Registration Statement on
Form S-3 (No. 333-52601)
Filed pursuant to Rule 424(b)(5)
PROSPECTUS SUPPLEMENT
(To Prospectus Dated May 26, 1998)
306,372 SHARES
HOME PROPERTIES OF NEW YORK, INC.
COMMON STOCK
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We are offering and selling 306,372 shares of our common stock, par
value $.01 per share, to Cohen & Steers Quality Income Realty Fund, Inc. (the
"Fund") with this prospectus supplement and the accompanying prospectus.
Our common stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "HME." The last reported sale price of the shares of common
stock on the NYSE on February 25, 2001 was $32.64 per share.
The common stock is subject to certain restrictions on ownership to
preserve compliance with the real estate investment trust (REIT) provisions of
the Internal Revenues Code of 1986, as amended. Ownership of the common stock by
any single stockholder is limited to 8% of the number of shares of common stock
outstanding. See "Description of Capital Stock" on page S-7 of this prospectus
supplement.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE S-2 OF THIS PROSPECTUS SUPPLEMENT.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus are truthful or complete.
Any representation to the contrary is a criminal offense.
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The Fund will purchase our common stock at a price of $32.64 per share,
resulting in $9,999,982 of aggregate proceeds to us before deducting estimated
fees and expenses of this offering.
The shares of common stock will ready for delivery on or about February
28, 2002.
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The date of this prospectus supplement is February 25, 2002.
You should rely only on the information contained or incorporated by
reference into this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information . If anyone
provides you with different or additional information, you should not rely on
it. We are not making an offer of these securities in any state where the offer
is not permitted. You should not assume that the information contained in this
prospectus supplement or the accompanying prospectus and the documents
incorporated by reference is accurate as of any date other their respective
dates. Our business, financial condition, results of operations and prospects
may have changed since those dates.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
The Company................................................................ S-1
Forward-Looking Statements................................................. S-1
Documents Incorporated By Reference ....................................... S-1
Use of Proceeds............................................................ S-2
Description of Capital Stock............................................... S-7
Certain Federal Income Tax Considerations................................. S-13
Plan of Distribution...................................................... S-27
Legal Matters............................................................. S-27
PROSPECTUS
Available Information........................................................ 2
Forward Looking Statements................................................... 2
Documents Incorporated By Reference.......................................... 3
The Company.................................................................. 3
Risk Factors................................................................. 4
Ratio of Earnings to Fixed Charges........................................... 8
Use of Proceeds.............................................................. 9
Description of Capital Stock................................................. 9
Description of Debt Securities...............................................15
Federal Incomes Tax Considerations...........................................19
ERISA Considerations.........................................................32
Plan of Distribution.........................................................33
Legal Matters................................................................34
Experts......................................................................34
The following information in this prospectus supplement is qualified in
its entirety by the more detailed information and financial statements,
including the notes thereto, appearing in the accompanying prospectus and the
documents incorporated by reference into this prospectus supplement and the
accompanying prospectus. Unless otherwise indicated, all references to "we" "us"
"our" or "the company" refer to Home Properties of New York, Inc. and its
subsidiaries.
THE COMPANY
Home Properties of New York, Inc., the 10th largest apartment company
in the United States, is a fully integrated, self-managed real estate investment
trust. With operations in select Northeast, Midwest and Mid-Atlantic markets, we
own, operate, acquire, rehabilitate and develop apartment communities.
Currently, we operate 285 communities containing 49,247 apartment units. Of
these, we own 38,668 units in 137 communities, we partially own and manage as
general partner 7,979 units in 131 communities, and we manage for other owners
2,600 units in 17 communities. We also manage 2.2 million square feet of
commercial space. The owned and managed apartment communities and commercial
space are referred to herein as the "Properties."
