRATEGY. Our growth strategy is based on
the acquisition and development of additional properties, including acquisitions
through co-investment programs such as joint ventures. In the context of our
business plan, "development" generally means an expansion or renovation of an
existing property or the acquisition of a newly constructed property. We
typically provide a developer with a commitment to acquire a property upon
completion of construction. Our plan to grow through the acquisition and
development of new properties could be adversely affected by trends in the real
estate and financing businesses. The consummation of any future acquisitions
will be subject to satisfactory completion of our extensive valuation analysis
and due diligence review and to the negotiation of definitive documentation. We
cannot be sure that we will be able to implement our strategy because we may
have difficulty finding new properties, negotiating with new or
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existing tenants or securing acceptable financing. If we are unable to carry out
our strategy, our financial condition and results of operations could be
adversely affected.
Acquisitions of additional properties entail the risk that investments will
fail to perform in accordance with expectations, including operating and leasing
expectations. Redevelopment and new project development are subject to numerous
risks, including risks of construction delays, cost overruns or force majeure
that may increase project costs, new project commencement risks such as the
receipt of zoning, occupancy and other required governmental approvals and
permits, and the incurrence of development costs in connection with projects
that are not pursued to completion.
We anticipate that some of our acquisitions and developments will be
financed using the proceeds of periodic equity or debt offerings, lines of
credit or other forms of secured or unsecured financing that will result in a
risk that permanent financing for newly acquired projects might not be available
or would be available only on disadvantageous terms. If permanent debt or equity
financing is not available on acceptable terms to refinance acquisitions
undertaken without permanent financing, further acquisitions may be curtailed or
cash available for distribution may be adversely affected.
DILUTION OF COMMON SHARES. Our future growth will depend in part on our
ability to raise additional capital. If we raise additional capital through the
issuance of equity securities, the interests of holders of our common shares,
including the common shares being offered by this prospectus supplement, could
be diluted. Likewise, our Board of Trustees is authorized to cause us to issue
preferred shares in one or more series, the holders of which would be entitled
to dividends and voting and other rights as our Board of Trustees determines,
and which could be senior to our common shares. Accordingly, an issuance by us
of preferred shares could be dilutive to or otherwise adversely affect the
interests of holders of our common shares.
OWNERSHIP LIMITATIONS. For us to qualify as a REIT for federal income tax
purposes, among other requirements, not more than 50% of the value of our
capital shares may be owned, directly or indirectly, by five or fewer
individuals (as defined for federal income tax purposes to include certain
entities) during the last half of each taxable year after 1993, and such capital
shares must be beneficially owned by 100 or more persons during at least 335
days of a taxable year of 12 months or during a proportionate part of a shorter
taxable year (in each case, other than the first such year). Our Declaration of
Trust includes certain restrictions regarding transfers of our capital shares
and ownership limits that are intended to assist us in satisfying these
limitations. These restrictions and limits may not be adequate in all cases,
however, to prevent the transfer of our capital shares in violation of the
ownership limitations. The ownership limit discussed above may have the effect
of delaying, deferring or preventing someone from taking control of our company,
even though a change of control could involve a premium price for your common
shares or otherwise be in your best interest.
RESTRICTIONS ON A POTENTIAL CHANGE OF CONTROL. Our Board of Trustees is
authorized by our Declaration of Trust to establish and issue one or more series
of preferred shares without shareholder approval. As of the date of this
prospectus supplement, we have established one series of preferred shares, but
no shares of this series are currently outstanding. The establishment and
issuance of shares of this or a future series of preferred shares could make
more difficult a change of control of our company that could be in your best
interest.
In addition, we have entered into employment agreements with six of our
executive officers which provide that, upon the occurrence of a change in
control of our company (including a change in ownership of more than fifty
percent of the total combined voting power of our outstanding securities, the
sale of all or substantially all of our assets, dissolution of our company, the
acquisition, except from us, of 20% or more of our voting shares or a change in
the majority of our Board of Trustees), those executive officers would be
entitled to severance benefits based on their current annual base salaries and
recent annual bonuses, as defined in the employment agreements. The provisions
of these agreements could deter a change of control of our company that could be
in your best interest.
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CONCENTRATION OF OWNERSHIP BY CERTAIN INVESTORS. As of the date of this
prospectus supplement, E. Robert Roskind, the Chairman of our Board of Trustees,
owned or controlled (including through trusts with respect to which he is a
beneficiary) 561,622 common shares, 1,487,183 operating partnership units which
are currently convertible into common shares at various dates, and options to
purchase 25,000 common shares, representing 6.5% of our total outstanding voting
securities. A significant concentration of ownership may allow an investor to
exert a greater influence over our management and affairs, and may have the
effect of delaying, deferring or preventing a change in control of our company,
may discourage bids for our common shares at a premium over the market price and
may adversely affect the market price of our common shares.
LIMITED CONTROL OVER JOINT VENTURE INVESTMENTS. Our joint venture
investments may involve risks not otherwise present for investments made solely
by us, including the possibility that our co-venturer might, at any time, become
bankrupt, have different interests or goals than we do, or take action contrary
to our instructions, requests, policies or objectives, including our policy with
respect to maintaining our qualification as a REIT. Other risks of joint venture
investments include impasse on decisions, such as a sale, because neither we nor
a co-venturer would have full control over the joint venture. Also, there is no
limitation under our organizational documents as to the amount of funds that may
be invested in joint ventures. Our credit facility restricts the amount of
capital that we can invest in joint ventures.
Under the terms of our joint venture with CRF, we are required to first
offer to the joint venture all of our opportunities to acquire office and
industrial properties requiring a minimum investment of $10 million which are
net leased primarily to investment grade tenants for a minimum term of ten
years, are available for immediate delivery and satisfy other specified
investment criteria. Only if CRF elects not to approve the joint venture's
pursuit of an acquisition opportunity may we pursue the opportunity directly. As
a result, we may not be able to make attractive acquisitions directly and may
only receive a minority interest in such acquisitions through our minority
interest in this joint venture.
CONFLICTS OF INTEREST WITH RESPECT TO SALES AND REFINANCINGS. Two of our
trustees and officers own units of limited partnership interest in our operating
partnerships and, as a result, may face different and more adverse tax
consequences than you will if we sell or reduce our mortgage indebtedness on our
properties. Those individuals may, therefore, have different objectives than you
regarding the appropriate pricing and timing of any sale of such properties or
reduction of mortgage debt. Accordingly, there may be instances in which we may
not sell a property or pay down the debt on a property even though doing so
would be advantageous to you.
LIMITATIONS ON SALE OF CERTAIN PROPERTIES. We have agreed with the seller
of one of our properties not to sell the property for a period of time in a
taxable transaction, subject to certain exceptions. We may enter into similar
agreements in connection with future property acquisitions. These agreements
generally provide that we may dispose of these properties in transactions that
qualify as tax-free exchanges under Section 1031 of the Internal Revenue Code of
1986, as amended. Therefore, we may be precluded from selling these properties
other than in transactions that would qualify as tax-free exchanges for federal
income tax purposes, even if it would be in your best interest to do so. This
restriction expires on January 1, 2004. As of March 31, 2003, the net book value
of this property approximated $5.1 million.
OUR ABILITY TO CHANGE OUR PORTFOLIO IS LIMITED BECAUSE REAL ESTATE
INVESTMENTS ARE ILLIQUID. Equity investments in real estate are relatively
illiquid and, therefore, our ability to change our portfolio promptly in
response to changed conditions will be limited. Our Board of Trustees may
establish investment criteria or limitations as it deems appropriate, but
currently does not limit the number of properties in which we may seek to invest
or on the concentration of investments in any one geographic region. We could
change our investment, disposition and financing policies without a vote of our
shareholders.
OUR BOARD OF TRUSTEES MAY CHANGE OUR INVESTMENT POLICY WITHOUT
SHAREHOLDERS' APPROVAL. Subject to our fundamental investment policy to maintain
our qualification as a REIT, our Board of
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Trustees will determine our investment and financing policies, our growth
strategy and our debt, capitalization, distribution, acquisition, disposition
and operating policies. Although our Board of Trustees has no present intention
to revise or amend these strategies and policies, it may do so at any time
without a vote by our shareholders. Accordingly, our shareholders' control over
changes in our strategies and policies is limited to the election of trustees,
and changes made by our Board of Trustees may not serve the interests of our
shareholders and could adversely affect our financial condition or results of
operations, including our ability to distribute cash to shareholders or qualify
as a REIT.
LIMITS ON OWNERSHIP OF OUR COMMON SHARES. Actual or constructive ownership
of our capital shares in excess of the share ownership limits contained in our
Declaration of Trust would cause the violative transfer or ownership to be void
or cause the shares to be transferred to a charitable trust and then sold to a
person or entity who can own the shares without violating these limits. As a
result, if a violative transfer were made, the recipient of the shares would not
acquire any economic or voting rights attributable to the transferred shares.
Additionally, the constructive ownership rules for these limits are complex and
groups of related individuals or entities may be deemed a single owner and
consequently in violation of the share ownership limits. We recommend that you
read "Description of Common Shares -- Restrictions on Ownership" and
"Restrictions on Transfers of Capital Shares and Anti-Takeover
Provisions -- Restrictions Relating to REIT Status" on pages 24 and 25,
respectively, of the accompanying prospectus for a detailed description of the
share ownership limits.
ADVERSE LEGISLATIVE OR REGULATORY TAX CHANGES. At any time, the federal
income tax laws governing REITs or the administrative interpretations of those
laws may be amended. Any of those new laws or interpretations may take effect
retroactively and could adversely affect us or you as a shareholder. The Bush
administration has released a proposal that would exclude corporate dividends
from an individual's taxable income to the extent that corporate income tax has
been paid on the earnings from which dividends are paid. REIT dividends would
not be exempt from income tax in the hands of an individual shareholder because
a REIT's income generally is not subject to corporate level tax. This proposal
could cause shares in non-REIT corporations to be a more attractive investment
to individual investors than shares in REITs. We can make no assurance regarding
the form in which this proposal ultimately will be enacted or whether it will in
fact be enacted. If enacted, the proposal could adversely affect the market
price of our common shares.
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USE OF PROCEEDS
We expect to receive net proceeds from this offering of approximately $73.9
million, after deducting offering expenses. We intend to use the net proceeds
(i) to repay the indebtedness set forth in the table below (although we may
decide to substitute different debt for repayment), (ii) to fund future
acquisitions, and (iii) for general business purposes.
INDEBTEDNESS EXPECTED TO BE REPAID OUT OF PROCEEDS
OUTSTANDING BALANCE
AS OF APRIL 29, 2003 INTEREST RATE
INDEBTEDNESS ($000'S) AS OF APRIL 29, 2003 MATURITY DATE
------------ -------------------- -------------------- -------------
Unsecured revolving credit
facility.......................... $ 9,500 2.82%(1)(4) March 2004
Variable-rate mortgage on Chester,
SC property....................... 10,798 7.50%(2)(4) August 2004
Fixed-rate mortgage on Salt Lake
City, UT property................. 4,721 7.87% October 2005
Variable-rate mortgage on Warren, OH
property.......................... 12,500 5.07%(3)(4) October 2007
-------
Total.......................... $37,519
=======
---------------
(1) Our $60 million unsecured revolving credit facility, which is provided by
Fleet Bank, NA, bears interest at 150 to 250 basis points over LIBOR
(depending on the amount of properties we own free and clear of mortgage
debt), and has an interest rate period of one, three or six months, at our
option.
(2) This mortgage bears interest at 30-day LIBOR + 2.25%, with a minimum
interest rate of 7.50%.
(3) This mortgage bears interest at 90-day LIBOR + 3.75%.
(4) As of the date of this prospectus supplement, 30-day LIBOR was 1.32% and
90-day LIBOR was 1.31%.
In connection with the repayment of the indebtedness described above, we may
incur prepayment penalties of approximately $800,000, which we would also pay
out of the proceeds of this offering.
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DESCRIPTION OF COMMON SHARES
The following updates and supersedes information about our common shares
included in the accompanying prospectus. For a summary of the material terms and
provisions of our common shares, see "Description of Common Shares" on page 24
of the accompanying prospectus.
On November 28, 2001, our shareholders approved an amendment to our
Declaration of Trust to increase our authorized common shares from 40,000,000
common shares to 80,000,000 common shares.
RESTRICTIONS ON TRANSFERS OF CAPITAL SHARES
AND ANTI-TAKEOVER PROVISIONS
The following updates and supersedes information about Maryland law
included in the accompanying prospectus. For a summary of other restrictions on
transfers of our capital shares, see "Restrictions on Transfers of Capital
Shares and Anti-Takeover Provisions" on page 25 of the accompanying prospectus.
MARYLAND LAW
Maryland law includes certain other provisions which may also discourage a
change in control of management. Maryland law provides that, unless an exemption
applies, we may not engage in any "business combination" with an "interested
stockholder" or any affiliate of an interested stockholder for a period of five
years after the interested stockholder became an interested stockholder, and
thereafter may not engage in a business combination with such interested
stockholder unless the combination is recommended by our Board of Trustees and
approved by the affirmative vote of at least (i) 80% of the votes entitled to be
cast by the holders of all of our outstanding voting shares, and (ii) 66 2/3% of
the votes entitled to be cast by all holders of outstanding shares of voting
shares other than voting shares held by the interested stockholder. An
"interested stockholder" is defined, in essence, as any person owning
beneficially, directly or indirectly, 10% or more of the outstanding voting
shares of a Maryland real estate investment trust. The voting requirements do
not apply at any time to business combinations with an interested stockholder or
its affiliates if approved by our Board of Trustees prior to the time the
interested stockholder first became an interested stockholder. Additionally, if
the business combination involves the receipt of consideration by our
shareholders in exchange for common shares that satisfies certain "fair price"
conditions, such supermajority voting requirements do not apply.
Maryland law provides that "control shares" of a Maryland real estate
investment trust acquired in a "control share acquisition" have no voting rights
except to the extent approved by a vote of two-thirds of the votes entitled to
be cast on the matter, excluding shares owned by the acquiror or by officers or
trustees who are employees of the trust. "Control shares" are voting shares
that, if aggregated with all other shares previously acquired by that person,
would entitle the acquiror to exercise voting power in electing trustees 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 shareholder approval.
A "control share acquisition" means the acquisition of ownership of or the
power to direct the exercise of voting power of issued and outstanding control
shares, subject to certain exceptions. A person who has made or proposes to make
a control share acquisition, upon satisfaction of certain conditions (including
an undertaking to pay expenses), may compel the trust's board of trustees to
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call a special meeting of shareholders, to be held within 50 days of demand, to
consider the voting rights of the shares. If no request for a meeting is made,
the trust may itself present the question at any shareholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an "acquiring person statement" as permitted by the statute,
then, subject to certain conditions and limitations, the trust 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, as of the date of the last control share acquisition or of any
meeting of shareholders at which the voting rights of such shares were
considered and not approved. If voting rights for control shares are approved at
a shareholders' meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other shareholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of the appraisal
rights may not be less than the highest price per share paid in the control
share acquisition, and certain limitations and restrictions otherwise applicable
to the exercise of dissenters' rights do not apply in the context of a control
share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the trust is a party to the
transaction, or to acquisitions approved or exempted by our Declaration of Trust
or By-Laws prior to the control share acquisition. No such exemption appears in
our Declaration of Trust or By-Laws. The control share acquisition statute could
have the effect of discouraging offers to acquire us and of increasing the
difficulty of consummating any such offer.
Additionally, Maryland law may make it more difficult for someone to
acquire us. Maryland law provides, among other things, that the board of
trustees has broad discretion in adopting shareholders' rights plans and has the
sole power to fix the record date, time and place for special meetings of the
shareholders. In addition, Maryland law provides that trusts that have three
trustees who are not employees of the entity or related to an acquiring person
and are subject to the reporting requirements of the Securities Exchange Act of
1934 may elect in their declaration of trust or bylaws or by resolution of the
board of trustees to be subject to all or part of a special subtitle which
provides, among other things, that: (1) the trust will have a staggered board of
trustees; (2) the number of trustees may only be set by the board of trustees,
even if the procedure is contrary to the declaration of trust or bylaws; (3)
vacancies may only be filled by the remaining trustees, even if the procedure is
contrary to the declaration of trust or bylaws; and (4) the secretary of the
trust may call a special meeting of shareholders at the request of shareholders
only on the written request of the shareholders entitled to cast at least a
majority of all the votes entitled to be cast at least a majority of all the
votes entitled to be cast at the meeting, even if the procedure is contrary to
the declaration of trust or bylaws.
DISTRIBUTION POLICY
Distributions are paid to our shareholders on a quarterly basis if, as and
when declared by our Board of Trustees. In order to maintain our status as a
REIT, we are generally required to distribute annually to our shareholders at
least 90% of our REIT taxable income (determined as provided in the Internal
Revenue Code without regard to the deduction for dividends paid and by excluding
any net capital gain).
Future distributions on our common shares will be at the discretion of our
Board of Trustees and will depend on, among other things, our results of
operations, financial condition and capital requirements, the annual
distribution requirements under the REIT provisions of the Code, our debt
service requirements and other factors as our Board of Trustees may deem
relevant. In addition, our unsecured credit agreement imposes certain
restrictions on us with regard to dividends and incurring additional debt
obligations.
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We do not believe that the financial covenants contained in our unsecured
revolving credit agreement and secured indebtedness will have a material adverse
impact on our ability to pay dividends in the normal course of business to our
shareholders or to distribute amounts necessary to maintain our qualifications
as a REIT.
Distributions on our common shares to the extent of our current and
accumulated earnings and profits for federal income tax purposes, and to the
extent not designated as a capital gain dividend, generally will be taxable to
shareholders as ordinary income. Distributions in excess of such earnings and
profits generally will be treated as a non-taxable reduction in a shareholder's
basis in its shares to the extent of such basis, and thereafter as gain from the
sale of such shares.
PRICE RANGE OF OUR COMMON SHARES AND DISTRIBUTION HISTORY
Our common shares have been traded on the New York Stock Exchange under the
symbol "LXP" since October 1993. The last reported sale price of our common
shares on the New York Stock Exchange on the date of this prospectus supplement
was $17.62 per share. The following table sets forth the quarterly high and low
closing sales prices per share reported on the New York Stock Exchange and the
distributions paid per share during the periods indicated.
PRICE
-------------------
HIGH LOW DISTRIBUTION
------- ------- ------------
2001
First Quarter............................. $13.438 $11.750 $0.31
Second Quarter............................ 15.550 12.750 0.32
Third Quarter............................. 15.480 13.000 0.32
Fourth Quarter............................ 15.700 13.700 0.32
2002
First Quarter............................. $16.000 $14.210 $0.33
Second Quarter............................ 16.530 15.000 0.33
Third Quarter............................. 16.870 14.900 0.33
Fourth Quarter............................ 16.350 13.250 0.33
2003
First Quarter............................. $17.200 $15.630 $0.335
Second Quarter............................ 18.230(1) 17.450(1) 0.335(2)
---------------
(1) Through April 29, 2003
(2) Declared April 15, 2003 and payable on May 15, 2003 to shareholders of
record as of April 30, 2003.
FEDERAL INCOME TAX CONSIDERATIONS
You are advised to assume that the information in the prospectus supplement
and the accompanying prospectus is accurate only as of their respective dates.
The following discussion summarizes the material federal income tax
considerations to you as a prospective holder of common shares. The following
discussion is for general information purposes only, is not exhaustive of all
possible tax considerations and is not intended to be and should not be
construed as tax advice. For example, this summary does not give a detailed
discussion of any state, local or foreign tax considerations. In addition, this
discussion is intended to address only those federal income tax considerations
that are generally applicable to all our security holders. It does not discuss
all of the aspects of federal income taxation that may be relevant to you in
light of your particular circumstances or to certain types of security holders
who are subject to special treatment
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under the federal income tax laws including, without limitation, insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States.
The information in this section is based on the Internal Revenue Code of
1986, as amended, which is referred to as the Code, existing, temporary and
proposed regulations under the Code, the legislative history of the Code,
current administrative rulings and practices of the IRS and court decisions, all
as of the date hereof. No assurance can be given that future legislation,
regulations, administrative interpretations and court decisions will not
significantly change current law or adversely affect existing interpretations of
current law. Any such change could apply retroactively to transactions preceding
the date of the change. In addition, we have not received, and do not plan to
request, any rulings from the IRS concerning our tax treatment. Thus no
assurance can be provided that the statements set forth herein (which do not
bind the IRS or the courts) will not be challenged by the IRS or that such
statements will be sustained by a court if so challenged.
EACH PROSPECTIVE PURCHASER OF COMMON SHARES IS ADVISED TO CONSULT WITH HIS
OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF
THE PURCHASE, OWNERSHIP AND SALE OF COMMON SHARES OF AN ENTITY ELECTING TO BE
TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL. We elected to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with our taxable year ended December 31, 1993. We
believe that we have been organized, and have operated, in such a manner so as
to qualify for taxation as a REIT under the Code and intend to conduct our
operations so as to continue to qualify for taxation as a REIT. No assurance,
however, can be given that we have operated in a manner so as to qualify or will
be able to operate in such a manner so as to remain qualified as a REIT.