We were incorporated in November 1993 as a Maryland corporation. We are
the general partner of Home Properties of New York, L.P., a New York limited
partnership through which we own, acquire and operate most of our market rate
apartments. We frequently refer to Home Properties of New York, L.P. as the
"Operating Partnership." Certain of our activities, such as residential and
commercial property management for others, development activities and
construction, development and redevelopment services, are carried on through two
subsidiaries: Home Properties Management Inc. and Home Properties Resident
Services, Inc (together, the "Management Companies"). We own 95% and 99%,
respectively of the economic interest in the Management Companies while certain
members of our management hold the remaining 5% and 1%, respectively, in order
to satisfy certain technical tax requirements.
Our principal executive offices are located at 850 Clinton Square,
Rochester, New York 14604. Our telephone number is (585) 546-4900.
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus contain, or
incorporate by reference, statements that may be deemed to be "forward-looking"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Exchange Act of 1934. Although we
believe expectations reflected in such forward-looking statements are based on
reasonable assumptions, we can give no assurance that our expectations will be
achieved. Factors that may cause actual results to differ include general
economic and local real estate conditions, other conditions that might affect
operating expenses, and the timely completion of repositioning activities within
anticipated budgets, the actual pace of future acquisitions and developments,
and continued access to capital to fund growth. All these factors should be
considered in evaluating any forward-looking statement included or incorporated
by reference in this prospectus supplement or the accompanying prospectus.
We undertake no obligation to publicly update or revise any
forward-looking statements included or incorporated by reference in this
prospectus supplement or the accompanying prospectus, where as a result of new
information, future events or otherwise. In light of the factors referred to
above, the forward-looking events discussed in or incorporated by reference in
the this prospectus supplement of the accompanying prospectus may not occur and
actual results, performance or achievement could differ materially from that
anticipated or implied in the forward-looking statements.
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by
S-1
reference is considered to be part of this prospectus supplement and completely
replaces the financial information incorporated by reference in the accompanying
prospectus. The information that we file with the SEC later will automatically
update and supersede this information.
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission, or SEC. You may
read and copy such reports, statements or other information at the SEC's public
reference room at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our SEC filings are also available to the public from
commercial document retrieval services and at the SEC's website at
http://www.sec.gov. You can also review copies of our SEC filings at the offices
of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
We incorporate by reference the documents listed below and any future
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"):
- our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, filed on February 27, 2001; and
- all other reports filed by the Company pursuant to Section
13(a) of the Exchange Act since December 31, 2001, provided, however,
that the content of the company's Current Report on Form 8-K filed with
February 8, 2002 disclosing matters under Item 9 "Regulation FD
Disclosure" with respect to fourth quarter and year-end 2001 results,
is not incorporated herein.
You may request a copy of these filings, at no cost, by writing or
telephoning us, from the Company. Requests should be directed to Charis W.
Copin, Vice President, Investor Relations, Home Properties of New York, Inc.,
850 Clinton Square, Rochester, New York 14604, telephone (585) 546-4900. Copies
of documents so requested will be sent by first class mail, postage paid.
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock
offered hereby , after deducting estimated fees and expenses related to this
offering of $542,499, are approximately $9,457,483. We will use the net proceeds
from this offering for general working capital purposes and to repay borrowings
outstanding, thereby increasing availability under the Company's revolving
credit facility to permit financing of future acquisitions. We intend to
contribute or otherwise transfer the net proceeds of the sale of the common
stock offered hereby to Home Properties Trust, a qualified REIT subsidiary in
which we own all the outstanding stock, and that entity will contribute such
proceeds to the Operating Partnership in exchange for an equal number of units
of limited partnership interest ("Units") in the Operating Partnership.
RECENT DEVELOPMENTS
Simultaneously with this offering, we have also entered into an
underwriting agreement with Salomon Smith Barney Inc. to sell 398,230 shares of
common stock at a price of $31.01 per share. Salomon Smith Barney Inc. may also
purchase up to an additional 59,735 shares of common stock at that price.
RISK FACTORS
An investment in our common stock involves various risks. Before making
an investment decision, you should carefully consider all of the risks described
in this prospectus supplement, which replace completely the information under
the heading "Risks Factors" described in the accompanying prospectus. If any of
the risks discussed in this prospectus supplement actually occur, our business,
financial condition and results of operations could be materially and adversely
affected. If this were to occur, the trading price of our common stock could
S-2
decline significantly, and you may lose part or all of your investment. In
addition to general investment risks and those factors set forth elsewhere in
this prospectus supplement and the accompanying prospectus, prospective
investors should consider, among other things, the following factors.
Assimilation of a Substantial Number of New Acquisitions
Since our formation, we have undertaken a strategy of aggressive growth
through acquisitions. Our ability to manage our growth effectively requires that
we, among other things, successfully apply our experience in managing our
existing portfolio to an increased number of properties. In addition, we will be
required to successfully manage the integration of a substantial number of new
personnel. There can be no assurances that we will be able to integrate and
manage these operations effectively or maintain or improve on their historical
financial performance.
Real Estate Financing Risks
General. We are subject to the customary risks associated with debt
financing, including the potential inability to refinance existing mortgage
indebtedness upon maturity on favorable terms. If a Property is mortgaged to
secure payment of indebtedness and we are unable to meet its debt service
obligations, the Property could be foreclosed upon. This could adversely affect
our cash flow and, consequently, the amount available for distributions to our
stockholders.
No limitation on debt. Our Board of Directors has adopted a policy of
limiting our indebtedness to approximately 50% of our total market
capitalization (i.e., the market value of issued and outstanding shares of our
common stock and Units in the Operating Partnership plus total debt), but our
organizational documents do not contain any limitation on the amount or
percentage of indebtedness, funded or otherwise, that we may incur. Accordingly,
our Board of Directors could alter or eliminate its current policy on borrowing.
If this policy were changed, we could become more highly leveraged, resulting in
an increase in debt service that could adversely affect our ability to make
expected distributions to stockholders and increase the risk of default on our
indebtedness. Our debt to total market capitalization ratio fluctuates based on
the timing of acquisitions and financings. At December 31, 2001, our ratio of
debt to total market capitalization was 41%. Our bank agreements and certain
agreements with holders of our preferred stock limit the amount of indebtedness
that we may incur.
Existing debt maturities. We are subject to the risks normally
associated with debt financing, including the risk that our cash flow will be
insufficient to meet the required payments of principal and interest. Because
much of the financing is not fully self-amortizing, we anticipate that only a
portion of the principal of our indebtedness will be repaid prior to maturity.
So, we will need to refinance debt. Accordingly, there is a risk that we will
not be successful in refinancing existing indebtedness or that the terms of such
refinancing will not be as favorable as the terms of the existing indebtedness.
We aim to stagger our debt maturities with the goal of minimizing the amount of
debt which must be refinanced in any year.
Real Estate Investment Risks
General Risks. Real property investments are subject to varying degrees
of risk. If our communities do not generate revenues sufficient to meet
operating expenses, including debt service and capital expenditures, our cash
flow and ability to make distributions to our stockholders will be adversely
affected. A multifamily apartment community's revenues and value may be
adversely affected by the general economic climates; the local economic climate;
local real estate considerations (such as over supply of, or reduced demand for,
apartments); the perception by prospective residents of the safety, convenience
and attractiveness of the communities or neighborhoods in which they are located
and the quality of local schools and other amenities; and increased operating
costs (including real estate taxes and utilities). Certain significant fixed
expenses are generally not reduced when circumstances cause a reduction in
income from the investment.
Operating Risks. We are dependent on rental income to pay operating
expenses and to generate cash to enable us to make distributions to our
stockholders. If we are unable to attract and retain residents or if our
residents
S-3
are unable, due to an adverse change in the economic condition of a particular
region or otherwise, to pay their rental obligations, our ability to make
expected distributions will be adversely affected.
Illiquidity of Real Estate. Real estate investments are relatively
illiquid and, therefore, we have limited ability to vary our portfolio quickly
in response to changes in economic or other conditions. In addition, the
prohibition in the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), on REITs holding property for sale and related regulations may
affect our ability to sell properties without adversely affecting distributions
to stockholders. A significant number of our Properties were acquired using
Units subject to certain agreements, which restrict our ability to sell such
Properties in transactions, that would create current taxable income to the
former owners.