Qualification and taxation as a REIT depend upon our ability to meet on a
continuing basis, through actual annual operating results, the required
distribution levels, diversity of share ownership and the various qualification
tests imposed under the Code discussed below, the results of which will not be
reviewed by counsel. Given the highly complex nature of the rules governing
REITs, the ongoing importance of factual determinations, and the possibility of
future changes in our circumstances, no assurance can be given that the actual
results of our operations for any one taxable year have satisfied or will
continue to satisfy such requirements.
In the opinion of Paul, Hastings, Janofsky & Walker LLP, based on certain
assumptions and our factual representations that are described in this section
and in the officer's certificate, commencing with our taxable year ended
December 31, 1993, we have been organized and operated in conformity with the
requirements for qualification as a REIT and our current and proposed method of
operation will enable us to continue to meet the requirements for qualification
and taxation as a REIT. It must be emphasized that this opinion is based on
various assumptions and is conditioned upon certain representations made by us
as to factual matters including, but not limited to, those set forth herein and
in the discussion of "Federal Income Tax Considerations" contained in the
accompanying prospectus, and those concerning our business and properties as set
forth in this prospectus supplement and the accompanying prospectus. An opinion
of counsel is not binding on the Internal Revenue Service or the courts.
The following is a general summary of the Code provisions that govern the
federal income tax treatment of a REIT and its shareholders. These provisions of
the Code are highly technical and complex. This summary is qualified in its
entirety by the applicable Code provisions, Treasury Regulations and
administrative and judicial interpretations thereof, all of which are subject to
change prospectively or retroactively.
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If we qualify for taxation as a REIT, we generally will not be subject to
federal corporate income taxes on our net income that is currently distributed
to shareholders. This treatment substantially eliminates the "double taxation"
(at the corporate and shareholder levels) that generally results from investment
in a corporation. However, we will be subject to federal income tax as follows:
first, we will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under certain
circumstances, we may be subject to the "alternative minimum tax" on our items
of tax preference. Third, if we have (a) net income from the sale or other
disposition of "foreclosure property", which is, in general, property acquired
on foreclosure or otherwise on default on a loan secured by such real property
or a lease of such property, which is held primarily for sale to customers in
the ordinary course of business or (b) other nonqualifying income from
foreclosure property, we will be subject to tax at the highest corporate rate on
such income. Fourth, if we have net income from prohibited transactions such
income will be subject to a 100% tax. Prohibited transactions are, in general,
certain sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure property.
Fifth, if we should fail to satisfy the 75% gross income test or the 95% gross
income test (as discussed below), but nonetheless maintain our qualification as
a REIT because certain other requirements have been met, we will be subject to a
100% tax on an amount equal to (a) the gross income attributable to the greater
of the amount by which we fail the 75% or 95% test multiplied by (b) a fraction
intended to reflect our profitability. Sixth, if we should fail to distribute
during each calendar year at least the sum of (a) 85% of our REIT ordinary
income for such year, (b) 95% of our REIT capital gain net income for such year,
and (c) any undistributed taxable income from prior periods, we would be subject
to a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, as provided in temporary regulations, and
assuming we do not elect to instead be taxed at the time of the acquisition, if
we acquire any asset from a C corporation (i.e., a corporation generally subject
to full corporate level tax) in a transaction in which the basis of the asset in
our hands is determined by reference to the basis of the asset (or any other
property) in the hands of the C corporation, we would be subject to tax at the
highest corporate rate if we dispose of such asset during the 10-year period
beginning on the date that we acquired that asset, to the extent of such
property's "built-in gain" (the excess of the fair market value of such property
at the time of our acquisition over the adjusted basis of such property at such
time). Eighth, we will incur a 100% excise tax on transactions with a taxable
REIT subsidiary that are not conducted on an arm's-length basis.
REQUIREMENTS FOR QUALIFICATION. A REIT is a corporation, trust or
association (1) which is managed by one or more trustees or directors, (2) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (3) which would be taxable as
a domestic corporation, but for Sections 856 through 859 of the Code, (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code, (5) that has the calendar year as its taxable year, (6)
the beneficial ownership of which is held by 100 or more persons, (7) during the
last half of each taxable year not more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities), and (8) which meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (1) through (5), inclusive, must be
met during the entire taxable year and that condition (6) 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. We expect to meet the ownership test
immediately after the transaction contemplated herein.
We may redeem, at our option, a sufficient number of shares or restrict the
transfer thereof to bring or maintain the ownership of the shares in conformity
with the requirements of the Code. In addition, our Declaration of Trust
includes restrictions regarding the transfer of our shares that are intended to
assist us in continuing to satisfy requirements (6) and (7). Moreover, if we
comply with regulatory rules pursuant to which we are required to send annual
letters to our shareholders requesting information regarding the actual
ownership of our shares, and we do not know, or exercising reasonable diligence
would not have known, whether we failed to meet requirement (7)
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above, we will be treated as having met the requirement. See "Description of
Common Shares" and "Restrictions on Transfers of Capital Shares and
Anti-Takeover Provisions" in the accompanying prospectus.
The Code allows a REIT to own wholly-owned subsidiaries which are
"qualified REIT subsidiaries." The Code provides that a qualified REIT
subsidiary is not treated as a separate corporation, and all of its assets,
liabilities and items of income, deduction and credit are treated as assets,
liabilities and items of income, deduction and credit of the REIT. Thus, in
applying the requirements described herein, our qualified REIT subsidiaries will
be ignored, and all assets, liabilities and items of income, deduction and
credit of such subsidiaries will be treated as our assets, liabilities and items
of income, deduction and credit.
A REIT may also hold any direct or indirect interest in a corporation that
qualifies as a "taxable REIT subsidiary", as long as the REIT's aggregate
holdings of taxable REIT subsidiary securities do not exceed 20% of the value of
the REIT's total assets. A taxable REIT subsidiary is a fully taxable
corporation that generally is permitted to engage in businesses, own assets, and
earn income that, if engaged in, owned, or earned by the REIT, might jeopardize
REIT status or result in the imposition of penalty taxes on the REIT. To qualify
as a taxable REIT subsidiary, the subsidiary and the REIT must make a joint
election to treat the subsidiary as a taxable REIT subsidiary. A taxable REIT
subsidiary also includes any corporation (other than a REIT or a qualified REIT
subsidiary) in which a taxable REIT subsidiary directly or indirectly owns more
than 35% of the total voting power or value. See "Asset Tests" below. A taxable
REIT subsidiary will pay tax at regular corporate income rates on any taxable
income it earns. Moreover, the Code contains rules, including rules requiring
the imposition of taxes on a REIT at the rate of 100% on certain reallocated
income and expenses, to ensure that contractual arrangements between a taxable
REIT subsidiary and its parent REIT are at arm's-length.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of each of the assets of the partnership and will be deemed to be entitled to
the income of the partnership attributable to such share. In addition, the
character of the assets and items of gross income of the partnership will retain
the same character in the hands of the REIT for purposes of Section 856 of the
Code, including satisfying the gross income and assets tests (as discussed
below). Thus, our proportionate share of the assets, liabilities, and items of
gross income of the partnerships in which we own an interest are treated as our
assets, liabilities and items of gross income for purposes of applying the
requirements described herein.
INCOME TESTS. In order to maintain qualification as a REIT, we must
satisfy annually certain gross income requirements. First, at least 75% of our
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or from certain types of
qualified temporary investments. Second, at least 95% of our gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities.
Rents received by us will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if we, or an owner of 10% or more of our shares, actually or
constructively own 10% or more of such tenant. Third, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property." Finally, in order for rents received to qualify as "rents from real
property," we generally must not
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operate or manage the property (subject to a de minimis exception as described
below) or furnish or render services to the tenants of such property, other than
through an independent contractor from whom we derive no revenue or through a
taxable REIT subsidiary. We may, however, directly perform certain services that
are "usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to the occupant" of
the property ("Permissible Services").
Rents received generally will qualify as rents from real property
notwithstanding the fact that we provide services that are not Permissible
Services so long as the amount received for such services meets a de minimis
standard. The amount received for "impermissible services" with respect to a
property (or, if services are available only to certain tenants, possibly with
respect to such tenants) cannot exceed one percent of all amounts received,
directly or indirectly, by us with respect to such property (or, if services are
available only to certain tenants, possibly with respect to such tenants). The
amount that we will be deemed to have received for performing "impermissible
services" will be the greater of the actual amounts so received or 150% of the
direct cost to us of providing those services.
We believe that substantially all of our rental income will be qualifying
income under the gross income tests, and that our provision of services will not
cause the rental income to fail to be qualifying income under those tests.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a REIT for such year if such
failure was due to reasonable cause and not willful neglect, we disclosed the
nature and amounts of our items of gross income in a schedule attached to our
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances we would be entitled to the benefit of this relief provision. Even
if this relief provision applied, a 100% penalty tax would be imposed on the
amount by which we failed the 75% or 95% test (whichever amount is greater),
less an amount which generally reflects expenses attributable to earning the
nonqualified income.
Subject to certain safe harbor exceptions, any gain realized by us on the
sale of any property held as inventory or other property held primarily for sale
to customers in the ordinary course of business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. Such prohibited
transaction income may also have an adverse effect upon our ability to satisfy
the income tests for qualification as a REIT. Under existing law, whether
property is held as inventory or primarily for sale to customers in the ordinary
course of a trade or business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction.
ASSET TESTS. At the close of each quarter of our taxable year, we must
also satisfy the following tests relating to the nature of our assets. At least
75% of the value of our total assets must be represented by real estate assets,
including (1) our allocable share of real estate assets held by partnerships in
which we own an interest or held by our qualified REIT subsidiaries and (2)
stock or debt instruments held for not more than one year purchased with the
proceeds of an offering of equity securities or a long-term (at least five
years) debt offering by us, cash, cash items and government securities. In
addition, not more than 25% of our total assets may be represented by securities
other than those in the 75% asset class. Not more than 20% of the value of our
total assets may be represented by securities of one or more taxable REIT
subsidiaries (as defined above under "Requirements for Qualification"). Except
for investments included in the 75% asset class, securities in a taxable REIT
subsidiary or qualified REIT subsidiary and certain partnership interests and
debt obligations, (1) not more than 5% of the value of our total assets may be
represented by securities of any one issuer, (2) we may not hold securities that
possess more than 10% of the total voting power of the outstanding securities of
a single issuer and (3) we may not hold securities that have a value of more
than 10% of the total value of the outstanding securities of any one issuer.
We believe that substantially all of our assets consist and, after the
offering, will consist of (1) real properties, (2) stock or debt investments
that earn qualified temporary investment income,
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(3) other qualified real estate assets, and (4) cash, cash items and government
securities. We may also invest in securities of other entities, provided that
such investments will not prevent us from satisfying the asset and income tests
for REIT qualification set forth above.
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 by reason of changes in asset values. If we
inadvertently fail one or more of the asset tests at the end of a calendar
quarter because we acquire securities or other property during the quarter, we
can cure this failure by disposing of sufficient nonqualifying assets within 30
days after the close of the calendar quarter in which it arose.
ANNUAL DISTRIBUTION REQUIREMENT. With respect to each taxable year, we
must distribute to our shareholders as dividends (other than capital gain
dividends) at least 90% of our taxable income. Specifically, we must distribute
an amount equal to (1) 90% of the sum of our "REIT taxable income" (determined
without regard to the deduction for dividends paid and by excluding any net
capital gain) and any after-tax net income from foreclosure property, minus (2)
the sum of certain items of "excess noncash income" such as income attributable
to leveled stepped rents, cancellation of indebtedness and original issue
discount. REIT taxable income is generally computed in the same manner as
taxable income of ordinary corporations, with several adjustments, such as a
deduction allowed for dividends paid, but not for dividends received.
We will be subject to tax on amounts not distributed at regular United
States federal corporate income tax rates. In addition, a nondeductible 4%
excise tax is imposed on the excess of (1) 85% of our ordinary income for the
year plus 95% of capital gain net income for the year and the undistributed
portion of the required distribution for the prior year over (2) the actual
distribution to shareholders during the year (if any). Net operating losses
generated by us may be carried forward but not carried back and used by us for
15 years (or 20 years in the case of net operating losses generated in our tax
years commencing on or after January 1, 1998) to reduce REIT taxable income and
the amount that we will be required to distribute in order to remain qualified
as a REIT. As a REIT, our net capital losses may be carried forward for five
years (but not carried back) and used to reduce capital gains.
In general, a distribution must be made during the taxable year to which it
relates to satisfy the distribution test and to be deducted in computing REIT
taxable income. However, we may elect to treat a dividend declared and paid
after the end of the year (a "subsequent declared dividend") as paid during such
year for purposes of complying with the distribution test and computing REIT
taxable income, if the dividend is (1) declared before the regular or extended
due date of our tax return for such year and (2) paid not later than the date of
the first regular dividend payment made after the declaration, but in no case
later than 12 months after the end of the year. For purposes of computing the 4%
excise tax, a subsequent declared dividend is considered paid when actually
distributed. Furthermore, any dividend that is declared by us in October,
November or December of a calendar year, and payable to shareholders of record
as of a specified date in such quarter of such year will be deemed to have been
paid by us (and received by shareholders) on December 31 of such calendar year,
but only if such dividend is actually paid by us in January of the following
calendar year.
For purposes of complying with the distribution test for a taxable year as
a result of an adjustment in certain of our items of income, gain or deduction
by the IRS, we may be permitted to remedy such failure by paying a "deficiency
dividend" in a later year together with interest and a penalty. Such deficiency
dividend may be included in our deduction of dividends paid for the earlier year
for purposes of satisfying the distribution test. For purposes of the 4% excise
tax, the deficiency dividend is taken into account when paid, and any income
giving rise to the deficiency adjustment is treated as arising when the
deficiency dividend is paid.
We believe that we have distributed and intend to continue to distribute to
our shareholders in a timely manner such amounts sufficient to satisfy the
annual distribution requirements. However, it is possible that timing
differences between the accrual of income and its actual collection, and the
need
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to make non-deductible expenditures (such as capital improvements or principal
payments on debt) may cause us to recognize taxable income in excess of our net
cash receipts, thus increasing the difficulty of compliance with the
distribution requirement. In order to meet the distribution requirement, we
might find it necessary to arrange for short-term, or possibly long-term,
borrowings.
FAILURE TO QUALIFY. If we fail to qualify as a REIT for any taxable year,
and if certain relief provisions of the Code do not apply, we would be subject
to federal income tax (including applicable alternative minimum tax) on our
taxable income at regular corporate rates. Distributions to shareholders in any
year in which we fail to qualify will not be deductible by us nor will they be
required to be made. As a result, our failure to qualify as a REIT would reduce
the cash available for distribution by us to our shareholders. In addition, if
we fail to qualify as a REIT, all distributions to shareholders will be taxable
as ordinary income, to the extent of our current and accumulated earnings and
profits. Subject to certain limitations of the Code, corporate distributees may
be eligible for the dividends-received deduction.
If our failure to qualify as a REIT is not due to reasonable cause but
results from willful neglect, we would not be permitted to elect REIT status for
the four taxable years after the taxable year for which such disqualification is
effective. In the event we were to fail to qualify as a REIT in one year and
subsequently requalify in a later year, we might be required to recognize
taxable income based on the net appreciation in value of our assets as a
condition to requalification. In the alternative, we may be taxed on the net
appreciation in value of our assets if we sell properties within ten years of
the date we requalify as a REIT under federal income tax laws.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As used herein, the term "U.S. shareholder" means a holder of common shares
who (for United States federal income tax purposes) (1) is a citizen or resident
of the United States, (2) is a corporation, partnership, or other entity treated
as a corporation or partnership for federal income tax purposes created or
organized in or under the laws of the United States or of any political
subdivision thereof (unless, in the case of a partnership, Treasury regulations
are adopted that provide otherwise), (3) is an estate the income of which is
subject to United States federal income taxation regardless of its source or (4)
is a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust or a trust that has
a valid election to be treated as a U.S. person in effect.
As long as we qualify as a REIT, distributions made to our U.S.
shareholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by them as
ordinary income and corporate shareholders will not be eligible for the
dividends-received deduction as to such amounts. For purposes of computing our
earnings and profits, depreciation for depreciable real estate will be computed
on a straight-line basis over a 40-year period. For purposes of determining
whether distributions on the common shares are out of current or accumulated
earnings and profits, our earnings and profits will be allocated first to the
preferred shares, if any, and second to the common shares. There can be no
assurance that we will have sufficient earnings and profits to cover
distributions on any common shares.
Distributions that are properly designated as capital gain dividends will
be taxed as gains from the sale or exchange of a capital asset held for more
than one year (to the extent they do not exceed our actual net capital gain for
the taxable year) without regard to the period for which the shareholder has
held its shares. However, corporate shareholders may be required to treat up to
20% of certain capital gain dividends as ordinary income under the Code.
Distributions in excess of our current and accumulated earnings and profits
will constitute a non-taxable return of capital to a shareholder to the extent
that such distributions do not exceed the adjusted basis of the shareholder's
shares, and will result in a corresponding reduction in the shareholder's basis
in the shares. Any reduction in a shareholder's tax basis for its shares will
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increase the amount of taxable gain or decrease the deductible loss that will be
realized upon the eventual disposition of the shares. We will notify
shareholders at the end of each year as to the portions of the distributions
which constitute ordinary income, capital gain or a return of capital. Any
portion of such distributions that exceed the adjusted basis of a U.S.
shareholder's shares will be taxed as capital gain from the disposition of
shares, provided that the shares are held as capital assets in the hands of the
U.S. shareholder.
Aside from the different income tax rates applicable to ordinary income and
capital gain dividends, regular and capital gain dividends from us will be
treated as dividend income for most other federal income tax purposes. In
particular, such dividends will be treated as "portfolio" income for purposes of
the passive activity loss limitation and shareholders generally will not be able
to offset any "passive losses" against such dividends. Dividends will be treated
as investment income for purposes of the investment interest limitation
contained in Section 163(d) of the Code, which limits the deductibility of
interest expense incurred by noncorporate taxpayers with respect to indebtedness
attributable to certain investment assets.
In general, dividends paid by us will be taxable to shareholders in the
year in which they are received, except in the case of dividends declared at the
end of the year, but paid in the following January, as discussed above.
In general, a domestic shareholder will realize capital gain or loss on the
disposition of shares equal to the difference between (1) the amount of cash and
the fair market value of any property received on such disposition and (2) the
shareholder's adjusted basis of such shares. Such gain or loss will generally be
short-term capital gain or loss if the shareholder has not held such shares for
more than one year and will be long-term capital gain or loss if such shares
have been held for more than one year. Loss upon the sale or exchange of shares
by a shareholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as long-term capital loss to the
extent of distributions from us required to be treated by such shareholder as
long-term capital gain.
We may elect to retain and pay income tax on net long-term capital gains.
If we make such an election, you, as a holder of shares, will (1) include in
your income as long-term capital gains your proportionate share of such
undistributed capital gains and (2) be deemed to have paid your proportionate
share of the tax paid by us on such undistributed capital gains and thereby
receive a credit or refund for such amount. As a holder of shares you will
increase the basis in your shares by the difference between the amount of
capital gain included in your income and the amount of tax you are deemed to
have paid. Our earnings and profits will be adjusted appropriately.
BACKUP WITHHOLDING
We will report to our domestic shareholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any, with respect thereto. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 30% (subject to reduction
through 2006) with respect to dividends paid unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding and otherwise
complies with the applicable requirements of the backup withholding rules.
Amounts withheld as backup withholding will be creditable against the
shareholder's income tax liability. In addition, we may be required to withhold
a portion of capital gain distributions made to any shareholders who fail to
certify their non-foreign status to us. See "-- Taxation of Non-U.S.
Shareholders" below. Additional issues may arise pertaining to information
reporting and backup withholding with respect to Non-U.S. Shareholders (persons
other than U.S. shareholders, also further described below). Non-U.S.
Shareholders should consult their tax advisors with respect to any such
information and backup withholding requirements.
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TAXATION OF NON-U.S. SHAREHOLDERS
The following discussion is only a summary of the rules governing United
States federal income taxation of Non-U.S. Shareholders such as nonresident
alien individuals, foreign corporations, foreign partnerships or other foreign
estates or trusts. Prospective Non-U.S. Shareholders should consult with their
own tax advisors to determine the impact of federal, state and local income tax
laws with regard to an investment in shares, including any reporting
requirements.
Distributions that are not attributable to gain from sales or exchanges by
us of United States real property interests and not designated by us as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of our current or accumulated earnings and profits. Such
distributions ordinarily will be subject to a withholding tax equal to 30% of
the gross amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. Certain tax treaties limit the extent to which dividends
paid by a REIT can qualify for a reduction of the withholding tax on dividends.
Distributions in excess of our current and accumulated earnings and profits will
not be taxable to a Non-U.S. Shareholder to the extent that they do not exceed
the adjusted basis of the shareholder's shares, but rather will reduce the
adjusted basis of such shares. To the extent that such distributions exceed the
adjusted basis of a Non-U.S. Shareholder's shares, they will give rise to tax
liability if the Non-U.S. Shareholder would otherwise be subject to tax on any
gain from the sale or disposition of his shares, as described below.