Competition. We plan to continue to acquire additional multifamily
residential properties in the Northeast, Midwest and Mid-Atlantic regions of the
United States. There are a number of multifamily developers and other real
estate companies that compete with us in seeking properties for acquisition,
prospective residents and land for development. Most of our Properties are in
developed areas where there are other properties of the same type. Competition
from other properties may affect our ability to attract and retain residents, to
increase rental rates and to minimize expenses of operation. Virtually all of
the leases for our Properties are short-term leases (generally, one year or
less).
Uninsured Losses. Certain extraordinary losses may not be covered by
our comprehensive liability, fire, extended and rental loss insurance. If an
uninsured loss occurred, we could lose our investment in, and cash flow from,
the affected Property (but we would be required to repay any indebtedness
secured by that Property and related taxes and other charges).
Compliance With Laws and Regulations.
Many laws and governmental regulations are applicable to our Properties
and changes in these laws and regulations, or their interpretation by agencies
and the courts, occur frequently. Under the Americans with Disabilities Act of
1990 (the "ADA"), all places of public accommodation are required to meet
certain federal requirements related to access and use by disabled persons.
These requirements became effective in 1992. The ADA requires removal of
structural barriers to handicapped access in certain public areas, where such
removal is "readily achievable." The ADA does not, however, consider residential
properties, such as apartment communities, to be public accommodations or
commercial facilities, except to the extent portions of such facilities, such as
a leasing office, are open to the public. A number of additional federal, state
and local laws exist which also may require modifications to our Properties, or
restrict certain further renovations thereof, with respect to access thereto by
disabled persons. For example, the Fair Housing Amendments Act of 1988 (the
"FHAA") requires apartment communities first occupied after March 13, 1990 to be
accessible to the handicapped. Noncompliance with the ADA or the FHAA could
result in the imposition of fines or an award of damages to private litigants.
Although management believes that the Properties are substantially in compliance
with present requirements, we may incur additional costs in complying with the
ADA for both existing properties and properties acquired in the future. We
believe that our Properties that are subject to the ADA and the FHAA are in
compliance with such laws.
Under the federal Fair Housing Act and state fair housing laws,
discrimination on the basis of certain protected classes is prohibited. We have
a policy against any kind of discriminatory behavior and we train our employees
to avoid discrimination or the appearance of discrimination. There is no
assurance, however, that an employee will not violate our policy against
discrimination and violate the fair housing laws. Such a violation could subject
us to legal action and the possible awards of damages.
Under various laws, ordinances and regulations relating to the
protection of the environment, a current or previous owner or operator of real
estate may be held liable for the costs of removal or remediation of certain
hazardous or toxic substances located on, under or in the property. These laws
often impose liability without regard to whether the owner or operator was
responsible for, or even knew of, the presence of such substances. The presence
of contamination from hazardous or toxic substances, or the failure to remediate
such contaminated property properly, may adversely affect the owner's ability to
rent or sell that property or use that property as
S-4
collateral. Independent environmental consultants conducted "Phase I"
environmental audits (which involve visual inspection but not soil or
groundwater analysis) on substantially all of our Properties prior to their
acquisition. None of the Phase I audit reports revealed any significant issues
of environmental concern, nor are we aware of any environmental liability that
we believe would have a material adverse effect on us. There is no assurance
that the Phase I reports would reveal all environmental liabilities or that
environmental conditions not known to us may exist now or in the future on our
existing Properties or those subsequently acquired which would result in
liability to us for remediation or fines, either under existing laws and
regulations or future changes to such requirements. If compliance with the
various laws and regulations, now existing or hereafter adopted, exceeds our
budgets for such items, our ability to make expected distributions could be
adversely affected.
Federal Income Tax Risks.