For withholding tax purposes, we are generally required to treat all
distributions as if made out of our current or accumulated earnings and profits
and thus intend to withhold at the rate of 30% (or a reduced treaty rate if
applicable) on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a Non-U.S. Shareholder. We would
not be required to withhold at the 30% rate on distributions we reasonably
estimate to be in excess of our current and accumulated earnings and profits. If
it cannot be determined at the time a distribution is made whether such
distribution will be in excess of current and accumulated earnings and profits,
the distribution will be subject to withholding at the rate applicable to
ordinary dividends. However, the Non-U.S. Shareholder may seek from the IRS a
refund of such amounts from the IRS if it is subsequently determined that such
distribution was, in fact, in excess of our current or accumulated earnings and
profits, and the amount withheld exceeded the Non-U.S. Shareholder's United
States tax liability, if any, with respect to the distribution.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges by us of United States real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, a Non-U.S. Shareholder is taxed as if such gain were effectively
connected with a United States business. Non-U.S. Shareholders would thus be
taxed at the normal capital gain rates applicable to U.S. shareholders (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of non-resident alien individuals). Also, distributions subject to
FIRPTA may be subject to a 30% branch profits tax in the hands of a corporate
Non-U.S. Shareholder not entitled to treaty relief or exemption. We are required
by applicable regulations to withhold 35% of any distribution that could be
designated by us as a capital gains dividend regardless of the amount actually
designated as a capital gain dividend. This amount is creditable against the
Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of shares generally
will not be taxed under FIRPTA if we are a "domestically controlled REIT,"
defined generally as a REIT in which at all times during a specified testing
period less than 50% in value of the shares was held directly or indirectly by
foreign persons. It is anticipated that we will continue to be a "domestically
controlled REIT" after the offering. Therefore, the sale of shares will not be
subject to taxation under FIRPTA. However, because our common shares are
publicly traded, no assurance can be given that we will continue to qualify as a
"domestically controlled REIT." If the gain on the sale of shares were to be
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
the same treatment
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as U.S. Shareholders with respect to such gain (subject to applicable
alternative minimum tax, special alternative minimum tax in the case of
nonresident alien individuals and possible application of the 30% branch profits
tax in the case of foreign corporations) and the purchaser would be required to
withhold and remit to the Internal Revenue Service 10% of the purchase price.
Gain not subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (1)
investment in the shares is effectively connected with the Non-U.S.
Shareholder's United States trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as U.S. Shareholders with
respect to such gain, or (2) the Non-U.S. Shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year and such nonresident alien individual 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 capital gain.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While investments
in real estate may generate UBTI, the Service has issued a published ruling to
the effect that dividend distributions by a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling and on our intention to invest our assets in a
manner that will avoid the recognition of UBTI, amounts distributed by us to
Exempt Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of our shares with debt, a portion of its
income from us, if any, will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under specified provisions of
the Code are subject to different UBTI rules, which generally will require them
to characterize distributions from us as UBTI.
In addition, a pension trust that owns more than 10% of our shares is
required to treat a percentage of the dividends from us as UBTI (the "UBTI
Percentage") in certain circumstances. The UBTI Percentage is our gross income
derived from an unrelated trade or business (determined as if we were a pension
trust) divided by our total gross income for the year in which the dividends are
paid. The UBTI rule applies only if (i) the UBTI Percentage is at least 5%, (ii)
we qualify as a REIT by reason of the modification of the 5/50 Rule that allows
the beneficiaries of the pension trust to be treated as holding our shares in
proportion to their actuarial interests in the pension trust, and (iii) either
(A) one pension trust owns more than 25% of the value of our shares or (B) a
group of pension trusts individually holding more than 10% of the value of our
capital shares collectively owns more than 50% of the value of our capital
shares.
TAXATION OF REINVESTED DIVIDENDS
Shareholders who elect to participate in the Dividend Reinvestment Plan
will be deemed to have received the gross amount of dividends distributed on
their behalf by the Plan Agent as agent for the participants in such plan. Such
deemed dividends will be treated as actual dividends to such shareholders by us
and will retain their character and have the tax effects as described above.
Participants that are subject to federal income tax will thus be taxed as if
they received such dividends despite the fact that their distributions have been
reinvested and, as a result, they will not receive any cash with which to pay
the resulting tax liability.
OTHER TAX CONSIDERATIONS
ENTITY CLASSIFICATION. A significant number of our investments are held
through partnerships. If any such partnerships were treated as an association,
the entity would be taxable as a corporation and therefore would be subject to
an entity level tax on its income. In such a situation, the character
S-24
of our assets and items of gross income would change and might preclude us from
qualifying as a REIT.
We believe that each partnership in which we hold a material interest
(either directly or indirectly) is properly treated as a partnership for tax
purposes (and not as an association taxable as a corporation).
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. When property is
contributed to a partnership in exchange for an interest in the partnership, the
partnership generally takes a carryover basis in that property for tax purposes
equal to the adjusted basis of the contributing partner in the property, rather
than a basis equal to the fair market value of the property at the time of
contribution (this difference is referred to as "Book-Tax Difference"). Special
rules under Section 704(c) of the Code and the regulations thereunder require
special allocations of income, gain, loss and deduction with respect to
contributed property, which tend to eliminate the Book-Tax Difference over the
depreciable lives of such property, but which may not always entirely eliminate
the Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed
properties in the hands of the partnership could cause us (i) to be allocated
lower amounts of depreciation and other deductions for tax purposes than would
be allocated to us if all properties were to have a tax basis equal to their
fair market value at the time the properties were contributed to the
partnership, and (ii) possibly to be allocated taxable gain in the event of a
sale of such contributed properties in excess of the economic or book income
allocated to us as a result of such sale.
S-25
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus supplement, Wachovia Securities, Inc., as
underwriter, has agreed to purchase, and we have agreed to sell to the
underwriter, all of the common shares in this offering.
The underwriting agreement provides that the obligation of the underwriter
to purchase the shares included in this offering is subject to approval of
certain legal matters by counsel and to other conditions. The underwriter is
obligated to purchase all of the shares sold under the underwriting agreement if
it purchases any of the shares.
We have agreed to indemnify the underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the underwriter may be required to make in respect of
those liabilities.
The underwriter will offer the common shares offered by this prospectus
supplement from time to time in one or more transactions (which may include
block transactions) to purchasers directly, through agents, or through brokers
in brokerage transactions on the New York Stock Exchange or to dealers in
negotiated transactions or otherwise, or in a combination of such methods of
sale, at market prices prevailing at the time of sale, at prices related to
prevailing market prices or at negotiated prices. The common shares will not be
sold on or through the facilities of a national securities exchange except
through a market maker. The underwriter may sell common shares to or through
broker-dealers who may receive compensation in the form of underwriting
discounts, concessions or commissions from the underwriter and/or the purchasers
of the common shares for whom they may act as agents. In connection with the
sale of the common shares, the underwriter may be deemed to have received
compensation from us in the form of underwriting discounts, and the underwriter
also may receive commissions from the purchasers of the common shares for whom
it acts as agent. The underwriter and any broker-dealers that participate with
the underwriter in the distribution of the common shares may be deemed to be
underwriters, and any discounts or commissions received by them and any profit
on the resale of the common shares by them may be deemed to be underwriting
discounts or commissions.
The underwriter has agreed to purchase the 4,500,000 common shares offered
by this prospectus supplement at a price of $16.44 per share, resulting in
aggregate proceeds to us, before deducting transaction costs payable by us, of
$73,980,000.
We estimate that our portion of the total expenses of this offering will be
approximately $100,000.
SALES OF SIMILAR SECURITIES
We, and our executive officers and trustees, have agreed not to sell or
transfer any common shares for 90 days after the date of this prospectus
supplement without first obtaining the written consent of Wachovia Securities,
Inc., subject to the exceptions described below. Specifically, we have each
agreed not to directly or indirectly:
- offer, pledge, sell, or contract to sell any common shares;
- sell any option or contract to purchase any common shares;
- purchase any option or contract to sell any common shares;
- grant any option, right or warrant to purchase any common shares;
- otherwise dispose of or transfer any common shares; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common shares whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
S-26
This lockup provision applies to common shares and to securities
convertible into or exchangeable or exercisable for or repayable with common
shares.
Our lock-up agreement contains an exception that permits us to issue common
shares in connection with acquisitions and in connection with joint ventures and
similar arrangements, so long as the recipients of those shares agree not to
sell or transfer those shares in a public market transaction for 90 days after
the date of this prospectus supplement. Our lock-up agreement also contains
exceptions that permit us to issue (i) common shares upon the exercise of
outstanding employee options, (ii) common shares and options pursuant to
employee benefit plans, (iii) common shares pursuant to non-employee director
stock plans, (iv) common shares pursuant to our dividend reinvestment plan, and
(v) common shares upon conversion of currently outstanding convertible
securities. The lock-up agreements between the underwriter and our executive
officers and trustees contain exceptions that permit our executive officers and
trustees to (i) exercise stock options so long as they remain bound by the
lock-up agreement with respect to the underlying common shares they receive upon
exercise of the options for the remainder of the 90-day lock-up period and (ii)
make bona fide gifts to family members or to others approved by the underwriter,
so long as the recipients agree to be bound by the lock-up agreement for the
remainder of the 90-day lock-up period.
STOCK EXCHANGE LISTING
Our common shares are currently listed on the New York Stock Exchange under
the symbol "LXP."
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the common shares is complete, SEC rules limit
the ability of the underwriter to bid for and purchase our common shares on the
open market. However, once the distribution of the common shares is completed,
the underwriter may engage in transactions that stabilize the price of our
common shares, such as bids or purchases to peg, fix or maintain that price.
If the underwriter creates a short position in our common shares in
connection with the offering, i.e., if it sells more common shares than are
listed on the cover of this prospectus supplement, the underwriter may reduce
that short position by purchasing common shares in the open market. Purchases of
our common shares to stabilize the price or reduce a short position may cause
the price of our common shares to be higher than it might be in the absence of
such purchases.
Neither we nor the underwriter makes any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of our common shares. In addition, neither we nor the
underwriter makes any representation that the underwriter will engage in these
transactions or that these transactions, once commenced, will not be
discontinued without notice.
OTHER RELATIONSHIPS
The underwriter and its affiliates have engaged in, and may in the future
engage in, investment banking and other commercial dealings in the ordinary
course of business with us. The underwriter and its affiliates have received
customary fees and commissions for these transactions.
LEGAL MATTERS
The validity of the common shares offered as well as the legal matters
described under "Federal Income Tax Considerations" beginning on page S-15 of
this prospectus supplement will be passed upon for us by Paul, Hastings,
Janofsky & Walker LLP, New York, New York. Seth M. Zachary, a partner of Paul,
Hastings, Janofsky & Walker LLP, is presently serving on our Board of Trustees
and
S-27
will continue to do so at least until the 2003 Annual Meeting of Shareholders.
As of the date of this prospectus supplement, Mr. Zachary beneficially owns
40,659 common shares and holds options to purchase an additional 5,000 common
shares. Legal matters relating to this offering will be passed upon for the
underwriters by Hunton & Williams LLP. Paul, Hastings, Janofsky & Walker LLP and
Hunton & Williams LLP will rely as to matters of Maryland law on the opinion of
Piper Rudnick LLP, Baltimore, Maryland.
EXPERTS
The consolidated financial statements and the related financial statement
schedule included in our Annual Report on Form 10-K as of and for the year ended
December 31, 2002, as incorporated by reference in this prospectus supplement
and the accompanying prospectus, have been incorporated herein by reference in
reliance on the report, also incorporated herein by reference, of KPMG LLP,
independent public accountants, in reliance upon the authority of said firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934 which requires us to file reports and other information with the
Securities and Exchange Commission. You can inspect and copy reports, proxy
statements and other information filed by us at the public reference facility
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
obtain copies of this material by mail from the Public Reference Section of the
SEC at 450 West Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
You can also obtain such reports, proxy statements and other information from
the web site that the SEC maintains at http://www.sec.gov.
Reports, proxy statements and other information concerning us may also be
obtained electronically at our website, http://www.lxp.com and through a variety
of databases, including, among others, the SEC's Electronic Data Gathering and
Retrieval ("EDGAR") program, Knight-Ridder Information Inc., Federal Filing/Dow
Jones and Lexis/Nexis.
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" the information we file
with them, which means:
- Incorporated documents are considered part of this prospectus supplement
and the accompanying prospectus;
- We can disclose important information to you by referring you to those
documents; and
- Information that we file with the SEC will automatically update and
supersede this prospectus supplement and the accompanying prospectus.
We incorporate by reference the documents listed below which were filed
with the SEC under the Securities Exchange Act of 1934 (the "Exchange Act"):
- Annual Report on Form 10-K for the year ended December 31, 2002;
- Current Report on Form 8-K filed April 28, 2003; and
- Our Definitive Proxy Statement on Schedule 14A dated April 15, 2003.
If any statement in this prospectus supplement is inconsistent with a
statement in one of the incorporated documents referred to above, then the
statement in the incorporated document will be deemed to have been superseded by
the statement in this prospectus supplement.
S-28
We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this prospectus supplement but before
the end of the offering:
- Reports filed under Sections 13(a) and (c) of the Exchange Act;
- Definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any subsequent shareholders' meeting; and
- Any reports filed under Section 15(d) of the Exchange Act.
You may request a copy of any filings referred to above (excluding
exhibits), at no cost, by contacting us at the following address:
Lexington Corporate Properties Trust
Attention: T. Wilson Eglin, Chief Executive Officer
355 Lexington Avenue
New York, NY 10017-6603
(212) 692-7260
S-29
PROSPECTUS
$250,000,000
LEXINGTON CORPORATE PROPERTIES TRUST
DEBT SECURITIES
PREFERRED SHARES
COMMON SHARES
------------------------
Lexington Corporate Properties Trust (the "Company"), may offer from time
to time in one or more series (i) its debt securities ("Debt Securities"), which
may be senior or subordinated debt securities, (ii) its preferred shares, of
beneficial interest, $.0001 par value per share ("Preferred Shares"), and (iii)
its common shares of beneficial interest, $.0001 par value per share ("Common
Shares"), with an aggregate public offering price of up to $250,000,000 (or its
equivalent based on the exchange rate at the time of sale) in amounts, at prices
and on terms to be determined at the time of offering. The Debt Securities,
Preferred Shares and Common Shares (collectively, the "Securities") may be
offered, separately or together, in separate classes or series, in amounts, at
prices and on terms to be set forth in one or more supplements to this
Prospectus (each, a "Prospectus Supplement").
The specific terms of the Securities for which this Prospectus is being
delivered will be set forth in the applicable Prospectus Supplement and will
include, where applicable: (i) in the case of Debt Securities, the specific
title, aggregate principal amount, ranking, currency, form (which may be
registered or bearer, or certificated or global), authorized denominations,
maturity, rate (or manner of calculation thereof) and time of payment of
interest, terms for redemption at the option of the Company or repayment at the
option of the holder thereof, terms for sinking fund payments, terms for
conversion into Common Shares or Preferred Shares, covenants and any initial
public offering price; (ii) in the case of Preferred Shares, the specific
designation and stated value per share, any dividend, liquidation, redemption,
conversion, voting and other rights, and any initial public offering price; and
(iii) in the case of Common Shares, any initial public offering price. In
addition, such specific terms may include limitations on direct or beneficial
ownership and restrictions on transfer of the Securities, in each case as may be
consistent with the Company's Declaration of Trust (the "Declaration of Trust")
or otherwise appropriate to preserve the status of the Company as a real estate
investment trust for federal income tax purposes. See "Restrictions on Transfers
of Capital Shares and Anti-Takeover Provisions."
The applicable Prospectus Supplement will also contain information, where
appropriate, about certain United States federal income tax considerations
relating to, and any listings on a securities exchange of, the Securities
covered by such Prospectus Supplement.
The Securities may be offered by the Company directly, through agents
designated from time to time by the Company or to or through underwriters or
dealers. If any agents or underwriters are involved in the sale of any of the
securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them will be set forth or will be
calculable from the information set forth in the applicable Prospectus
Supplement. See "Plan of Distribution." No Securities may be sold without
delivery of a Prospectus Supplement describing the method and terms of the
offering of such Securities.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY MATTERS DISCUSSED UNDER THE
CAPTION "RISK FACTORS" APPEARING ON PAGES 4 THROUGH 6 WHICH ARE RELEVANT TO AN
INVESTMENT IN THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is April 10, 1998.
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, is required to file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material also can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. In addition, such material may be electronically
accessed at the Commission's site on the World Wide Web located at
http://www.sec.gov.
The Company's Common Shares are listed on the New York Stock Exchange (the
"NYSE") and reports, proxy and information statements, and other information
concerning the Company can be inspected at the offices of the NYSE at 20 Broad
Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3, of which this Prospectus forms a part (together with any amendments
thereto, the "Registration Statement"), under the Securities Act of 1933, as
amended (the "Securities Act"). As permitted by the rules and regulations of the
Commission, this Prospectus omits certain information, exhibits and undertakings
contained in the Registration Statement. Such additional information, exhibits
and undertakings may be inspected and obtained from the Commission's principal
office in Washington, D.C. upon payment of the fees prescribed by the
Commission. The summaries or descriptions of documents in this Prospectus are
not necessarily complete. Reference is made to the copies of such documents
attached hereto or otherwise filed as a part of the Registration Statement for a
full and complete statement of their provisions, and such summaries and
descriptions are, in each case, qualified in their entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In December 1997, the Company was reorganized as a Maryland real estate
investment trust. See "The Company." References herein to the Company include
references to the Company's predecessor corporations. The following documents or
information have been filed by the Company with the Commission and are
incorporated herein by reference:
1. The Company's Annual Report on Form 10-K (Commission File No. 1-12386)
for the year ended December 31, 1997, filed on March 31, 1998.
2. The Company's Current Report on Form 8-K (Commission File No. 1-12386),
filed on January 16, 1998.
3. The Company's 1997 Proxy Statement on Schedule 14-A, filed on May 6,
1997 (Commission File No. 1-12386).
4. The description of the Company's capital shares contained in the
Company's Registration Statement on Form 8-B under the Exchange Act,
filed on August 10, 1994 (Commission File No. 1-12386).
All documents subsequently filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of the offering of all
Securities covered by this Prospectus will be deemed incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
2
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person to the Company at 355 Lexington Avenue, New York, New
York 10017. Attention: T. Wilson Eglin, President and Chief Operating Officer,
any or all of the documents referred to above (other than exhibits to such
documents) which have been incorporated by reference in this Prospectus.
THE COMPANY
Lexington Corporate Properties Trust is a self-managed and
self-administered real estate investment trust ("REIT") that acquires, owns and
manages a geographically diversified portfolio of high quality office,
industrial and retail properties. Substantially all of the Company's leases are
"Net Leases," under which the tenant is responsible for all costs of real estate
taxes, insurance, ordinary maintenance and structural repairs. Management
believes that owning acquiring and managing net lease properties results in
lower operating expenses for the Company than the Company otherwise would incur
through investments in properties which were not net leased.
Management has diversified the Company's portfolio by geographical
location, tenant industry segment, lease term expiration and property type with
the intention of providing steady internal growth with low volatility.
Management believes that such diversification should help insulate the Company
from regional recession, industry specific downturns and price fluctuations by
property type.
The Company's management team has demonstrated its ability to create value
and increase cash flow for the Company through active management of its
portfolio of Properties subject to Net Leases, including acquisitions,
expansions of existing Properties, attracting strong tenants, refinancings and
selective dispositions. Management has an active presence in and knowledge of
the real estate market in the United States, particularly with respect to the
market for single tenant properties subject to Net Leases. Management subjects
each prospective property acquisition candidate to a rigorous underwriting
process which analyzes the property's (i) design, construction quality,
efficiency and functionality; (ii) location with respect to the immediate
submarket, city and region; (iii) tenant financial strength, credit rating,
growth prospects and competitive position within its respective industry; (iv)
lease integrity with respect to term, rental rate increases, corporate
guarantees and property maintenance provisions; (v) economics with respect to
the current and future cash flow growth prospects and expected investment yield
sensitivity calculations; and (vi) fit within the existing Company portfolio of
Properties.
The Company commenced operations in 1993 as a REIT, with several operating
partnership subsidiaries. This operating partnership structure enables the
Company to acquire property by issuing to a seller, as a form of consideration,
interests ("OP Units") in the Company's subsidiary operating partnerships. The
OP Units are exchangeable, after certain dates, for Common Shares of the
Company. Management believes that this structure facilitates the Company's
ability to raise capital and to acquire portfolio and individual properties by
enabling the Company to structure transactions which may defer tax gains for a
contributor of property while preserving the Company's cash available for other
purposes, including the payment of distributions.
The Company was originally incorporated under the laws of the State of
Delaware, and was reincorporated in the State of Maryland in June 1994. In
December 1997, the Company reorganized as a Maryland real estate investment
trust ("Maryland REIT"). The reorganization was effected by merging the Company
with and into a newly formed Maryland REIT. References herein to the Company
include references to the Company's Delaware and Maryland predecessor
corporations and the predecessor companies referenced above, unless the context
otherwise requires.
The principal executive offices of the Company are located at 355 Lexington
Avenue, New York, New York 10017, and its telephone number is (212) 692-7260.
3
RISK FACTORS
Risks Involved in Single Tenant Leases. The Company focuses its
acquisition activities in Net Leased real properties or interests therein.
Because the Company's Net Leased real properties are leased to single tenants,
the financial failure of or other default by a tenant resulting in the
termination of a lease is likely to cause a significant reduction in the
operating cash flow of the lessor and might decrease the value of the property
leased to such tenant.
Dependence on Major Tenants. Revenues from several of the Company's
Properties constitute a significant percentage of the Company's consolidated
rental revenues. The default, financial distress or bankruptcy of any of the
tenants of such Properties could cause interruptions in the receipt of lease
revenues from such tenants and/or result in vacancies in the respective
Properties, which would reduce the revenues of the Company until the affected
property is relet, and could decrease the ultimate sale value of each such
Property. Upon the expiration of the leases that are currently in place with
respect to these Properties, the Company may not be able to re-lease the vacant
property at a comparable lease rate or without incurring additional expenditures
in connection with such re-leasing.
Leverage. The Company has incurred, and may continue to incur,
indebtedness (secured and unsecured) in furtherance of its activities. Neither
the Declaration of Trust nor any policy statement formally adopted by the Board
limits either the total amount of indebtedness or the specified percentage of
indebtedness (based upon the total market capitalization of the Company) which
may be incurred. Accordingly, the Company could become more highly leveraged,
resulting in increased risk of default on obligations of the Company and in an
increase in debt service requirements which could adversely affect the financial
condition and results of operations of the Company and the Company's ability to
pay distributions. The Credit Facility (as defined below) limits the amount of
indebtedness the Company may incur to 60% of the Company's total market
capitalization.
Possible Inability to Refinance Balloon Payments on Mortgage Debt. A
significant number of the Company's Properties are subject to mortgages with
balloon payments. Balloon payments, relating to three Properties, of
approximately $10.0 million and $5.6 million are due in 1998 and 1999,
respectively. The Company's secured revolving credit facility with Fleet
National Bank (the "Credit Facility") matures in 1999. Also, on May 19, 1995,
the Company, through its wholly owned subsidiary, LXP Funding Corp., completed a
$70 million secured debt offering, secured by fifteen of the Company's
Properties, by issuing commercial mortgage pass-through certificates, which
mature in 2005. See Note 5 of the Company's Consolidated Financial Statements
included in the Company's 1997 Annual Report on Form 10-K. The ability of the
Company to make such balloon payments will depend upon its ability either to
refinance the mortgage related thereto or to sell the related property. The
ability of the Company to accomplish such goals will be affected by various
factors existing at the relevant time, such as the state of the national and
regional economies, local real estate conditions, available mortgage rates, the
Company's equity in the mortgaged properties, the financial condition of the
Company, the operating history of the mortgaged properties, and tax laws.
Uncertainties Relating to Lease Renewals and Re-letting of Space. The
Company will be subject to the risks that, upon expiration of leases for space
located in the Company's Properties, the premises may not be re-let or the terms
of re-letting (including the cost of concessions to tenants) may be less
favorable than current lease terms. If the Company were unable to re-let
promptly all or a substantial portion of its commercial units or if the rental
rates upon such re-letting were significantly lower than expected rates, the
Company's net income and ability to make expected distributions to shareholders
would be adversely affected. There can be no assurance that the Company will be
able to retain tenants in any of the Company's Properties upon the expiration of
their leases.
Defaults on Cross-Collateralized Properties. Although the Company does not
generally cross-collateralize any of its properties, management may determine to
do so from time to time. As of the date of this Prospectus, two of the Company's
Properties in Florida were cross-collateralized and fifteen of the Company's
Properties were the subject of a segregated pool of assets with respect to which
commercial mortgage pass-through certificates (as discussed above) were issued.
To the extent that any of the Company's Properties are cross-collateralized, any
default by the Company under the mortgage relating to one such Property will
result in a default under the financing arrangements relating to any other
Property which also provides security for such mortgage.
4
Possible Liability Relating to Environmental Matters. Under various
federal, state and local environmental laws, statutes, ordinances, rules and
regulations, an owner of real property may be liable for the costs of removal or
remediation of certain hazardous or toxic substances at, on, in or under such
property, as well as certain other potential costs relating to hazardous or
toxic substances (including government fines and penalties and damages for
injuries to persons and adjacent property). Such laws often impose liability
without regard to whether the owner knew of, or was responsible for, the
presence or disposal of such substances. Such liability may be imposed on the
owner in connection with the activities of an operator of, or tenant at, the
property. The cost of any required remediation, removal, fines or personal or
property damages and the owner's liability therefor could exceed the value of
the property and/or the aggregate assets of the owner. In addition, the presence
of such substances, or the failure to properly dispose of or remove such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral, which, in turn, would
reduce the Company's revenues and ability to make distributions. A property can
also be adversely affected either through physical contamination or by virtue of
an adverse effect upon value attributable to the migration of hazardous or toxic
substances, or other contaminants that have or may have emanated from other
properties. Although the Company's tenants are primarily responsible for any
environmental damages and claims related to the leased premises, in the event of
the bankruptcy or inability of the tenant of such premises to satisfy any
obligations with respect thereto, the Company may be required to satisfy such
obligations. In addition, under certain environmental laws, the Company, as the
owner of such properties, may be held directly liable for any such damages or
claims irrespective of the provisions of any lease.
From time to time, in connection with the conduct of the Company's
business, and prior to the acquisition of any property from a third party or as
required by the Company's financing sources, the Company authorizes the
preparation of Phase I environmental reports and, when necessary, Phase II
environmental reports, with respect to its Properties. Based upon such
environmental reports and management s ongoing review of its Properties, as of
the date of this Prospectus, management was not aware of any environmental
condition with respect to any of the Company's Properties which management
believed would be reasonably likely to have a material adverse effect on the
Company. There can be no assurance, however, that (i) the discovery of
environmental conditions, the existence or severity of which were previously
unknown, (ii) changes in law, (iii) the conduct of tenants, or (iv) activities
relating to properties in the vicinity of the Company's Properties will not
expose the Company to material liability in the future. Changes in laws
increasing the potential liability for environmental conditions existing on
properties or increasing the restrictions on discharges or other conditions may
result in significant unanticipated expenditures or may otherwise adversely
affect the operations of the Company's tenants, which could adversely affect the
Company's financial condition or results of operations.
Risks Relating to Acquisitions. A significant element of the Company's
business strategy is the enhancement of its portfolio through acquisitions of
additional properties. The consummation of any future acquisition will be
subject to satisfactory completion of the Company's extensive valuation analysis
and due diligence review and to the negotiation of definitive documentation.
There can be no assurance that the Company will be able to identify and acquire
additional properties or that it will be able to finance acquisitions in the
future. In addition, there can be no assurance that any such acquisition, if
consummated, will be profitable for the Company. If the Company is unable to
consummate the acquisition of additional properties in the future, there can be
no assurance that the Company will be able to increase the cash available for
distribution to shareholders.
Concentration of Ownership by Certain Investors. In three separate
closings in 1997, the Company sold 2,000,000 Class A Senior Cumulative
Convertible Preferred Shares of Beneficial Interest in the Company (the
"Convertible Preferred Shares") to Five Arrows Realty, L.L.C. ("Five Arrows").
The Convertible Preferred Shares are convertible to Common Shares on a
one-to-one basis at $12.50 per share. In March 1997, the Company sold to an
institutional investor in a private placement 8% Exchangeable Redeemable Secured
Notes (the "Exchangeable Notes") in the aggregate principal amount of $25
million. The Exchangeable Notes are exchangeable at $13 per share for the
Company's Common Shares beginning in the year 2000, subject to adjustment.
Significant concentrations of ownership by certain investors may allow such
investors to exert a greater influence over the management and affairs of the
Company.
5
Uninsured Loss. The Company carries comprehensive liability, fire,
extended coverage and carries rent loss insurance on most of its Properties,
with policy specifications and insured limits customarily carried for similar
properties. However, with respect to certain of the Properties where the leases
do not provide for abatement of rent under any circumstances, the Company
generally does not maintain rent loss insurance. In addition, there are certain
types of losses (such as due to wars or acts of God) that generally are not
insured because they are either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, the
Company could lose capital invested in a Property, as well as the anticipated
future revenues from a Property, while remaining obligated for any mortgage
indebtedness or other financial obligations related to the Property. Any such
loss would adversely affect the financial condition of the Company. Management
believes that the Company's Properties are adequately insured in accordance with
industry standards.
Adverse Effects of Changes in Market Interest Rates. The trading prices of
equity securities issued by REITs have historically been affected by changes in
broader market interest rates, with increases in interest rates resulting in
decreases in trading prices, and decreases in interest rates resulting in
increases in such trading prices. An increase in market interest rates could
therefore adversely affect the trading prices of any equity Securities issued by
the Company.
Competition. The real estate industry is highly competitive. The Company's
principal competitors include national REITs, many of which are substantially
larger and have substantially greater financial resources than the Company.
Failure to Qualify as a REIT. Management believes that the Company has met
the requirements for qualification as a REIT for federal income tax purposes
beginning with its taxable year ended December 31, 1993 and intends to continue
to meet such requirements in the future. However, qualification as a REIT
involves the application of highly technical and complex provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), for which there are only
limited judicial or administrative interpretations. No assurance can be given
that the Company has qualified or will remain qualified as a REIT. The Code
provisions and income tax regulations applicable to REITs are more complex than
those applicable to corporations. The determination of various factual matters
and circumstances not entirely within the Company's control may affect its
ability to qualify as a REIT. In addition, no assurance can be given that
legislation, regulations, administrative interpretations or court decisions will
not significantly change the requirements for qualification as a REIT or the
federal income tax consequences of such qualification. If the Company does not
qualify as a REIT, the Company would not be allowed a deduction for
distributions to shareholders in computing its income subject to tax at the
regular corporate rates. The Company also could be disqualified from treatment
as a REIT for the four taxable years following the year during which
qualification was lost. Cash available for distribution to the Company's
shareholders would be significantly reduced for each year in which the Company
does not qualify as a REIT. Although the Company currently intends to continue
to qualify as a REIT, it is possible that future economic, market, legal, tax or
other considerations may cause the Company, without the consent of the
shareholders, to revoke the REIT election or to otherwise take action that would
result in disqualification.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of Securities for general
corporate purposes, which may include the acquisition of additional properties,
the repayment of outstanding indebtedness or the improvement of certain
properties already in the Company's portfolio.
6
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for each of the years
ended 1997, 1996, 1995, 1994 and 1993 was 1.49, 1.41, 1.78, 1.48, and 1.40,
respectively. The ratios of earnings to fixed charges were computed by dividing
earnings by charges. For this purpose, earnings consist of pre-tax income from
continued operations plus fixed charges (excluding capitalized interest). Fixed
charges consist of interest expense and the amortization of debt issuance costs.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct obligations of the Company, which may be
secured or unsecured and may be either senior Debt Securities ("Senior
Securities") or subordinated Debt Securities ("Subordinated Securities"). The
Debt Securities will be issued under one or more indentures in the form filed as
an exhibit to the Registration Statement of which this Prospectus is a part (the
"Form of Indenture"). As provided in the Form of Indenture, the specific terms
of any Debt Security issued pursuant to an indenture will be set forth in one or
more Supplemental Indentures, each dated as of a date of or prior to the
issuance of the Debt Securities to which it relates (the "Supplemental
Indentures" and each a "Supplemental Indenture"). Senior Securities and
Subordinated Securities may be issued pursuant to separate indentures
(respectively, a "Senior Indenture" and a "Subordinated Indenture"), in each
case between the Company and a trustee (an "Indenture Trustee"), which may be
the same Indenture Trustee, subject to such amendments or supplements as may be
adopted from time to time. The Senior Indenture and the Subordinated Indenture,
as amended or supplemented from time to time, are sometimes hereinafter referred
to collectively as the "Indentures." The Indentures will be subject to and
governed by the Trust Indenture Act of 1939, as amended. The statements made
under this heading relating to the Debt Securities and the Indentures are
summaries of the provisions thereof, do not purport to be complete and are
qualified in their entirety by reference to the Indentures and such Debt
Securities.
Capitalized terms used herein and not defined shall have the meanings
assigned to them in the applicable Indenture.
TERMS
The indebtedness represented by the Senior Securities will rank equally
with all other unsecured and unsubordinated indebtedness of the Company. The
indebtedness represented by Subordinated Securities will be subordinated in
right of payment to the prior payment in full of the Senior Debt of the Company
as described under "-- Subordination." The particular terms of the Debt
Securities offered by a Prospectus Supplement will be described in the
applicable Prospectus Supplement, along with any applicable federal income tax
considerations unique to such Debt Securities. Accordingly, for a description of
the terms of any series of Debt Securities, reference must be made to both the
Prospectus Supplement relating thereto and the description of the Debt
Securities set forth in this Prospectus.
Except as set forth in any Prospectus Supplement, the Debt Securities may
be issued without limits as to aggregate principal amount, in one or more
series, in each case as established from time to time by the Company or as set
forth in the applicable Indenture or in one or more Supplemental Indentures. All
Debt Securities of one series need not be issued at the same time and, unless
otherwise provided, a series may be reopened, without the consent of the holders
of the Debt Securities of such series, for issuance of additional Debt
Securities of such series.
The Form of Indenture provides that the Company may, but need not,
designate more than one Indenture Trustee thereunder, each with respect to one
or more series of Debt Securities. Any Indenture Trustee under an Indenture may
resign or be removed with respect to one or more series of Debt Securities and a
successor Indenture Trustee may be appointed to act with respect to such series.
If two or more persons are acting as Indenture Trustee with respect to different
series of Debt Securities, each such Indenture Trustee
7
shall be an Indenture Trustee of a trust under the applicable Indenture separate
and apart from the trust administered by any other Indenture Trustee, and,
except as otherwise indicated herein, any action described herein to be taken by
each Indenture Trustee may be taken by each such Indenture Trustee with respect
to, and only with respect to, the one or more series of Debt Securities for
which it is Indenture Trustee under the applicable Indenture.
The following Summaries set forth certain general terms and provisions of
the Indentures and the Debt Securities. The Prospectus Supplement relating to
the series of Debt Securities being offered will contain further terms of such
Debt Securities, including the following specific terms:
(1) The title of such Debt Securities and whether such Debt Securities
are secured or unsecured or Senior Securities or Subordinated Securities;
(2) The aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount;
(3) The price (expressed as a percentage of the principal amount
thereof) at which such Debt Securities will be issued and, if other than
the principal amount thereof, the portion of the principal amount thereof
payable upon declaration of the maturity thereof, or (if applicable) the
portion of the principal amount of such Debt Securities that is convertible
into Common Shares or Preferred Shares, or the method by which any such
portion shall be determined;
(4) If convertible, the terms on which such Debt Securities are
convertible, including the initial conversion price or rate and the
conversion period and any applicable limitations on the ownership or
transferability of the Common Shares or Preferred Shares receivable on
conversion;
(5) The date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be payable;
(6) The rate or rates (which may be fixed or variable), or the method
by which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(7) The date or dates, or the method for determining such date or
dates, from which any such interest will accrue, the dates on which any
such interest will be payable, the record dates for such interest payment
dates, or the method by which such dates shall be determined, the persons
to whom such interest shall be payable, and the basis upon which interest
shall be calculated if other than that of a 360-day year of twelve 30-day
months;
(8) The place or places where the principal of (and premium, if any)
and interest, if any, on such Debt Securities will be payable, where such
Debt Securities may be surrendered for conversion or registration of
transfer or exchange and where notices or demands to or upon the Company
with respect to such Debt Securities and the applicable Indenture may be
served;
(9) The period or periods, if any, within which, the price or prices
at which and the other terms and conditions upon which such Debt Securities
may, pursuant to any optional or mandatory redemption provisions, be
redeemed, as a whole or in part, at the option of the Company;
(10) The obligation, if any, of the Company to redeem, repay or
purchase such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a holder thereof, and the period or periods
within which, the price or prices at which and the other terms and
conditions upon which such Debt Securities will be redeemed, repaid or
purchased, as a whole or in part, pursuant to such obligation;
(11) If other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(12) Whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which
8
index, formula or method may, but need not, be based on a currency,
currencies, currency unit or units, or composite currency or currencies)
and the manner in which such amounts shall be determined;
(13) Whether such Debt Securities will be issued in certificated or
book-entry form and, if so, the identity of the depository for such Debt
Securities;
(14) Whether such Debt Securities will be in registered or bearer form
or both and, if in registered form, the denominations thereof if other than
$1,000 and any integral multiple thereof and, if in bearer form, the
denominations thereof and terms and conditions relating thereto;
(15) The applicability, if any, of the defeasance and covenant
defeasance provisions described herein or set forth in the applicable
Indenture, or any modification thereof;
(16) Whether and under what circumstances the Company will pay any
additional amounts on such Debt Securities in respect of any tax,
assessment or governmental charge and, if so, whether the Company will have
the option to redeem such Debt Securities in lieu of making such payment;
(17) Any deletions from, modifications of or additions to the events
of default or covenants of the Company, to the extent different from those
described herein or set forth in the applicable Indenture with respect to
such Debt Securities, and any change in the right of any Trustee or any of
the holders to declare the principal amount of any of such Debt Securities
due and payable;
(18) The provisions, if any, relating to the security provided for
such Debt Securities; and
(19) Any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
If so provided in the applicable Prospectus Supplement, the Debt Securities
may be issued at a discount below their principal amount and provide for less
than the entire principal amount thereof to be payable upon declaration of
acceleration of the maturity thereof ("Original Issue Discount Securities"). In
such cases, any special U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
Except as may be set forth in any Prospectus Supplement, neither the Debt
Securities nor the Indenture will contain any provisions that would limit the
ability of the Company to incur indebtedness or that would afford holders of
Debt Securities protection in the event of a highly leveraged or similar
transaction involving the Company or in the event of a change of control,
regardless of whether such indebtedness, transaction or change of control is
initiated or supported by the Company, any affiliate of the Company or any other
party. However, certain restrictions on ownership and transfers of the Common
Shares and Preferred Shares are designed to preserve the Company's status as a
REIT and, therefore, may act to prevent or hinder a change of control. See
"Restrictions on Transfers of Capital Shares and Anti-Takeover Provisions."
Reference is made to the applicable Prospectus Supplement for information with
respect to any deletions from, modifications of, or additions to, the events of
default or covenants of the Company that are described below, including any
addition of a covenant or other provision providing event risk or similar
protection.
DENOMINATION, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of Debt
Securities will be payable at the corporate trust office of the applicable
Indenture Trustee, the address of which will be stated in the applicable
Prospectus Supplement; provided, however, that, at the option of the Company,
payment of interest may be made by check mailed to the address of the person
entitled thereto as it appears in the applicable register for such Debt
Securities or by wire transfer of funds to such person at an account maintained
within the United States.
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the
9
same series and of a like aggregate principal amount and tenor upon surrender of
such Debt Securities at the corporate trust office of the applicable Indenture
Trustee or at the office of any transfer agent designated by the Company for
such purpose. In addition, subject to certain limitations imposed upon Debt
Securities issued in book-entry form, the Debt Securities of any series may be
surrendered for conversion or registration of transfer or exchange thereof at
the corporate trust office of the applicable Indenture Trustee or at the office
of any transfer agent designated by the Company for such purpose. Every Debt
Security surrendered for conversion, registration of transfer or exchange must
be duly endorsed or accompanied by a written instrument of transfer, and the
person requesting such action must provide evidence of title and identity
satisfactory to the applicable Indenture Trustee or transfer agent. No service
charge will be made for any registration of transfer or exchange of any Debt
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. If the
applicable Prospectus Supplement refers to any transfer agent (in addition to
the applicable Indenture Trustee) initially designated by the Company with
respect to any series of Debt Securities, the Company may at any time rescind
the designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, except that the Company will be
required to maintain a transfer agent in each place of payment for such series.
The Company may at any time designate additional transfer agents with respect to
any series of Debt Securities.
Neither the Company nor any Indenture Trustee shall be required (i) to
issue, register the transfer of or exchange Debt Securities of any series during
a period beginning at the opening of business 15 days before the day of mailing
of a notice of redemption of any Debt Securities that may be selected for
redemption and ending at the close of business on the day of such mailing; (ii)
to register the transfer of or exchange any Debt Security, or portion thereof,
so selected for redemption, in whole or in part, except the unredeemed portion
of any Debt Security being redeemed in part; or (iii) to issue, register the
transfer of or exchange any Debt Security that has been surrendered for
repayment at the option of the holder, except the portion, if any, of such Debt
Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indentures will provide that the Company may, without the consent of
the holders of any outstanding Debt Securities, consolidate with, or sell, lease
or convey all or substantially all of its assets to, or merge with or into, any
other entity provided that (a) either the Company shall be the continuing
entity, or the successor entity (if other than the Company) formed by or
resulting from any such consolidation or merger or which shall have received the
transfer of such assets, is organized under the laws of any domestic
jurisdiction and assumes the Company's obligations to pay principal of (and
premium, if any) and interest on all of the Debt Securities and the due and
punctual performance and observance of all of the covenants and conditions
contained in each Indenture; (b) immediately after giving effect to such
transaction and treating any indebtedness that becomes an obligation of the
Company or any subsidiary as a result thereof as having been incurred by the
Company or such subsidiary at the time of such transaction, no event of default
under the Indentures, and no event which, after notice or the lapse of time, or
both, would become such an event of default, shall have occurred and be
continuing; and (c) an officers' certificate and legal opinion covering such
conditions shall be delivered to each Indenture Trustee.