General. We believe that we have been organized and have operated in
such manner so as to qualify as a REIT under the Internal Revenue Code,
commencing with our taxable year ended December 31, 1994, and we intend to
continue to so qualify. A REIT generally is not taxed at the corporate level on
income it currently distributes to its stockholders as long as it distributes
currently at least 90% (95% in years prior to 2001) of its taxable income
(excluding net capital gain). No assurance can be provided, however, that we
have qualified or will continue to qualify as a REIT or that new legislation,
treasury regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to our qualification as a REIT or
the federal income tax consequences of such qualification.
Required Distributions and Payments. In order to continue to qualify as
a REIT, we currently are required each year to distribute to our stockholders at
least 90% of our taxable income (excluding net capital gain). In addition, we
will be subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions made by us with respect to the calendar year are less than
the sum of 85% of our ordinary income, 95% of our capital gain net income for
that year, and any undistributed taxable income from prior periods. We intend to
make distributions to our stockholders to comply with the 90% distribution
requirement and to avoid the nondeductible excise tax and will rely for this
purpose on distributions from the Operating Partnership. However, differences in
timing between taxable income and cash available for distribution could require
us to borrow funds or to issue additional equity to enable us to meet the 90%
distribution requirement (and therefore to maintain our REIT qualification) and
to avoid the nondeductible excise tax. In addition, because we are unable to
retain earnings (as a result of REIT distribution requirements), we will
generally be required to refinance debt that matures with additional debt or
equity. There can be no assurance that any of these sources of funds, if
available at all, would be available to meet our distribution and tax
obligations.
Adverse Consequences of Our Failure to Qualify as a REIT. If we fail to
qualify as a REIT, we will be subject to federal income tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. In addition, unless entitled to relief under certain statutory
provisions, we will be disqualified from treatment as a REIT for the four
taxable years following the year during which REIT qualification is lost. The
additional tax burden on us would significantly reduce the cash available for
distribution by us to our stockholders. Our failure to qualify as a REIT could
reduce materially the value of our common stock and would cause all our
distributions to stockholders to be taxable as ordinary income to the extent of
our current and accumulated earnings and profits (although, subject to certain
limitations under the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction with respect to these
distributions). See "Failure to Qualify."
The Operating Partnership's Failure to Qualify as a Partnership. We
believe that the Operating Partnership qualifies as a partnership for federal
income tax purposes. No assurance can be provided, however, that the Internal
Revenue Service (the "IRS") will not challenge its status as a partnership for
federal income tax purposes, or that a court would not sustain such a challenge.
If the IRS were to be successful in treating the Operating Partnership as an
entity that is taxable as a corporation, we would cease to qualify as a REIT
because the value our ownership interest in the Operating Partnership would
exceed 5% of our assets and because we would be considered to hold more than 10%
of another corporation. See "Taxation of Home Properties - Asset Tests." Also,
the imposition of a corporate tax on the Operating Partnership would reduce
significantly the amount of cash available for distribution to its limited
partners. See "Tax Aspects of the Operating Partnership."
S-5
Limits on Ownership
In order for us to maintain our qualification as a REIT, not more than
50% in value of our outstanding stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Internal Revenue Code to include
certain entities) at any time during the last half of a taxable year. We have
limited ownership of the issued and outstanding shares of our common stock by
any single stockholder to 8.0% of the outstanding shares with certain
exceptions. Shares of common stock held by certain entities, such as qualified
pension plans, are treated as if the beneficial owners of such entities were the
holders of the common stock. These restrictions can be waived by our Board of
Directors if it were satisfied, based upon the advice of tax counsel or
otherwise, that such action would be in our best interests. Waivers have been
granted to certain institutional investors in connection with the sale of our
preferred stock. Shares acquired or transferred in breach of the limitation may
be redeemed by us for the lesser of the price paid or the average closing price
for the ten trading days immediately preceding redemption or may be sold at our
direction. A transfer of shares of common stock to a person who, as a result of
the transfer, violates the ownership limit will be void and the shares will
automatically be converted into shares of "Excess Stock," which is subject to a
number of limitations. See "Description of Capital Stock - Restrictions on
Transfer" in this prospectus supplement for additional information regarding the
ownership limits.