CERTAIN COVENANTS
Existence. Except as permitted under "-- Merger, Consolidation or Sale of
Assets," the Indentures will require the Company to do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, rights (by declaration of trust, by-laws and statute) and franchises;
provided, however, that the Company will not be required to preserve any right
or franchise if its Board of Trustees determines that the preservation thereof
is no longer desirable in the conduct of its business by appropriate
proceedings.
Maintenance of Properties. The Indentures will require the Company to
cause all of its material properties used or useful in the conduct of its
business or the business of any subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the
10
judgment of the Company may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times;
provided, however, that the Company and its subsidiaries shall not be prevented
from selling or otherwise disposing of their properties for value in the
ordinary course of business.
Insurance. The Indentures will require the Company to cause each of its
and its subsidiaries' insurable properties to be insured against loss or damage
with insurers of recognized responsibility and, if described in the applicable
Prospectus Supplement, having a specified rating from a recognized insurance
rating service, in such amounts and covering all such risks as shall be
customary in the industry in accordance with prevailing market conditions and
availability.
Payment of Taxes and Other Claims. The Indentures will require the Company
to pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon it or any subsidiary or upon the income, profits or property of the
Company or any subsidiary and (ii) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon the property of the
Company or any subsidiary; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith.
Provision of Financial Information. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Indentures will require the
Company, within 15 days of each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject, (i) to transmit by
mail to all holders of Debt Securities, as their names and addresses appear in
the applicable register for such Debt Securities, without cost to such holders,
copies of the annual reports, quarterly reports and other documents that the
Company would have been required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act if the Company were subject to such Sections,
(ii) to file with the applicable Indenture Trustee copies of the annual reports,
quarterly reports and other documents that the Company would have been required
to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act
if the Company were subject to such Sections and (iii) to supply, promptly upon
written request and payment of the reasonable cost of duplication and delivery,
copies of such documents to any prospective holder.
Additional Covenants. Any additional covenants of the Company with respect
to any series of Debt Securities will be set forth in the Prospectus Supplement
relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable Prospectus Supplement, each
Indenture will provide that the following events are "Events of Default" with
respect to any series of Debt Securities issued thereunder (i) default for 30
days in the payment of any installment of interest on any Debt Security of such
series; (ii) default in the payment of principal of (or premium, if any, on) any
Debt Security of such series at its maturity; (iii) default in making any
sinking fund payment as required for any Debt Security of such series; (iv)
default in the performance or breach of any other covenant or warranty of the
Company contained in the Indenture (other than a covenant added to the Indenture
solely for the benefit of a series of Debt Securities issued thereunder other
than such series), continued for 60 days after written notice as provided in the
applicable Indenture; (v) a default under any bond, debenture, note or other
evidence of indebtedness for money borrowed by the Company or any of its
subsidiaries (including obligations under leases required to be capitalized on
the balance sheet of the lessee under generally accepted accounting principles
but not including any indebtedness or obligations for which recourse is limited
to property purchased) in an aggregate principal amount in excess of $10,000,000
or under any mortgage, indenture or instrument under which there may be issuedor
by which there may be secured or evidenced any indebtedness for money borrowed
by the Company or any its subsidiaries (including such leases, but not including
such indebtedness or obligations for which recourse is limited to property
purchased) in an aggregate principal amount in excess of $10,000,000, whether
such indebtedness exists on the date of such Indenture or shall thereafter be
created, with such obligations being accelerated and not rescinded or annulled;
(vi) certain events of bankruptcy, insolvency or reorganiza-
11
tion, or court appointment of a receiver, liquidator or trustee of the Company
or any Significant Subsidiary of the Company; and (vii) any other event of
default provided with respect to a particular series of Debt Securities. The
term "Significant Subsidiary" has the meaning ascribed to such term in
Regulation S-X promulgated under the Securities Act.
If an event of default under any Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case the applicable Indenture Trustee or the holders of not less than 25%
in principal amount of the Debt Securities of that series will have the right to
declare the principal amount (or, if the Debt Securities of that series are
Original Issue Discount Securities or indexed securities, such portion of the
principal amount as may be specified in the terms thereof) of all the Debt
Securities of that series to be due and payable immediately by written notice
thereof to the Company (and to the applicable Indenture Trustee if given by the
holders). However, at any time after such a declaration of acceleration with
respect to Debt Securities of such series (or of all Debt Securities then
outstanding under any Indenture, as the case may be) has been made, but before a
judgment or decree for payment of the money due has been obtained by the
applicable Indenture Trustee, the holders of not less than a majority in
principal amount of outstanding Debt Securities of such series (or of all Debt
Securities then outstanding under the applicable Indenture, as the case may be)
may rescind and annul such declaration and its consequences if (i) the Company
shall have deposited with the applicable Indenture Trustee all required payments
of the principal of (and premium, if any) and interest on the Debt Securities of
such series (or of all Debt Securities than outstanding under the applicable
Indenture, as the case may be), plus certain fees, expenses, disbursements and
advances of the applicable Indenture Trustee and (ii) all events of default,
other than the non-payment of accelerated principal (or specified portion
thereof), with respect to Debt Securities of such series (or of all Debt
Securities then outstanding under the applicable Indenture, as the case may be)
have been cured or waived as provided in such Indenture. The Indentures will
also provide that the holders of not less than a majority in principal amount of
the outstanding Debt Securities of any series (or of all Debt Securities then
outstanding under the applicable Indenture, as the case may be) may waive any
past default with respect to such series and its consequences, except a default
(x) in the payment of the principal of (or premium, if any) or interest on any
Debt Security of such series or (y) in respect of a covenant or provision
contained in the applicable Indenture that cannot be modified or amended without
the consent of the holder of each outstanding Debt Security affected thereby.
The Indentures will require each Indenture Trustee to give notice to the
holders of Debt Securities within 90 days of a default under the applicable
Indenture unless such default shall have been cured or waived; provided,
however, that such Indenture Trustee may withhold notice to the holders of any
series of Debt Securities of any default with respect to such series (except a
default in the payment of the principal of (or premium, if any) or interest on
any Debt Security of such series or in the payment of any sinking fund
installment in respect to any Debt Security of such series) if specified
responsible officers of such Indenture Trustee consider such withholding to be
in the interest of such holders.
The Indentures will provide that no holder of Debt Securities of any series
may institute any proceeding, judicial or otherwise, with respect to such
Indenture or for any remedy thereunder, except in the case of failure of the
applicable Indenture Trustee, for 60 days, to act after it has received a
written request to institute proceedings in respect of an event of default from
the holders of not less than 25% in principal amount of the outstanding Debt
Securities of such series, as well as an offer of indemnity reasonably
satisfactory to it. This provision will not prevent, however, any holder of Debt
Securities from instituting suit for the enforcement of payment of the principal
of (and premium, if any) and interest on such Debt Securities at the respective
due dates thereof.
The Indentures will provide that, subject to provisions in each Indenture
relating to its duties in case of default, an Indenture Trustee will be under no
obligation to exercise any of its rights or powers under an Indenture at the
request or direction of any holders of any series of Debt Securities then
outstanding under such Indenture, unless such holders shall have offered to the
Indenture Trustee thereunder reasonable security or indemnity. The holders of
not less than a majority in principal amount of the outstanding Debt Securities
of any series (or of all Debt Securities then outstanding under an Indenture, as
the case may be) shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the
12
applicable Indenture Trustee, or of exercising any trust or power conferred upon
such Indenture Trustee. However, an Indenture Trustee may refuse to follow any
direction which is in conflict with any law or the applicable Indenture, which
may involve such Indenture Trustee in personal liability or which may be unduly
prejudicial to the holders of Debt Securities of such series not joining
therein.
Within 120 days after the close of each fiscal year, the Company will be
required to deliver to each Indenture Trustee a certificate, signed by one of
several specified officers of the Company, stating whether or not such officer
has knowledge of any default under the applicable Indenture and, if so,
specifying each such default and the nature and status thereof.
MODIFICATION OF THE INDENTURES
Modifications and amendments of an Indenture will be permitted to be made
only with the consent of the holders of not less than a majority in principal
amount of all outstanding Debt Securities issued under such Indenture affected
by such modification or amendment; provided, however, that no such modification
or amendment may, without the consent of the holder of each such Debt Security
affected thereby, (i) change the stated maturity of the principal of, or any
installment of interest (or premium, if any) on, any such Debt Security; (ii)
reduce the principal amount of, or the rate or amount of interest on, or any
premium payable on redemption of, any such Debt Security, or reduce the amount
of principal of an Original Issue Discount Security that would be due and
payable upon declaration of acceleration of the maturity thereof or would be
provable in bankruptcy, or adversely affect any right of repayment of the holder
of any such Debt Security; (iii) change the place of payment, or the coin or
currency, for payment of principal of, premium, if any, or interest on any such
Debt Security; (iv) impair the right to institute suit for the enforcement of
any payment on or with respect to any such Debt Security; (v) reduce the
above-stated percentage of outstanding Debt Securities of any series necessary
to modify or amend the applicable Indenture, to waive compliance with certain
provisions thereof or certain defaults and consequences thereunder or to reduce
the quorum or voting requirements set forth in the applicable Indenture; or (vi)
modify any of the foregoing provisions or any of the provisions relating to the
waiver of certain past defaults or certain covenants, except to increase the
required percentage to effect such action or to provide that certain other
provisions may not be modified or waived without the consent of the holder of
such Debt Security.
The holders of a majority in aggregate principal amount of the outstanding
Debt Securities of each series may, on behalf of all holders of Debt Securities
of that series, waive, insofar as that series is concerned, compliance by the
Company with certain restrictive covenants of the applicable Indenture.
Modifications and amendments of an Indenture will be permitted to be made
by the Company and the respective Indenture Trustee thereunder without the
consent of any holder of Debt Securities for any of the following purposes: (i)
to evidence the succession of another person to the Company as obligor under
such Indenture; (ii) to add to the covenants of the Company for the benefit of
the holders of all or any series of Debt Securities or to surrender any right or
power conferred upon the Company in such Indenture; (iii) to add events of
default for the benefit of the holders of all or any series of Debt Securities;
(iv) to add or change any provisions of an Indenture to facilitate the issuance
of, or to liberalize certain terms of, Debt Securities in bearer form, or to
permit or facilitate the issuance of Debt Securities in uncertificated form;
provided that such action shall not adversely affect the interest of the holders
of the Debt Securities of any series in any material respect; (v) to change or
eliminate any provisions of an Indenture; provided that any such change or
elimination shall be effective only when there are no Debt Securities
outstanding of any series created prior thereto which are entitled to the
benefit of such provision; (vi) to secure the Debt Securities; (vii) to
establish the form or terms of Debt Securities of any series, including the
provisions and procedures, if applicable, for the conversion of such Debt
Securities into Common Shares or Preferred Shares; (viii) to provide for the
acceptance of appointment by a successor Indenture Trustee or facilitate the
administration of the trusts under an Indenture by more than one Indenture
Trustee; (ix) to cure any ambiguity, defect or inconsistency in an Indenture;
provided that such action shall not adversely affect the interests of holders of
Debt Securities of any series issued under such Indenture; or (x) to supplement
any of the provisions of an Indenture to the extent necessary to permit or
facilitate defeasance and discharge of any series of such Debt Securities;
provided that such action shall not adversely affect the interests of the
holders of the outstanding Debt Securities of any series.
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The Indentures will provide that, in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof (ii) the principal amount of
any Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Securities of the amount determined as provided in (i) above), (iii) the
principal amount of an indexed security that shall be deemed outstanding shall
be the principal face amount of such indexed security at original issuance,
unless otherwise provided with respect to such indexed security pursuant to such
Indenture, and (iv) Debt Securities owned by the Company or any other obligor
upon the Debt Securities or an affiliate of the Company or of such other obligor
shall be disregarded.
The Indentures will contain provisions for convening meetings of the
holders of Debt Securities of a series issued thereunder. A meeting may be
called at any time by the applicable Indenture Trustee, and also, upon request
by the Company or the holder of at least 25% in principal amount of the
outstanding Debt Securities of such series, in any such case upon notice given
as provided in such Indenture. Except for any consent that must be given by the
holder of each Debt Security affected by certain modifications and amendments of
an Indenture, any resolution presented at a meeting or adjourned meeting duly
reconvened at which a quorum is present may be adopted by the affirmative vote
of the holders of a majority in principal amount of the outstanding Debt
Securities of that series; provided, however, that, except as referred to above,
any resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
holders of a specified percentage, which is less than a majority, in principal
amount of the outstanding Debt Securities of a series may be adopted at a
meeting or adjourned meeting duly reconvened at which a quorum is present by the
affirmative vote of the holders of such specified percentage in principal amount
of the outstanding Debt Securities of that series. Any resolution passed or
decision taken at any meeting of holders of Debt Securities of any series duly
held in accordance with an Indenture will be binding on all holders of Debt
Securities of that series. The quorum at any meeting called to adopt a
resolution, and at any reconvened meeting, will be persons holding or
representing a majority in principal amount of the outstanding Debt Securities
of a series; provided, however, that if any action is to be taken at such
meeting with respect to a consent or waiver which may be given by the holders of
not less than a specified percentage in principal amount of the outstanding Debt
Securities of a series, the persons holding or representing such specified
percentage in principal amount of the outstanding Debt Securities of such series
will constitute a quorum.
Notwithstanding the foregoing provisions, the Indentures will provide that
if any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver and other action that such Indenture expressly provides may be
made, given or taken by the holders of a specified percentage in principal
amount of all outstanding Debt Securities affected thereby, or of the holders of
such series and one or more additional series; (i) there shall be no minimum
quorum requirement for such meeting, and (ii) the principal amount of the
outstanding Debt Securities of such series that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action shall
be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under such Indenture.
SUBORDINATION
Unless otherwise provided in the applicable Prospectus Supplement,
Subordinated Securities will be subject to the following subordination
provisions.
Upon any distribution to creditors of the Company in a liquidation,
dissolution or reorganization, the payment of the principal of and interest on
any Subordinated Securities will be subordinated to the extent provided in the
applicable Indenture in right of payment to the prior payment in full of all
Senior Debt (as
14
defined below), but the obligation of the Company to make payments of the
principal of and interest on such Subordinated Securities will not otherwise be
affected. No payment of principal or interest will be permitted to be made on
Subordinated Securities at any time if a default on Senior Debt exists that
permits the holders of such Senior Debt to accelerate its maturity and the
default is the subject of judicial proceedings or the Company receives notice of
the default. After all Senior Debt is paid in full and until the Subordinated
Securities are paid in full, holders will be subrogated to the rights of holders
of Senior Debt to the extent that distributions otherwise payable to holders
have been applied to the payment of Senior Debt. The Subordinated Indenture will
not restrict the amount of Senior Indebtedness or other indebtedness of the
Company and its subsidiaries. As a result of these subordination provisions in
the event of a distribution of assets upon insolvency, holders of Subordinated
Indebtedness may recover less, ratably, than senior creditors of the Company.
Senior Debt will be defined in the applicable Indenture as the principal of
and interest on, or substantially similar payments to be made by the Company in
respect of, the following, whether outstanding at the date of execution of the
applicable Indenture or thereafter incurred, created or assumed: (i)
indebtedness of the Company for money borrowed or represented by purchase-money
obligations, (ii) indebtedness of the Company evidenced by notes, debentures, or
bonds, or other securities issued under the provisions of an indenture, fiscal
agency agreement or other agreement, (iii) obligations of the Company as lessee
under leases of property either made as part of any sale and leaseback
transaction to which the Company is a part or otherwise, (iv) indebtedness of
partnerships and joint ventures which is included in the consolidated financial
statements of the Company, (v) indebtedness obligations and liabilities of
others in respect of which the Company is liable contingently or otherwise to
pay or advance money or property or as guarantor, endorser or otherwise or which
the Company has agreed to purchase or otherwise acquire, and (vi) any binding
commitment of the real estate investment, in each case other than (a) any such
indebtedness, obligation or liability referred to in clauses (i) through (vi)
above as to which, in the instrument creating or evidencing the same pursuant to
which the same is outstanding, it is provided that such indebtedness, obligation
or liability is not superior in right of payment to the Subordinated Securities
or ranks pari passu with the Subordinated Securities, (b) any such indebtedness
obligation or liability which is subordinated to indebtedness of the Company to
substantially the same extent as or to a greater extent than the Subordinated
Securities are subordinated, and (c) the Subordinated Securities. There will not
be any restriction in any Indenture relating to Subordinated Securities upon the
creation of additional Senior Debt.
If this Prospectus is being delivered in connection with a series of
Subordinated Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will set forth the approximate
amount of Senior Debt outstanding as of the end of the Company's most recent
fiscal quarter.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company will be permitted, at its option, to discharge certain obligations to
holders of any series of Debt Securities issued under any Indenture that have
not already been delivered to the applicable Indenture Trustee for cancellation
and that either have become due and payable or will become due and payable
within one year (or scheduled for redemption within one year) by irrevocably
depositing with the applicable Indenture Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities with respect to principal
(and premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the stated maturity or redemption
date, as the case may be.
The Indentures will provide that, unless otherwise indicated in the
applicable Prospectus Supplement, the Company may elect either (i) to defease
and be discharged from any and all obligations (except for the obligation to pay
additional amounts, if any, upon the occurrence of certain events of tax
assessment or governmental charge with respect to payments on such Debt
Securities and the obligations to register the transfer or exchange of such Debt
Securities, to replace temporary or mutilated, destroyed, lost or stolen Debt
Securities, to maintain an office or agency in respect of such Debt Securities,
to hold moneys for payment in trust and, with respect to Subordinated Debt
Securities which are convertible or exchangeable, the right to
15
convert or exchange) with respect to such Debt Securities ("defeasance") or (ii)
to be released from its obligations with respect to such Debt Securities under
the applicable Indenture ( being the restrictions described under '-- Certain
Covenants") or, if provided in the applicable Prospectus Supplement, its
obligations with respect to any other covenant, and any omission to comply with
such obligations shall not constitute an event of default with respect to such
Debt Securities ("covenant defeasance"), in either case upon the irrevocable
deposit by the Company with the applicable Indenture Trustee, in trust, of an
amount in such currency or currencies, currency unit or units or composite
currency or currencies in which such Debt Securities are payable at stated
maturity, or Government Obligations (as defined below), or both, applicable to
such Debt Securities, which through the scheduled payment of principal and
interest in accordance with their terms will provide money in an amount
sufficient to pay the principal of (and premium, if any) and interest on such
Debt Securities, and any mandatory sinking fund or analogous payments thereon,
on the scheduled due dates therefor.
Such a trust will only be permitted to be established if, among other
things, the Company has delivered to the applicable Indenture Trustee an opinion
of counsel (as specified in the applicable Indenture) to the effect that the
holders of such Debt Securities will not recognize income, gain or loss for U.S.
federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to U.S. federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred, and such opinion of counsel,
in the case of defeasance, will be required to refer to and be based upon a
ruling received from or published by the Internal Revenue Service or a change in
applicable United States federal income tax law occurring after the date of the
Indenture. In the event of such defeasance, the holders of such Debt Securities
would thereafter be able to look only to such trust fund for payment of
principal (and premium, if any) and interest.
"Government Obligations" means securities that are (i) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged, or (ii) obligations
of a person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or such government which issued
the foreign currency in which the Debt Securities of such series are payable,
the payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America or such other government, which, in
either case, are not callable or redeemable at the option of the issuer thereof,
and shall also include a depository receipt issued by a bank or trust company as
custodian with respect to any such Government Obligation or a specific payment
of interest on or principal of any such Government Obligation held by such
custodian for the account of the holder of a depository receipt; provided that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the Government Obligation or
the specific payment of interest on or principal of the Government Obligation
evidenced by such depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(i) the holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the applicable Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security, or
(ii) a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security will be deemed to have been, and
will be, fully discharged and satisfied through the payment of the principal of
(and premium, if any) and interest on such Debt Security as they become due out
of the proceeds yielded by converting the amount so deposited in respect of such
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or such
cessation of usage based on the applicable market exchange rate. "Conversion
Event" means the cessation of use of (a) a currency, currency unit or composite
currency both by the government of the country which issued such currency and
for the settlement of transactions by a central bank or other public
institutions of or within the international banking community, (b) the ECU both
within the European Monetary System and
16
for the settlement of transactions by public institutions of or within the
European Communities, or (c) any currency unit or composite currency other than
the ECU for the purposes for which it was established. Unless otherwise provided
in the applicable Prospectus Supplement, all payments of principal of (and
premium, if any) and interest on any Debt Security that is payable in a foreign
currency that ceases to be used by its government of issuance shall be made in
U.S. dollars.
If the Company effects covenant defeasance with respect to any Debt
Securities and such Debt Securities are declared due and payable because of the
occurrence of any event of default other than the event of default described in
clause (iv) under "-Events of Default, Notice and Waiver" with respect to
specified sections of an Indenture (which sections would no longer be applicable
to such Debt Securities) or described in clause (vii) under "-Events of Default,
Notice and Waiver" with respect to any other covenant as to which there has been
covenant defeasance, the amount in such currency, currency unit or composite
currency in which such Debt Securities are payable, and Government Obligations
on deposit with the applicable Indenture Trustee, will be sufficient to pay
amounts due on such Debt Securities at the time of their stated maturity but may
not be sufficient to pay amounts due on such Debt Securities at the time of the
acceleration resulting from such event of default. However, the Company would
remain liable to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Shares or Preferred Shares will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Shares or Preferred
Shares, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the holders
or the Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities and any restrictions on conversion, including restrictions directed
at maintaining the Company's REIT status.
PAYMENT
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of Debt
Securities will be payable at the corporate trust office of the Indenture
Trustee, the address of which will be stated in the applicable Prospectus
Supplement; provided that, at the option of the Company, payment of interest may
be made by check mailed to the address of the person entitled thereto as it
appears in the applicable register for such Debt Securities or by wire transfer
of funds to such person at an account maintained within the United States.
All moneys paid by the Company to a paying agent or an Indenture Trustee
for the payment of the principal of or any premium or interest on any Debt
Security which remain unclaimed at the end of one year after such principal,
premium or interest has become due and payable will be repaid to the Company,
and the holder of such Debt Security thereafter may look only to the Company for
payment thereof.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
17
DESCRIPTION OF PREFERRED SHARES
The description of the Company's preferred shares, par value $.0001 per
share ("Preferred Shares"), set forth below does not purport to be complete and
is qualified in its entirety by reference to the Company's Declaration of Trust
and Bylaws (the "Bylaws").
GENERAL
Under the Declaration of Trust, the Company has authority to issue
10,000,000 Preferred Shares from time to time, in one or more series, as
authorized by the Board of Trustees of the Company. Prior to issuance of shares
of each series, the Board of Trustees is required by the Maryland law of
Corporations and Associations and the Declaration of Trust to fix for each
series, subject to the provisions of the Declaration of Trust regarding excess
shares of beneficial interest, $.0001 par value per share ("Excess Shares"), the
terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption, as are permitted by Maryland law. The Preferred Shares
will, when issued against payment therefor, be fully paid and nonassessable and
will not be subject to preemptive rights. The Board of Trustees could authorize
the issuance of Preferred Shares with terms and conditions that could have the
effect of discouraging a takeover or other transaction that holders of Common
Shares might believe to be in their best interests or in which holders of some,
or a majority, of the Common Shares might receive a premium for their shares
over the then market price of such Common Shares.
TERMS
The following description of the Preferred Shares sets forth certain
general terms and provisions of the Preferred Shares to which any Prospectus
Supplement may relate. The statements below describing the Preferred Shares are
in all respects subject to and qualified in their entirety by reference to the
applicable provisions of the Declaration of Trust and Bylaws and any applicable
amendment to the Declaration of Trust designating terms of a series of Preferred
Shares (a "Designating Amendment").
Reference is made to the Prospectus Supplement relating to the Preferred
Shares offered thereby for specific terms, including:
(1) The title and stated value of such Preferred Shares;
(2) The number of such Preferred Shares offered, the liquidation
preference per share and the offering price of such Preferred Shares;
(3) The dividend rate(s), period(s) and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Shares;
(4) The date from which dividends on such Preferred Shares shall
accumulate, if applicable;
(5) The provision for a sinking fund, if any, for such Preferred
Shares;
(6) The provision for redemption, if applicable, of such Preferred
Shares;
(7) Any listing of such Preferred Shares on any securities exchange;
(8) The terms and conditions, if applicable, upon which such Preferred
Shares will be convertible into Common Shares, including the conversion
price (or manner of calculation thereof);
(9) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Shares;
(10) A discussion of federal income tax considerations applicable to
such Preferred Shares;
(11) The relative ranking and preference of such Preferred Shares as
to dividend rights and rights upon liquidation, dissolution or winding-up
of the affairs of the Company;
18
(12) Any limitations on issuance of an series of Preferred Shares
ranking senior to or on a parity with such series of Preferred Shares as to
dividend rights and rights upon liquidation, dissolution or winding-up of
the affairs of the Company; and
(13) Any limitations on direct or beneficial ownership and
restrictions on transfer, in each case as may be appropriate to preserve
the status of the Company as a REIT.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Shares will, with respect to dividend rights and rights upon liquidation,
dissolution or winding-up of the Company, rank (i) senior to all classes or
series of Common Shares of the Company, and to all equity securities ranking
junior to such Preferred Shares with respect to dividend rights or rights upon
liquidation, dissolution or winding-up of the Company, (ii) on a parity with all
equity securities issued by the Company the terms of which specifically provide
that such equity securities rank on a parity with the Preferred Shares with
respect to dividend rights or rights upon liquidation, dissolution or winding-up
of the Company; and (iii) junior to all equity securities issued by the Company
the terms of which specifically provide that such equity securities rank senior
to the Preferred Shares with respect to dividend rights or rights upon
liquidation, dissolution or winding-up of the Company. The term "equity
securities" does not include convertible debt securities.
DIVIDENDS
Holders of the Preferred Shares of each series will be entitled to receive,
when, as and if declared by the Board of Trustees of the Company, out of assets
of the Company legally available for payment, cash dividends at such rates and
on such dates as will be set forth in the applicable Prospectus Supplement. Each
such dividend shall be payable to holders of record as they appear on the share
transfer books of the Company on such record dates as shall be fixed by the
Board of Trustees of the Company.
Dividends on any series of the Preferred Shares may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Trustees of the Company fails
to declare a dividend payable on a dividend payment date on any series of the
Preferred Shares for which dividends are noncumulative, then the holders of such
series of the Preferred Shares will have no right to receive a dividend in
respect of the dividend period ending on such dividend payment date, and the
Company will have no obligation to pay the dividend accrued for such period,
whether or not dividends on such series are declared payable on any future
dividend payment date.
If Preferred Shares of any series are outstanding, no dividends will be
declared or paid or set apart for payment on any capital shares of the Company
of any other series ranking, as to dividends, on a parity with or junior to the
Preferred Shares of such series for any period unless (i) if such series of
Preferred Shares has a cumulative dividend, full cumulative dividends have been
or contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof is set apart for such payment on the Preferred Shares of
such series for all past dividend periods and the then current dividend period
or (ii) if such series of Preferred Shares does not have a cumulative dividend,
full dividends for the then current dividend period have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for such payment on the Preferred Shares of such
series. When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon Preferred Shares of any series and the shares
of any other series of Preferred Shares ranking on a parity as to dividends with
the Preferred Shares of such series, all dividends declared upon Preferred
Shares of such series and any other series of Preferred Shares ranking on a
parity as to dividends with such Preferred Shares shall be declared pro rata so
that the amount of dividends declared per share of Preferred Shares of such
series and such other series of Preferred Shares shall in all cases bear to each
other the same ratio that accrued dividends per share on the Preferred Shares of
such series (which shall not include any accumulation in respect of unpaid
dividends for prior dividend periods if such Preferred Shares does not have a
cumulative dividend) and such other series of Preferred Shares bear to each
19
other. No interest, or sum or money in lieu of interest, shall be payable in
respect or any dividend payment or payments on Preferred Shares of such series
which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Shares has a cumulative dividend, full cumulative
dividends on the Preferred Shares of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
is set apart for payment for all past dividend periods and the then current
dividend period, and (ii) if such series of Preferred Shares does not have a
cumulative dividend, full dividends on the Preferred Shares of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof is set apart for payment for the then current dividend
period, no dividends (other than in Common Shares or other capital shares in the
Company ranking junior to the Preferred Shares of such series as to dividends
and upon liquidation) shall be declared or paid or set aside for payment nor
shall any other distribution be declared or made upon the Common Shares, or any
other capital shares of the Company ranking junior to or on a parity with the
Preferred Shares of such series as to dividends or upon liquidation, nor shall
any Common Shares, or any other capital shares of the Company ranking junior to
or on a parity with the Preferred Shares of such series as to dividends or upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any such shares) by the Company (except by conversion into or
exchange for other capital shares of the Company ranking junior to the Preferred
Shares of such series as to dividends and upon liquidation).
Any dividend payment made on shares of a series of Preferred Shares shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series which remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred
Shares will be subject to mandatory redemption or redemption at the option of
the Company, as a whole or in part, in each case upon the terms, at the times
and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Shares that is
subject to mandatory redemption will specify the number of such Preferred Shares
that shall be redeemed by the Company in each year commencing after a date to be
specified, at a redemption price per share to be specified, together with an
amount equal to all accrued and unpaid dividends thereon (which shall not, if
such Preferred Shares does not have a cumulative dividend, include any
accumulation in respect of unpaid dividends for prior dividend periods) to the
date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Shares of any series is payable only from the net
proceeds of the issuance of capital shares of the Company, the terms of such
Preferred Shares may provide that, if no such capital shares shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Shares shall
automatically and mandatorily be converted into the applicable capital shares of
the Company pursuant to conversion provisions specified in the applicable
Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if a series of Preferred Shares
has a cumulative dividend, full cumulative dividends on all shares of all such
series of Preferred Shares shall have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for all past dividend periods and the then current dividend period, and
(ii) if a series of Preferred Shares does not have a cumulative dividend, full
dividends on all Preferred Shares of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for the then current dividend period, no shares of such
series of Preferred Shares shall be redeemed unless all outstanding Preferred
Shares of such series are simultaneously redeemed; provided, however, that the
foregoing shall not prevent the purchase or acquisition of Preferred Shares of
such series to preserve the REIT status of the Company or pursuant to a purchase
or exchange offer made on the same terms to holders of all outstanding Preferred
Shares of such series. In addition, unless (a) if such series of Preferred
Shares has a cumulative dividend, full cumulative dividends on all outstanding
shares of such series of Preferred Shares
20
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, and (b) if such series of
Preferred Shares does not have a cumulative dividend, full dividends on the
Preferred Shares of such series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then current dividend period, the Company shall not purchase or
otherwise acquire directly or indirectly any Preferred Shares of such series
(except by conversion into or exchange for capital shares of the Company ranking
junior to the Preferred Shares of such series as to dividends and upon
liquidation); provided, however, that the foregoing shall not prevent the
purchase or acquisition of Preferred Shares of such series to preserve the REIT
status of the Company or pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding Preferred Shares of such series.
If fewer than all of the outstanding Preferred Shares of any series are to
be redeemed, the number of shares to be redeemed will be determined by the
Company and such shares may be redeemed pro rata from the holders of record of
such shares in proportion to the number of such shares held or for which
redemption is requested by such holder (with adjustments to avoid redemption of
fractional shares) or by an other equitable manner determined by the Company.
Notice of redemption will be mailed at least 15 days but not more than 60
days before the redemption date to each holder of record of Preferred Shares of
any series to be redeemed at the address shown on the share transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Shares to be redeemed; (iii) the
redemption price; (iv) the place or places where certificates for such Preferred
Shares are to be surrendered for payment of the redemption price; (v) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date; and (vi) the date upon which the holder's conversion rights, if any, as to
such shares shall terminate. If fewer than all the Preferred Shares of any
series are to be redeemed, the notice mailed to each such holder thereof shall
also specify the number of Preferred Shares to be redeemed from each such
holder. If notice of redemption of any Preferred Shares has been given and if
the funds necessary for such redemption have been set aside by the Company in
trust for the benefit of the holders of any Preferred Shares so called for
redemption, then from and after the redemption date dividends will cease to
accrue on such Preferred Shares, and all rights of the holders of such shares
will terminate, except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Shares or any other class or series of capital
shares of the Company ranking junior to the Preferred Shares in the distribution
of assets upon any liquidation, dissolution or winding-up of the Company, the
holders of each series of Preferred Shares shall be entitled to receive out of
assets of the Company legally available for distribution to shareholders
liquidating distributions in the amount of the liquidation preference per share,
if any, set forth in the applicable Prospectus Supplement, plus an amount equal
to all dividends accrued and unpaid thereon (which shall not include any
accumulation in respect of unpaid noncumulative dividends for prior dividend
periods). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Shares will have no right or
claim to any of the remaining assets of the Company. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding-up, the
available assets of the Company are insufficient to pay the amount of the
liquidating distributions on all outstanding Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital shares of the Company ranking on a parity with the Preferred Shares in
the distribution of assets, then the holders of the Preferred Shares and all
other such classes or series of capital shares shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Shares, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of capital shares ranking junior to
the Preferred Shares upon liquidation, dissolution or winding-up, according to
their
21
respective rights and preferences and in each case according to their respective
number of shares. For such purposes, the consolidation or merger of the Company
with or into any other corporation, trust or entity, or the sale, lease or
conveyance of all or substantially all of the property or business of the
Company, shall not be deemed to constitute a liquidation, dissolution or
winding-up of the Company.
VOTING RIGHTS
Holders of the Preferred Shares will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Shares, so long as
any Preferred Shares of a series remain outstanding, the Company will not,
without the affirmative vote or consent of the holders of a percentage to be
specified in the applicable Prospectus Supplement of the shares of such series
of Preferred Shares outstanding at the time, given in person or by proxy, either
in writing or at a meeting (such series voting separately as a class), (i)
authorize or create, or increase the authorized or issued amount of any class or
series of capital shares ranking prior to such series of Preferred Shares with
respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding-up or reclassify any authorized capital shares of the
Company into such shares, or create, authorize or issue any obligation or
security convertible into or evidencing the right to purchase any such shares;
or (ii) amend, alter or repeal the provisions of the Declaration of Trust or the
Designating Amendment for such series of Preferred Shares, whether by merger,
consolidation or otherwise (an "Event"), so as to materially and adversely
affect any right, preference, privilege or voting power of such series of
Preferred Shares or the holders thereof; provided, however, with respect to the
occurrence of any of the Events set forth in (ii) above, so long as the
Preferred Shares remain outstanding with the terms thereof materially unchanged,
taking into account that upon the occurrence of an Event the Company may not be
the surviving entity, the occurrence of any such Event shall not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
power of holders of Preferred Shares, and provided further that (x) any increase
in the amount of the authorized Preferred Shares or the creation or issuance of
any other series of Preferred Shares, or (y) any increase in the amount of
authorized shares of such series or any other series of Preferred Shares, in
each case ranking on a parity with or junior to the Preferred Shares of such
series with respect to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding-up, shall not be deemed to materially and
adversely affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Shares shall
have been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Shares
is convertible into Common Shares will be set forth in the applicable Prospectus
Supplement relating thereto. Such terms will include the number of Common Shares
into which the Preferred Shares are convertible, the conversion price (or manner
of calculation thereof), the conversion period, provisions as to whether
conversion will be at the option of the holders of the Preferred Shares or the
Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such series of
Preferred Shares.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital shares may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
requirement the Company may take certain actions to limit the beneficial
ownership, directly or indirectly, by a single person of the Company's
outstanding equity securities, including any Preferred Shares of the Company.
Therefore, the Designating Amendment for each series of Preferred Shares may
contain provisions
22
restricting the ownership and transfer of the Preferred Shares. The applicable
Prospectus Supplement will specify any additional ownership limitation relating
to a series of Preferred Shares. See "Restrictions on Transfers of Capital
Shares and Anti-Takeover Provisions."
TRANSFER AGENT
The transfer agent and registrar for the Preferred Shares will be set forth
in the applicable Prospectus Supplement.
TERMS OF CLASS A SENIOR CUMULATIVE CONVERTIBLE PREFERRED SHARES
In December 1996, the Company entered into an agreement with Five Arrow
Realty Securities L.L.C. ("Five Arrows") providing for the sale of up to
2,000,000 of the Company's Class A Senior Cumulative Convertible Preferred
Shares ("Convertible Preferred Shares"). Under the terms of the agreement, the
Company sold all 2,000,000 Convertible Preferred Shares to Five Arrows at three
closings during 1997 for an aggregate price of $25 million. The Convertible
Preferred Shares, which are convertible into Common Shares on a one-for-one
basis at $12.50 per share, subject to adjustment, are entitled to quarterly
distributions equal to the greater of $.295 per share or the product of 1.05 and
the per share quarterly distribution on Common Shares. The Convertible Preferred
Shares may be redeemed by the Company after five years at a 6% premium over the
liquidation preference of $12.50 per share (plus accrued and unpaid dividends),
with such premium declining to zero on or after December 31, 2011. In certain
instances, including a change of control of the Company (as defined in the
agreement with Five Arrows), a holder of Convertible Preferred Shares may
require the Company to redeem its shares at a price equal to $13.75 per share
plus any accrued dividends. Each Convertible Preferred Share is entitled to one
vote per share and holders thereof are entitled to vote on all matters submitted
to a vote of holders of outstanding Common Shares. In connection with such sale,
the Company has entered into certain related agreements with Five Arrows,
providing, among other things for certain demand and piggyback registration
rights with respect to such shares and the right to designate a member or
members of the Board of Trustees of the Company. Five Arrows designee, John D.
McGurk, is currently serving as a member of the Board of Trustees of the
Company.
23
DESCRIPTION OF COMMON SHARES
The description of the Company's Common Shares of beneficial interest, par
value $.0001 per share ("Common Shares"), set forth below does not purport to be
complete and is qualified in its entirety by reference to the Company's
Declaration of Trust and Bylaws.
GENERAL
Under the Declaration of Trust, the Company has authority to issue
40,000,000 Common Shares, par value $.0001 per share. Under Maryland law,
shareholders generally are not responsible for a corporation's debts or
obligations.
TERMS
Subject to the preferential rights of any other shares or series of equity
securities and to the provisions of the Declaration of Trust regarding Excess
Shares, holders of Common Shares are entitled to receive dividends on Common
Shares if, as and when authorized and declared by the Board of Trustees of the
Company out of assets legally available therefor and to share ratably in the
assets of the Company legally available for distribution to its shareholders in
the event of its liquidation, dissolution or winding-up after payment of, or
adequate provision for, all known debts and liabilities of the Company and the
amount to which holders of any class of shares classified or reclassified or
having a preference on distributions in liquidation, dissolution or winding-up
of the Company have a right.
Subject to the provisions of the Declaration of Trust regarding Excess
Shares, each outstanding Common Share entitles the holder to one vote on all
matters submitted to a vote of shareholders, including the election of Trustees
and, except as otherwise required by law or except as provided with respect to
any other class or series of shares, the holders of Common Shares will possess
the exclusive voting power. There is no cumulative voting in the election of
Trustees, which means that the holders of a majority of the outstanding Common
Shares can elect all of the Trustees then standing for election, and the holders
of the remaining Common Shares will not be able to elect any Trustees.
Holders of Common Shares have no conversion, sinking fund or redemption
rights, or preemptive rights to subscribe for any securities of the Company.
The Company furnishes its shareholders with annual reports containing
audited consolidated financial statements and an opinion thereon expressed by an
independent public accounting firm and quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.
Subject to the provisions of the Declaration of Trust regarding Excess
Shares, all Common Shares will have equal dividend, distribution, liquidation
and other rights and will have no preference, appraisal or exchange rights.
Pursuant to the Maryland Law of Corporations and Associations, a real
estate investment trust generally cannot amend its declaration of trust or merge
unless approved by the affirmative vote of shareholders holding at least
two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes to be cast on the
matter) is set forth in the declaration of trust. However, the Company's
Declaration of Trust provides that such actions, with the exception of certain
amendments to the Declaration of Trust for which a higher vote requirement has
been set, shall be valid and effective if authorized by holders of a majority of
the total number of shares of all classes outstanding and entitled to vote
thereon.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital shares may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
requirement, the Company may take certain actions to limit the beneficial
ownership, directly or indirectly, by a single person of the Company's
outstanding equity securities. See "Restrictions on Transfers of Capital Shares
and Anti-Takeover Provisions."
24
TRANSFER AGENT
The transfer agent and registrar for the Common Shares is ChemicalMellon
Shareholder Services LLC.
RESTRICTIONS ON TRANSFERS OF CAPITAL SHARES
AND ANTI-TAKEOVER PROVISIONS
RESTRICTIONS RELATING TO REIT STATUS
For the Company to qualify as a REIT under the Code, among other things,
not more than 50% in value of its outstanding capital shares may be owned,
directly or indirectly, by five or fewer individuals (defined in the Code to
include certain entities) during the last half of a taxable year, and such
capital shares must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year (in each case, other than the first such year). To assist
the Company in continuing to remain a qualified REIT, the Declaration of Trust,
subject to certain exceptions, provides that no holder may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than 9.8% (the
"Ownership Limit") of the Company's equity shares, defined as Common Shares or
Preferred Shares. The Board of Trustees may waive the Ownership Limit if
evidence satisfactory to the Board of Trustees and the Company's tax counsel is
presented that the changes in ownership will not then or in the future
jeopardize the Company's status as a REIT. Any transfer of equity shares or any
security convertible into equity shares that would create a direct or indirect
ownership of equity shares in excess of the Ownership Limit or that would result
in the disqualification of the Company as a REIT, including any transfer that
results in the equity shares being owned by fewer than 100 persons or results in
the Company being "closely held" within the meaning of Section 856(h) of the
Code, shall be null and void, and the intended transferee will acquire no rights
to the equity shares. The foregoing restrictions on transferability and
ownership will not apply if the Board of Trustees determines that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT.