Change of Control
Our Articles of Amendment and Restatement of the Articles of
Incorporation, as amended (the "Articles of Incorporation"), authorize our Board
of Directors to issue up to a total of 80 million shares of common stock, 10
million shares of "excess stock" and 10 million shares of preferred stock and to
establish the rights and preferences of any shares issued. Further, under the
Articles of Incorporation, our stockholders do not have cumulative voting
rights.
The percentage ownership limit, the issuance of preferred stock in the
future and the absence of cumulative voting rights could have the effect of: (i)
delaying or preventing a change of control of us even if a change in control
were in the stockholders' interest; (ii) deterring tender offers for our common
stock that may be beneficial to the stockholders; or (iii) limiting the
opportunity for stockholders to receive a premium for their common stock that
might otherwise exist if an investor attempted to assemble a block of our common
stock in excess of the percentage ownership limit or otherwise to effect a
change of control of us.
We have various agreements which may have the effect of discouraging a
change of control of us due to the costs involved. The Articles Supplementary to
our Articles of Incorporation under which several series of our outstanding
preferred stock were issued provide that upon a change of control of us or the
Operating Partnership, under certain circumstances, the holder of such Preferred
Stock may require us to redeem it. Also, to assure that our management has
appropriate incentives to focus on our business and Properties in the face of a
change of control situation, we have adopted an executive retention plan which
provides some key employees with salary, bonus and certain benefit continuation
in the event of a change of control.
Potential Conflicts of Interest
Unlike persons acquiring common stock, our executive officers own most
of their interest in us through Units. As a result of their status as holders of
Units, the executive officers and other limited partners may have interests that
conflict with stockholders with respect to business decisions affecting us and
the Operating Partnership. In particular, certain executive officers may suffer
different or more adverse tax consequence than us upon the sale or refinancing
of some of our Properties as a result of unrealized gain attributable to those
Properties. Thus, executive officers and the stockholders may have different
objectives regarding the appropriate pricing and timing of any sale or
refinancing of Properties. In addition, our executive officers, as limited
partners of the Operating Partnership, have the right to approve certain
fundamental transactions such as the sale of all or substantially all of the
assets of the Operating Partnership, merger or consolidation or dissolution of
the Operating Partnership and certain amendments to the Operating Partnership
Agreement.
S-6
We manage multifamily residential properties through the Operating
Partnership and commercial and development properties and certain multifamily
residential properties not owned by us through the Management Companies. As a
result, our officers will devote a significant portion of their business time
and efforts to the management of properties not owned by us. Some of our
officers have a significant interest in certain of the managed properties as the
only stockholders of the general partners of the partnerships that own such
managed properties and as holders of other ownership interests. Accordingly,
these officers will have conflicts of interest between their fiduciary
obligations to the partnerships that own the managed properties and their
fiduciary obligations as our officers and directors, particularly with respect
to the enforcement of the management contracts and timing of the sale of the
managed properties. In order to comply with technical requirements of the
Internal Revenue Code pertaining to our qualification as a REIT, the Operating
Partnership owns all of the outstanding non-voting common stock (990 shares) of
one of the Management Companies, Home Properties Management, Inc., and Norman
and Nelson Leenhouts own all of the outstanding voting common stock (52 shares).
The Operating Partnership also owns all of the outstanding non-voting common
stock (4,752 shares) of the other Management Company, Home Properties Resident
Services, Inc., and Norman and Nelson Leenhouts own all of the outstanding
voting common stock (48 shares). As a result, although we will receive
substantially all of the economic benefits of the business carried on by the
Management Companies through our right to receive dividends, we will not be able
to elect directors and officers of the Management Companies and, therefore, our
ability to cause dividends to be declared or paid or influence the day-to-day
operations of the Management Companies will be limited. Furthermore, although we
will receive a management fee for managing the managed properties, this fee has
not been negotiated at arm's length and may not represent a fair price for the
services rendered. We believe these management fees to be comparable to fees
charged in arm's length transactions.