Equity shares owned, or deemed to be owned, or transferred to a shareholder
in excess of the Ownership Limit, will automatically be exchanged for Excess
Shares that will be transferred, by operation of law, to the Company as trustee
of a trust for the exclusive benefit of the transferees to whom such capital
shares may be ultimately transferred without violating the Ownership Limit.
While the Excess Shares are held in trust, they will not be entitled to vote,
they will not be considered for purposes of any shareholder vote or the
determination of a quorum for such vote and, except upon liquidation, they will
not be entitled to participate in dividends or other distributions. Any dividend
or distribution paid to a proposed transferee of Excess Shares prior to the
discovery by the Company that equity shares have been transferred in violation
of the provisions of the Declaration of Trust shall be repaid to the Company
upon demand. The Excess Shares are not treasury shares, but rather constitute a
separate class of issued and outstanding shares of the Company. The original
transferee-shareholder may, at any time the Excess Shares are held by the
Company in trust, transfer the interest in the trust representing the Excess
Shares to any individual whose ownership of the equity shares exchanged into
such Excess Shares would be permitted under the Declaration of Trust, at a price
not in excess of the price paid by the original transferee-shareholder for the
equity shares that were exchanged into Excess Shares, or, if the
transferee-shareholder did not give value for such shares, a price not in excess
of the market price (as determined in the manner set forth in the Declaration of
Trust) on the date of the purported transfer. Immediately upon the transfer to
the permitted transferee, the Excess Shares will automatically be exchanged for
equity shares of the class from which they were converted. If the foregoing
transfer restrictions are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then the intended transferee of any
Excess Shares may be deemed, at the option of the Company, to have acted as an
agent on behalf of the Company in acquiring the Excess Shares and to hold the
Excess Shares on behalf of the Company.
25
In addition to the foregoing transfer restrictions, the Company will have
the right, for a period of 90 days during the time any Excess Shares are held by
the Company in trust, to purchase all or any portion of the Excess Shares from
the original transferee-shareholder for the lesser of the price paid for the
equity shares by the original transferee-shareholder or the market price (as
determined in the manner set forth in the Declaration of Trust) of the equity
shares on the date the Company exercises its option to purchase. The 90-day
period begins on the date on which the Company receives written notice of the
transfer or other event resulting in the exchange of equity shares for Excess
Shares.
Each shareholder shall upon demand be required to disclose to the Company
in writing any information with respect to the direct, indirect and constructive
ownership of beneficial interests as the Board of Trustees deems necessary to
comply with the provisions of the Code applicable to REITs, to comply with the
requirements of any taxing authority or governmental agency or to determine any
such compliance.
This ownership limitation may have the effect of precluding acquisition of
control of the Company unless the Board of Trustees determines that maintenance
of REIT status is no longer in the best interests of the Company.
Authorized Capital
The Company has an aggregate of 40,000,000 authorized Common Shares,
40,000,000 Excess Shares, 2,000,000 of which have been designated Excess Class A
Preferred Shares, par value $.0001 per share and 10,000,000 undesignated
Preferred Shares available for issuance in its Declaration of Trust, 2,000,000
of which have been designated Class A Senior Cumulative Convertible Preferred
Shares, $.0001 par value per share. Such shares (other than reserved shares) may
be issued from time to time by the Company in the discretion of the Board of
Trustees to raise additional capital, acquire assets, including additional real
properties, redeem or retire debt or for any other business purpose. In
addition, the undesignated Preferred Shares may be issued in one or more
additional classes with such designations, preferences and relative,
participating, optional or other special rights including, without limitation,
preferential dividend or voting rights, and rights upon liquidation, as shall be
fixed by the Board of Trustees. Also, the Board of Trustees is authorized to
classify and reclassify any unissued capital shares by setting or changing, in
any one or more respects, the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares. Such authority includes, without
limitation, subject to the provisions of the Declaration of Trust, authority to
classify or reclassify any such unissued shares into a class or classes of
preferred shares, preference shares, special shares or other shares, and to
divide and reclassify shares of any class into one or more series of such class.
In certain circumstances, the issuance of Preferred Shares, or the exercise by
the Board of Trustees of such rights to classify or reclassify shares, could
have the effect of deterring individuals or entities from making tender offers
for the Common Shares or seeking to change incumbent management.
Maryland Corporations and Associations Law
The Law of Corporations and Associations of the State of Maryland includes
certain other provisions which may also discourage a change in control of
management of the Company. Maryland law provides that a Maryland real estate
investment trust may not engage in any "business combination" with any
"interested stockholder." An "interested stockholder" is defined, in essence, as
any person owning beneficially, directly or indirectly, 10% or more of the
outstanding voting shares of a Maryland real estate investment trust. Unless an
exemption applies, the Company may not engage in any business combination with
an interested stockholder for a period of five years after the interested
stockholder became an interested stockholder, and thereafter may not engage in a
business combination unless it is recommended by the Board of Trustees and
approved by the affirmative vote of at least (i) 80% of the votes entitled to be
cast by the holders of all outstanding voting shares of the Company, and (ii)
66 2/3% of the votes entitled to be cast by all holders of outstanding shares of
voting shares other than voting shares held by the interested stockholder. The
voting requirements do not apply at any time to business combinations with an
interested stockholder or its affiliates if approved by the Board of Trustees
prior to the time the interested stockholder first became an interested
stockholder. Additionally, if the business combination involves the receipt of
consideration by the shareholders in exchange for the Company's shares, the
voting requirements do not apply if certain "fair price" conditions are met.
26
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes the material federal income tax
considerations to a prospective holder of Common Shares. The following
discussion is for general information purposes only, is not exhaustive of all
possible tax considerations and is not intended to be and should not be
construed as tax advice. For example, this summary does not give a detailed
discussion of any state, local or foreign tax considerations. In addition, this
discussion is intended to address only those federal income tax considerations
that are generally applicable for all security holders in the Company. It does
not discuss all of the aspects of federal income taxation that may be relevant
to a prospective security holder in light of his or her particular circumstances
or to certain types of security holders who are subject to special treatment
under the federal income tax laws including, without limitation, insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States. If the Company offers one or more series of Preferred Shares or Debt
Securities, then there may be tax consequences for the holders of such
Securities not discussed herein. For a discussion of any such additional
consequences, see the applicable Prospectus Supplement.
The information in this section is based on the Code (including the
provisions of the Taxpayer Relief Act of 1997 (the "1997 Act"), several of which
are described herein), current, temporary and proposed Treasury Regulations, the
legislative history of the Code, current administrative interpretations and
practices of the IRS (including its practices and policies as endorsed in
private letter rulings, which are not binding on the IRS except with respect to
the taxpayer that receives such a ruling), and court decisions, all as of the
date hereof. No assurance can be given that future legislation, Treasury
Regulations, administrative interpretations and court decisions will not
significantly change current law or adversely affect existing interpretations of
current law. Any such change could apply retroactively to transactions preceding
the date of the change. The Company has not received any rulings from the IRS
concerning the tax treatment of the Company. Thus no assurance can be provided
that the statements set forth herein (which do not bind the IRS or the courts)
will not be challenged by the IRS or will be sustained by a court if so
challenged.
EACH PROSPECTIVE PURCHASER OF THE SECURITIES IS ADVISED TO CONSULT WITH HIS
OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF
THE PURCHASE, OWNERSHIP AND SALE OF SECURITIES OF AN ENTITY ELECTING TO BE TAXED
AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The Company elected to be taxed as a REIT under Sections 856
through 860 of the Code effective for its taxable year ended December 31, 1993.
The Company believes that it was organized, and has operated, in such a manner
so as to qualify for taxation as a REIT under the Code and intends to conduct
its operations so as to continue to qualify for taxation as a REIT. No
assurance, however, can be given that the Company has operated in a manner so as
to qualify or will be able to operate in such a manner so as to remain qualified
as a REIT. Qualification and taxation as a REIT depends upon the Company's
ability to meet on a continuing basis, through actual annual operating results,
the required distribution levels, diversity of share ownership and the various
qualification tests imposed under the Code discussed below, the results of which
will not be reviewed by Counsel. Given the highly complex nature of the rules
governing REITs, the ongoing importance of factual determinations, and the
possibility of future changes in circumstances of the Company, no assurance can
be given that the actual results of the Company's operations for any one taxable
year have satisfied or will continue to satisfy such requirements.
The following is a general summary of the Code provisions that govern the
federal income tax treatment of a REIT and its shareholders. These provisions of
the Code are highly technical and complex. This summary
27
is qualified in its entirety by the applicable Code provisions, Treasury
Regulations and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) that generally results from
investment in a corporation. However, the Company will be subject to federal
income tax as follows: first, the Company will be taxed at regular corporate
rates on any undistributed REIT taxable income, including undistributed net
capital gains. Second, under certain circumstances, the Company may be subject
to the "alternative minimum tax" on its items of tax preference. Third, if the
Company has (i) net income from the sale or other disposition of "foreclosure
property" (which is, in general, property acquired on foreclosure or otherwise
on default on a loan secured by such real property or a lease of such property)
which is held primarily for sale to customers in the ordinary course of business
or (ii) other nonqualifying income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income. Fourth, if the Company has
net income from prohibited transactions (which are, in general, certain sales or
other dispositions of property held primarily for sale to customers in the
ordinary course of business other than foreclosure property), such income will
be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), but
nonetheless has maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on an amount equal
to (a) the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% test multiplied by (b) a fraction intended to
reflect the Company's profitability. Sixth, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year, and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if the Company
acquires any asset from a C corporation (i.e., a corporation generally subject
to full corporate level tax) in a transaction in which the basis of the asset in
the Company's hands is determined by reference to the basis of the asset (or any
other property) in the hands of the C corporation, and the Company recognizes
gain on the disposition of such asset during the 10-year period beginning on the
date on which such asset was acquired by the Company, then, to the extent of
such property's "built-in gain" (the excess of the fair market value of such
property at the time of the acquisition by the Company over the adjusted basis
of such property at such time), such gain will be subject to tax at the highest
regular corporate rate applicable (as provided in Internal Revenue Service
regulations that have not yet been promulgated).
Requirements for Qualification. A REIT is a corporation, trust or
association (i) which is managed by one or more trustees or directors, (ii) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (iii) which would be taxable
as a domestic corporation, but for Sections 856 through 859 of the Code, (iv)
which is neither a financial institution nor an insurance company subject to
certain provisions of the Code, (v) the beneficial ownership of which is held by
100 or more persons, (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities), and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) through (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
The Company expects to meet the ownership test immediately after the transaction
contemplated herein. The Company may redeem, at its option, a sufficient number
of shares or restrict the transfer thereof to bring or maintain the ownership of
the shares in conformity with the requirements of the Code. In addition, the
Company's Declaration of Trust includes restrictions regarding the transfer of
its stock that are intended to assist the Company in continuing to satisfy
requirements (v) and (vi). Moreover, for the Company's taxable years commencing
on or after January 1, 1998, if the Company complies with regulatory rules
pursuant to which it is required to send annual letters to holders of its
capital stock requesting information regarding the actual ownership of its
capital stock, and the Company does not know, or exercising reasonable diligence
would not have known, whether it failed to meet requirement (vi) above, the
Company will be treated as having met the requirement. See "Description
28
of Common Shares," "Description of Preferred Shares" and "Restrictions on
Transfers of Capital Shares and Anti-Takeover Provisions."
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of each of the assets of the partnership and will be deemed to be entitled to
the income of the partnership attributable to such share. In addition, the
character of the assets and items of gross income of the partnership will retain
the same character in the hands of the REIT for purposes of Section 856 of the
Code, including satisfying the gross income tests and assets (as discussed
below). Thus, the Company's proportionate share of the assets, liabilities, and
items of gross income of the partnerships in which the Company owns an interest
are treated as assets, liabilities and items of the Company for purposes of
applying the requirements described herein.
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy certain gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
qualified temporary investments. Second, at least 95% of the Company's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from such real property investments, dividends, interest
and gain from the sale or disposition of stock or securities. For its tax years
ending on or before December 31, 1997, the Company was subject to a third gross
income test which required that short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions and gain
on the sale or other disposition of real property held for less than four years
(apart from involuntary conversions and sales of foreclosure property) must have
represented less than 30% of the Company's gross income (including gross income
from prohibited transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or an owner of 10% or more of the REIT, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify as
"rents from real property," the Company generally must not operate or manage the
property (subject to a de minimis exception applicable to the Company's tax
years commencing on and after January 1, 1998 as described below) or furnish or
render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no revenue. The REIT may,
however, directly perform certain services that are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant" of the property ("Permissible
Services").
For the Company's taxable years commencing on or after January 1, 1998,
rents received generally will qualify as rents from real property
notwithstanding the fact that the Company provides services that are not
Permissible Services so long as the amount received for such services meets a de
minimis standard. The amount received for "impermissible services" with respect
to a property (or, if services are available only to certain tenants, possibly
with respect to such tenants) cannot exceed one percent of all amounts received,
directly or indirectly, by the Company with respect to such property (or, if
services are available only to certain tenants, possibly with respect to such
tenants). The amount that the Company will be deemed to have received for
performing "impermissible services" will be the greater of the actual amounts so
received or 150% of the direct cost to the Company of providing those services.
29
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if such failure was due to reasonable cause and not willful neglect, it
disclosed the nature and amounts of its items of gross income in a schedule
attached to its return, and any incorrect information on the schedule was not
due to fraud with intent to evade tax. A 100% penalty tax would be imposed on
the amount by which the Company failed the 75% or 95% test (whichever amount is
greater), less an amount which generally reflects expenses attributable to
earning the nonqualified income. No analogous relief is available for failure to
satisfy the 30% income test.
Subject to certain safe harbor exceptions, any gain realized by the Company
on the sale of any property held as inventory or other property held primarily
for sale to customers in the ordinary course of business will be treated as
income from a prohibited transaction that is subject to a 100% penalty tax. Such
prohibited transaction income may also have an adverse effect upon the Company's
ability to satisfy the income tests for qualification as a REIT. Under existing
law, whether property is held as inventory or primarily for sale to customers in
the ordinary course of a trade or business is a question of fact that depends on
all the facts and circumstances with respect to the particular transaction.
Asset Tests. The Company must also satisfy three tests relating to the
nature of its assets every quarter. First, at least 75% of the value of the
Company's total assets must be represented by real estate assets (including (i)
its allocable share of real estate assets held by partnerships in which the
Company owns an interest or held by "qualified REIT subsidiaries" (as defined in
the Code) of the Company and (ii) stock or debt instruments held for not more
than one year purchased with the proceeds of an offering of equity securities or
a long-term (at least five years) debt offering of the Company, cash, cash items
and government securities). Second, not more than 25% of the Company's total
assets may be represented by securities other than those in the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets and the Company may not own more than 10% of any one
issuer's outstanding voting securities. The Company expects that substantially
all of its assets will consist of (i) real properties, (ii) stock or debt
investments that earn qualified temporary investment income, (iii) other
qualified real estate assets, and (iv) cash, cash items and government
securities. The Company may also invest in securities of other entities,
provided that such investments will not prevent the Company from satisfying the
asset and income tests for REIT qualification set forth above.
If the Company inadvertently fails one or more of the asset tests at the
end of a calendar quarter, such a failure would not cause it to lose its REIT
status, provided that (i) it satisfied all of the asset tests at the close of a
preceding calendar quarter, and (ii) the discrepancy between the values of the
Company's assets and the standards imposed by the asset test either did not
exist immediately after the acquisition of any particular acquisition or was not
wholly partly caused by such an acquisition. If the condition described in
clause (ii) of the preceding sentence were not satisfied, the Company could
still avoid disqualification by eliminating any discrepancy within 30 days after
the close of the calendar quarter in which it arose.
Annual Distribution Requirement. With respect to each taxable year, the
Company must distribute to its shareholders dividends (other than capital gain
dividends) in an amount at least equal to the sum of (a) 95% of its "REIT
Taxable income" (determined without regard to the deduction for dividends paid
and by excluding any net capital gain), and (b) 95% of any after-tax net income
from foreclosure property, minus the sum of certain items of "excess noncash
income." REIT Taxable Income is generally computed in the same manner as taxable
income of ordinary corporations, with several adjustments, such as a deduction
allowed for dividends paid, but not for dividends received. "Excess noncash
income" is the amount, if any, by which the sum of certain items of noncash
income exceeds 5% of REIT Taxable Income for the taxable year (determined
without regard to the deduction for dividends paid and by excluding any net
capital gain). With respect to the Company's taxable years commencing prior to
January 1, 1998, these items of noncash income for which relief from the
distribution requirement is provided are (i) the excess of amounts includible in
gross income due to the operation of Section 467 of the Code (relating to
deferred rental agreements) over the amounts that would have been includible
without regard to such provision, (ii) income from certain like-kind exchanges
not eligible for tax-free treatment, and (iii) the amounts includible on gross
income with respect to the amount that original issue discount on purchase money
debt obligations (but not other kinds of original
30
issue discount or market discount) exceed the amount of money and fair market
value of other property received during the taxable year under such instruments.
With respect to the Company's tax years commencing on and after January 1, 1998,
"excess noncash income" described in clause (iii) above applies equally to REITs
that use the accrual method of accounting for United States federal income tax
purposes.
The Company will be subject to tax on amounts not distributed at regular
United States federal corporate income tax rates. With respect to its taxable
years beginning on and after January 1, 1998, the Company may elect to retain
rather than distribute, net long-term capital gain, and be subject to regular
United States federal income tax thereon. For the consequences of such an
election to the REIT's shareholders, see "Taxation of Taxable Shareholders." In
addition, a nondeductible 4% excise tax is imposed on the excess of (i) 85% of
the Company's ordinary income for the year plus 95% of capital gain net income
for the year and the undistributed portion of the required distribution for the
prior year over (ii) the actual distribution to shareholders during the year (if
any). Net operating losses generated by the Company may be carried forward but
not carried back and used by the Company for 15 years (or 20 years in the case
of net operating losses generated in the Company's tax years commencing on or
after January 1, 1998) to reduce REIT Taxable Income and the amount that the
Company will be required to distribute in order to remain qualified as a REIT.
Net capital losses of the Company may be carried forward for five years (but not
carried back) and used to reduce capital gains.
In general, a distribution must be made during the taxable year to which it
relates to satisfy the distribution test and to be deducted in computing REIT
Taxable Income. However, the Company may elect to treat a dividend declared and
paid after the end of the year (a "subsequent declared dividend") as paid during
such year for purposes of complying with the distribution test and computing
REIT Taxable Income, if the dividend is (i) declared before the regular or
extended due date of the Company's tax return for such year and (ii) paid not
later than the date of the first regular dividend payment made after the
declaration (but in no case later than 12 months after the end of the year). For
purposes of computing the 4% excise tax, a subsequent declared dividend is
considered paid when actually distributed. Furthermore, any dividend that is
declared by the Company in October, November of December of a calendar year, and
payable to shareholders of record as of a specified date in such month of such
year will be deemed to have been paid by the Company (and received by
shareholders) on December 31 of such calendar year, but only if such dividend is
actually paid by the Company in January of the following calendar year. For
purposes of complying with the distribution test for a taxable year as a result
of an adjustment in certain of its items of income, gain or deduction by the
IRS, the Company may be permitted to remedy such failure by paying a "deficiency
dividend" in a later year together with interest and a penalty. Such deficiency
dividend may be included in the Company's deduction of dividends paid for the
earlier year for purposes of satisfying the distribution test. For purposes of
the 4% excise tax, the deficiency dividend is taken into account when paid, and
any income giving rise to the deficiency adjustment is treated as arising when
the deficiency dividend is paid.
The Company believes that it has distributed and intends to continue to
distribute to its shareholders an amount at least equal to 95% of the sum of (i)
its REIT Taxable Income (determined without regard to the deduction for
dividends paid and by excluding any net capital gains) and (ii) any after-tax
net income from foreclosure properties less any "excess noncash income," as
those amounts are determined in good faith by the Company or its independent
accountants. However, it is possible that timing differences between the accrual
of income and its actual collection, and the need to make deductible
expenditures (such as capital improvements or principal payments on debt) may
cause the Company to recognize taxable income in excess of its net cash
receipts, thus increasing the difficulty of compliance with the distribution
requirement. In order to meet the 95% requirement, the Company might find it
necessary to arrange for short-term, or possibly long-term, borrowings.
Failure to Qualify. If the Company fails to qualify as a REIT for any
taxable year, and if certain relief provisions of the Code do not apply, it
would be subject to federal income tax (including applicable alternative minimum
tax) on its taxable income at regular corporate rates. Distributions to
shareholders in any year in which the Company fails to qualify will not be
deductible by the Company nor will they be required to be made. As a result, the
Company's failure to qualify as a REIT would reduce the cash available for
distribution by the Company to its shareholders. In addition, if the Company
fails to qualify as a REIT, all distributions to
31
shareholders will be taxable as ordinary income, to the extent of the Company's
current and accumulated earnings and profits. Subject to certain limitations of
the Code, corporate distributees may be eligible for the dividends-received
deduction.
If the Company's failure to qualify as a REIT is not due to reasonable
cause but results from willful neglect, the Company would not be permitted to
elect REIT status for the four taxable years after the taxable year for which
such disqualification is effective. In the event the Company were to fail to
qualify as a REIT in one year and subsequently requalify in a later year, the
Company might be required to recognize taxable income based on the net
appreciation in value of its assets as a condition to requalification. In the
alternative, the Company may be taxed on the net appreciation in value of its
assets if it sells properties within ten years of the date the Company
requalifies as a REIT under federal income tax laws.
TAXATION OF TAXABLE SHAREHOLDERS
As used herein, the term "U.S. shareholder" means a holder of Common or
Preferred Shares who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity treated as a corporation or partnership for federal income tax
purposes created or organized in or under the laws of the United States or of
any political subdivision thereof, (iii) is an estate the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust.
As long as the Company qualifies as a REIT, distributions made to the
Company's U.S. shareholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken into account by
them as ordinary income and corporate shareholders will not be eligible for the
dividends-received deductions as to such amounts. For purposes of computing the
Company's earnings and profits, depreciation for depreciable real estate will be
computed on a straight-line basis over a 40-year period. For purposes of
determining whether distributions on the Common Shares are out of current or
accumulated earnings and profits, the earnings and profits of the Company will
be allocated first to the Preferred Shares and second to the Common Shares.
There can be no assurance that the Company will have sufficient earnings and
profits to cover distributions on any Preferred Shares.
Distributions that are properly designated as capital gain dividends will
be taxed as gains from the sale or exchange of a capital asset held for more
than one year (to the extent they do not exceed the Company's actual net capital
gain for the taxable year) without regard to the period for which the
shareholder has held its shares. However, corporate shareholders may be required
to treat up to 20% of certain capital gain dividends as ordinary income pursuant
to Section 291 of the Code. As described below, the Taxpayer Relief Act of 1997
(the "1997 Act") changed significantly the taxation of capital gains by
taxpayers who are individuals, estates, or a trust. With respect to amounts
designated as capital gain distributions, the IRS has released Notice 97-64
describing temporary regulations that will be issued to permit REITs to further
designate such capital gain dividends as (i) a 20% rate gain distribution, (ii)
an unrecaptured Section 1250 gain distribution (taxed at a rate of 25%), or
(iii) a 28% rate gain distribution. Capital gain distributions that are not
specifically designated will be characterized as a 28% rate gain distribution.
Notice 97-64 provides that a REIT must determine the maximum amounts that it may
designate as 20% and 25% rate capital gain dividends by performing the
computation required by the Code as if the REIT were an individual whose
ordinary income were subject to a marginal tax rate of at least 28%. The Notice
further provides that designations made by the REIT will be effective only to
the extent that they comply with Revenue Ruling 89-81, which requires that
distributions made to different classes of shares not be composed
disproportionately of dividends of a particular type.
Distributions in excess of current and accumulated earnings and profits
will constitute a non-taxable return of capital to a shareholder to the extent
that such distributions do not exceed the adjusted basis of the shareholder's
shares, and will result in a corresponding reduction in the shareholder's basis
in the shares. Any reduction in a shareholder's tax basis for its shares will
increase the amount of taxable gain or decrease the deductible loss that will be
realized upon the eventual disposition of the shares. The Company will notify
shareholders at the end of each year as to the portions of the distributions
which constitute ordinary income,
32
capital gain or a return of capital. Any portion of such distributions that
exceed the adjusted basis of a U.S. shareholder's shares will be taxed as
capital gain from the disposition of shares, provided that the shares are held
as capital assets in the hands of the U.S. shareholder.
Aside from the different income tax rates applicable to ordinary income and
capital gain dividends, regular and capital gain dividends from the Company will
be treated as dividend income for most other federal income tax purposes. In
particular, such dividends will be treated as "portfolio" income for purposes of
the passive activity loss limitation (including all individuals) and generally
will not be able to offset any "passive losses" against such dividends.
Dividends will be treated as investment income for purposes of the investment
interest limitation contained in Section 63(d) of the Code, which limits the
deductibility of interest expense incurred by noncorporate taxpayers with
respect to indebtedness attributable to certain investment assets.
In general, dividends paid by the Company will be taxable to shareholders
in the year in which they are received, except in the case of dividends declared
at the end of the year, but paid in the following January, as discussed above.
In general, a domestic shareholder will realize capital gain or loss on the
disposition of shares equal to the difference between (i) the amount of cash and
the fair market value of any property received on such disposition and (ii) the
shareholder's adjusted basis of such shares. With respect to dispositions
occurring after July 28, 1997, in the case of a domestic shareholder who is an
individual or an estate or trust, such gain or loss will be long-term capital
gain or loss if such shares have been held for more than one year but not more
than 18 months and long-term capital gain or loss subject to a 20% tax rate if
such shares have been held for more than 18 months. In the case of a taxable
U.S. shareholder that is a corporation, such gain or loss will be long-term
capital gain or loss if such shares have been held for more than one year. Loss
upon the sale or exchange of shares by a shareholder who has held such shares
for six months or less (after applying certain holding period rules) will be
treated as long-term capital loss to the extent of distribution from the Company
required to be treated by such shareholder as long-term capital gain.
Pursuant to the 1997 Act, for the Company's taxable years commencing on or
after January 1, 1998, the Company may elect to require the holders of shares to
include the Company's undistributed net long-term capital gains in their income.
If the Company makes such an election, the holders of shares will (i) include in
their income as long-term capital gains their proportionate share of such
undistributed capital gains and (ii) be deemed to have paid their proportionate
share of the tax paid by the Company on such undistributed capital gains and
thereby receive a credit or refund for such amount. A holder of shares will
increase the basis in its shares by the difference between the amount of capital
gain included in its income and the amount of tax it is deemed to have paid. The
earnings and profits of the Company will be adjusted appropriately. As described
below in "-- Recent Legislation," with respect to such long-term capital gain of
a taxable domestic shareholder that is an individual or an estate or a trust,
the IRS has authority to issue regulations that could apply the special tax rate
applicable to sales of depreciable real property by an individual or an estate
or trust to the portion of the long-term capital gains of an individual or an
estate or trust attributable to deductions for depreciation taken with respect
to depreciable real property.
BACKUP WITHHOLDING
The Company will report to its domestic shareholders and the IRS the amount
of dividends paid during each calendar year, and the amount of tax withheld, if
any, with respect thereto. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 31% with respect to dividends
paid unless such holder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number and certifies as to no loss of exemption from
backup withholding. Amounts withheld as backup withholding will be creditable
against the shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions made to any
shareholders who fail to certify their non-foreign status to the Company. See
"-- Taxation of Non-U.S. Shareholders" below. Additional issues may arise
pertaining to information reporting and backup withholding with respect to
Non-U.S. Shareholders (persons other than (i) citizens or residents of the
United States, (ii) corporations, partnerships or other entities created or
33
organized under the laws of the United States or any political subdivision
thereof, and (iii) estates or trusts the income of which is subject to United
States federal income taxation regardless of its source) and Non-U.S.
Shareholders should consult their tax advisors with respect to any such
information and backup withholding requirements.
The Treasury Department has recently finalized regulations regarding the
withholding and information reporting rules discussed above. In general, these
regulations do not alter the substantive withholding and information reporting
requirements but unify current certification procedures and forms and clarify
and modify reliance standards. These regulations generally are effective for
payments made after December 31, 1998, subject to certain transition rules.
Valid withholding certificates that are held on December 31, 1998, will remain
valid until the earlier of December 31, 1999 or the date of expiration of the
certificate under rules currently in effect (unless otherwise invalidated due to
changes in the circumstances of the person whose name is on such certificate).
TAXATION OF NON-U.S. SHAREHOLDERS
The following discussion is only a summary of the rules governing United
States federal income taxation of nonresident alien individuals, foreign
corporations, foreign partnerships or other foreign estates or trusts
(collectively, "Non-U.S. Shareholders"). Prospective Non-U.S. Shareholders
should consult with their own tax advisors to determine the impact of federal,
state and local income tax laws with regard to an investment in shares,
including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gains dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. Certain tax treaties limit
the extent to which dividends paid by a REIT can qualify for a reduction of the
withholding tax on dividends. Distributions in excess of current and accumulated
earnings and profits of the Company will not be taxable to a Non-U.S.
Shareholder to the extent that they do not exceed the adjusted basis of the
Shareholder's shares, but rather will reduce the adjusted basis of such shares.
To the extent that such distributions exceed the adjusted basis of a Non-U.S.
Shareholder's shares, they will give rise to tax liability if the Non-U.S.
Shareholder would otherwise be subject to tax on any gain from the sale or
disposition of his shares in the Company, as described below.
For withholding tax purposes, the Company currently is required to treat
all distributions as if made out of its current or accumulated earnings and
profits and thus intends to withhold at the rate of 30% (or a reduced treaty
rate if applicable) on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a Non-U.S. Shareholder. Under the
final regulations (discussed above), generally effective for distributions on or
after January 1, 1999, the Company would be required to withhold at the 30% rate
on distributions it reasonably estimates to be in excess of the Company's
current and accumulated earnings and profits. If it cannot be determined at the
time a distribution is made whether such distribution will be in excess of
current and accumulated earnings and profits, the distribution will be subject
to withholding at the rate applicable to ordinary dividends. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that the Company will be required to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution (or a lower applicable treaty rate), to the
extent that the Company does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or lower applicable treaty rate) will
be subject to withholding at a rate of 10%. However, the Non-U.S. Shareholder
may seek from the IRS a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Company, and the amount
withheld exceeded the Non-U.S. Shareholder's United States tax liability, if
any.
34
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, a Non-U.S. Shareholder is taxed as if such gain were
effectively connected with a United States business. Non-U.S. Shareholders would
thus be taxed at the normal capital gain rates applicable to U.S. shareholders
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of non-resident alien individuals). Also, distributions subject
to FIRPTA may be subject to a 30% branch profits tax in the hands of a corporate
Non-U.S. Shareholder not entitled to treaty relief. The Company is required by
applicable regulations to withhold 35% of any distribution that could be
designated by the Company as a capital gains dividend regardless of the amount
actually designated as a capital gain dividend. This amount is creditable
against the Non-U.S. Shareholder's FIRPTA tax liability.
Although the law is not entirely clear on the matter, it appears that
amounts designated by the Company pursuant to the 1997 Act as undistributed
capital gains in respect of shares would be treated with respect to Non-U.S.
Shareholders in the manner outlined in the preceding paragraph for actual
distributions by the Company of capital gain dividends. See "Taxation of
Shareholders -- Taxation of Taxable Shareholders. "Under that approach, Non-U.S.
Shareholders would be able to offset as a credit against their United States
federal income tax liability resulting therefrom their proportionate share of
the tax paid by the Company on such undistributed capital gains (and to receive
from the IRS a refund to the extent their proportionate share of such tax paid
by the Company were to exceed their actual United States federal income tax
liability).
Gain recognized by a Non-U.S. Shareholder upon a sale of shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during specified
testing period less than 50% in value of the share was held directly or
indirectly by foreign persons. It is anticipated that the Company will be a
"domestically controlled REIT." Therefore, the sale of shares will not be
subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if (i) investment in the shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business, in
which case the Non-U.S. Shareholder will be subject to the same treatment as
U.S. Shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is
a nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and such gain is attributable to an office or
fixed place of business in the United States or such nonresident alien
individual has a "tax home" in the United States and such gain is not
attributable to an office or fixed place of business located outside the United
States or, if such gain is attributable to an office or fixed place of business
located outside the United States, it is not subject to foreign income tax equal
to at least 10% of such gain. If the gain on the sale of shares were to be
subject to taxation under FIRPTA, the Non-U.S. Shareholder will be subject to
the same treatment as U.S. Shareholders with respect to such gain (subject to
applicable alternative minimum tax, special alternative minimum tax in the case
of nonresident alien individuals and possible application of the 30% branch
profits tax in the case of foreign corporations) and the purchaser would be
required to withhold and remit to the Internal Revenue Service 10% of the
purchase price.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While investments
in real estate may generate UBTI, the Service has issued a published ruling to
the effect that dividend distributions by a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling and on the intention of the Company to invest its
assets in a manner that will avoid the recognition of UBTI by the Company,
amounts distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition of
shares in the Company with debt, a portion of its income from the Company, if
any, will constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemploy-
35
ment benefit trusts, and qualified group legal services plans that are exempt
from taxation under paragraphs (7), (9), (17), and (20), respectively, of Code
Section 501(c) are subject to different UBTI rules, which generally will require
them to characterize distributions from the Company as UBTI.
In addition, a pension trust that owns more than 10% of the Company is
required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage") in certain circumstances. The UBTI Percentage is the gross
income derived from an unrelated trade or business (determined as if the Company
were a pension trust) divided by the gross income of the Company for the year in
which the dividends are paid. The UBTI rule applies only if (i) the UBTI
Percentage is at least 5%, (ii) the Company qualifies as a REIT by reason of the
modification of the 5/50 Rule that allows the beneficiaries of the pension trust
to be treated as holding shares of the Company in proportion to their actuarial
interests in the pension trust, and (iii) either (A) one pension trust owns more
than 25% of the value of the Company's shares or (B) a group of pension trusts
individually holding more than 10% of the value of the Company's capital shares
collectively own more than 50% of the value of the Company's capital shares.
While an investment in the Company by an Exempt Organization generally is
not expected to result in UBTI except in the circumstances described in the
preceding paragraph, any gross UBTI that does arise from such an investment will
be combined with all other gross UBTI of the Exempt Organization for a taxable
year and reduced by all deductions attributable to the UBTI plus $1,000. Any
amount then remaining will constitute UBTI on which the Exempt Organization will
be subject to tax. If the gross income taken into account in computing UBTI
exceeds $1,000, the Exempt Organization is obligated to file a tax return for
such year on IRS Form 990-T. None of the Company, the Board of Trustees, or any
of their Affiliates expects to undertake the preparation or filing of IRS Form
990-T for any Exempt Organization in connection with an investment by such
Exempt Organization in the Common Shares. Generally, IRS Form 990-T must be
filed with the Service by April 15 of the year following the year in which it
relates.
RECENT LEGISLATION
As described above, the 1997 Act contains certain changes to the REIT
qualification requirements and to the taxation of REITs. The 1997 Act also
contains certain changes to the taxation of capital gains of individuals, trusts
and estates.
Capital Gain Rates. Subject to certain exceptions, for individuals, trusts
and estates, the maximum rate of tax on the net capital gain from a sale or
exchange occurring after July 28, 1997 of a capital asset held for more than 18
months has been reduced from 28% to 20%. The maximum rate has been reduced to
18% for capital assets acquired after December 31, 2000 and held for more than
five years. The maximum rate for capital assets held for more than one year but
not more than 18 months remains at 28%. The maximum rate for net capital gains
attributable to the sale of depreciable real property held for more than 18
months is 25% to the extent of the prior deductions for "unrecaptured Section
1250 gain" (i.e., depreciation deductions not otherwise recaptured as ordinary
income under the existing depreciation recapture rules). Capital gain from the
sale of depreciable real property held for more than 18 months allocated by the
Company to a non-corporate shareholder will be subject to the 25% rate to the
extent that the capital gain on the real property sold by the Company does not
exceed prior depreciation deductions with respect to such property. The 1997 Act
provides the IRS with authority to issue regulations that could, among other
things, apply these rates on a look-through basis in the case of "pass-through"
entities such as the Company. The taxation of capital gains of corporations was
not changed by the 1997 Act.
REIT Provisions. In addition to the provisions discussed above, the 1997
Act contains a number of technical provisions that either (i) reduce the risk
that the Company will inadvertently cease to qualify as a REIT, or (ii) provide
additional flexibility with which the Company can meet the REIT qualification
requirements. These provisions are effective for the Company's taxable years
commencing on or after January 1, 1998.
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TAXATION OF REINVESTED DIVIDENDS
Those holders of Common Shares who elect to participate in the Dividend
Reinvestment Plan will be deemed to have received the gross amount of dividends
distributed on their behalf by the Plan Agent as agent for the participants in
such plan. Such deemed dividends will be treated as actual dividends to such
shareholders by the Company and will retain their character and have the tax
effects as described above. Participants that are subject to federal income tax
will thus be taxed as if they received such dividends despite the fact that
their distributions have been reinvested and, as a result, they will not receive
any cash with which to pay the resulting tax liability.
OTHER TAX CONSIDERATIONS
Entity Classification. A significant number of the Company's investments
are held through partner-ships. If any such partnerships were treated as an
association, the entity would be taxable as a corporation and therefore would be
subject to an entity level tax on its income. In such a situation, the character
of the Company's assets and items of gross income would change and might
preclude the Company from qualifying as a REIT.
Prior to January 1, 1997, an organization formed as a partnership or a
limited liability company was treated as a partnership for federal income tax
purposes rather than as a corporation only if it had no more than two of the
four corporate characteristics that the Treasury Regulations in effect at that
time used to distinguish a partnership from a corporation for tax purposes.
These four characteristics were (i) continuity of life, (ii) centralization of
management, (iii) limited liability, and (iv) free transferability of interests.
Under final Treasury Regulations which became effective January 1, 1997, the
four factor test has been eliminated and an entity formed as a partnership or as
a limited liability company will be taxed as a partnership for federal income
tax purposes, unless it specifically elects otherwise. The Regulations provide
that the IRS will not challenge the classification of an existing partnership or
limited liability company for tax periods prior to January 1, 1997 so long as
(1) the entity had a reasonable basis for its claimed classification, (2) the
entity and all its members recognized the federal income tax consequences of any
changes in the entity's classification within the 60 months prior to January 1,
1997, and (3) neither the entity nor any member of the entity had been notified
in writing on or before May 8, 1996, that the classification of the entity was
under examination by the IRS.
The Company believes that each partnership in which it holds an interest
(either directly or indirectly) is properly treated as a partnership for tax
purposes (and not as an association taxable as a corporation).
Tax Allocations with Respect to the Properties. When property is
contributed to a partnership in exchange for an interest in the partnership, the
partnership generally takes a carryover basis in that property for tax purposes
equal to the adjusted basis of the contributing partner in the property, rather
than a basis equal to the fair market value of the property at the time of
contribution (this difference is referred to as "Book-Tax Difference"). Special
rules under 704(c) of the Code and the regulations thereunder tend to eliminate
the Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed
properties in the hands of the partnership could cause the Company (i) to be
allocated lower amounts of depreciation and other deductions for tax purposes
than would be allocated to the Company if all properties were to have a tax
basis equal to their fair market value at the time the properties were
contributed to the partnership, and (ii) possibly to be allocated taxable gain
in the event of a sale of such contributed properties in excess of the economic
or book income allocated to the Company as a result of such sale.
PLAN OF DISTRIBUTION
The Company may sell Securities through underwriters or dealers, directly
to one or more purchasers, through agents or through a combination of any such
methods of sale.
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The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, or at negotiated prices.
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or from purchasers of Securities, for whom
they may act as agents, in the form of discounts, concessions or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers, and agents that participate in the distribution
of Securities may be deemed to be underwriters under the Securities Act, and any
discounts or commissions they receive from the Company and any profit on the
resale of Securities they realize may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Company will be
described, in the applicable Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Shares which are listed on the NYSE. Any Common Shares
sold pursuant to a Prospectus Supplement will be listed on the NYSE, subject to
official notice of issuance. The Company may elect to list any series of Debt
Securities or Preferred Shares on an exchange, but is not obligated to do so. It
is possible that one or more underwriters may make a market in a series of
Securities, but will not be obligated to do so and may discontinue any market
making at any time without notice. Therefore, no assurance can be given as to
the liquidity of, or the trading market for, the Securities.
Under agreements into which the Company may enter, underwriters, dealers
and agents who participate in the distribution of Securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, or be tenants of, the Company in the ordinary course of
business.
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states Securities may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
EXPERTS
The consolidated financial statements of the Company incorporated into this
Prospectus by reference to the Annual Report on Form 10-K for the year ended
December 31, 1997, have been so incorporated in reliance on the report of KPMG
Peat Marwick LLP, independent certified public accountants (incorporated by
reference) and upon the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters, including the validity of the Securities and certain
tax matters, will be passed upon for the Company by Paul, Hastings, Janofsky &
Walker LLP, 399 Park Avenue, New York, New York 10022. Seth M. Zachary, a
partner of Paul, Hastings, Janofsky & Walker LLP, is presently serving as a
member of the Board of Trustees of the Company and will continue to serve as a
member of the Board of Trustees until the Company's 1998 Annual Meeting of
Shareholders. In connection with certain matters related to the laws of the
State of Maryland, Paul, Hastings, Janofsky & Walker LLP will rely on the
opinion of Piper & Marbury L.L.P., 36 South Charles Street, Baltimore, Maryland
21201.
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[LEXINGTON LOGO]
4,500,000 SHARES
COMMON SHARES OF BENEFICIAL INTEREST
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PROSPECTUS SUPPLEMENT
APRIL 29, 2003
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WACHOVIA SECURITIES