Shares Available for Future Sale
Sales of substantial amounts of shares of common stock in the public
market or the perception that such sales might occur could adversely affect the
market price of our common stock. In May 1998, we registered on a Form S-3
registration statement, preferred stock, common stock, common stock rights or
warrants and debt securities having an aggregate offering price of up to
$400,000,000. As of the date hereof, preferred stock, common stock, common stock
rights or warrants and debt securities with an aggregate offering price of
$227,390,000 remain available for sale pursuant to such registration statement.
Additionally, the Operating Partnership has issued approximately 16,202,076
Units through December 31, 2001, to persons, other than us or the Home
Properties Trust, which may be exchanged on a one-for-one basis for shares of
common stock under certain circumstances. We have issued Class B Cumulative
Convertible Preferred Stock, Class C Cumulative convertible Preferred Stock,
Class D Cumulative Convertible Preferred Stock and Class E Cumulative
Convertible Preferred Stock, which are convertible into an aggregate of
approximately 5,445,714 shares of common stock at December 31, 2001. Also, we
have issued 525,000 common stock purchase warrants to holders of the Class C
Cumulative Convertible Preferred Stock and the Class E Cumulative Convertible
Preferred Stock. In addition, as of December 31, 2001, we have outstanding
options to purchase approximately 2,105,102 shares of common stock to certain of
our directors, officers and employees, of Home Properties, of which 764,819 are
currently exercisable.
All of the shares of common stock issuable upon the exchange of Units
and upon conversion of shares of Preferred Stock will be "restricted securities"
within the meaning of Rule 144 under the Securities Act, and may not be
transferred unless they are registered under the Securities Act or are otherwise
transferrable under Rule 144. We have filed or expect to file registration
statements with respect to such shares of common stock, thereby allowing shares
issuable under our stock benefit plans and in exchange for Units to be
transferred or resold without restriction under the Securities Act.
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock completely replaces the
description under the heading "Description of Capital Stock" in the accompanying
prospectus, except where we specifically refer to that prospectus.
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GENERAL
Our authorized capital stock consists of:
- 80 million shares of common stock, $0.01 par value, of which
24,010,855 shares were outstanding on December 31, 2001;
- 10 million shares of Preferred Stock, $0.01 par value, with the
following shares outstanding, on December 31, 2001:
-- 2,000,000 shares which have been designated Series B
Convertible Cumulative Preferred Stock, all of which were
outstanding as of December 31, 2001 (of which 1,000,000 were
converted into common stock in February 2002);
-- 600,000 shares which have been designated Series C
Convertible Cumulative Preferred Stock, all of which are
outstanding as of December 31, 2001;
-- 500,000 shares which have been designated Series D
Convertible Cumulative Preferred Stock, 250,000 of which were
outstanding as of December 31,2001;
-- 300,000 shares which have been designated Series E
Convertible Cumulative Preferred Stock, 300,000 of which were
outstanding as of December 31, 2001; and
-- 10 million shares of Excess Stock, $0.01 par value (the
"Excess Stock"), of which no shares were outstanding on such
date.
For more detail about our Articles of Incorporation, and the Articles
Supplementary thereto relating to our preferred stock and our bylaws, you should
refer to the Articles of Incorporation and bylaws, which have been filed as
exhibits to other reports incorporated by reference into this prospectus
supplement. In addition, for a discussion of limitations on the ownership of our
capital stock, you should refer to the section entitled "Risk Factors" in this
prospectus.
COMMON STOCK
All of the shares of common stock offered by this prospectus will be
duly authorized, fully paid, and nonassessable when issued and paid for as
provided in the Underwriting Agreement. Holders of our common stock have no
conversion, redemption, sinking fund or preemptive rights; however, shares of
common stock will automatically convert into shares of Excess Stock as described
below. Under the Maryland General Corporation Law ("MGCL"), stockholders are
generally not liable for our debts or obligations, and the holders of shares
will not be liable for further calls or assessments by us. Subject to the
provisions of the Articles of Incorporation regarding Excess Stock described
below, all shares of common stock have equal dividend, distribution, liquidation
and other rights and will have no preference or exchange rights.
Subject to the right of holders of preferred stock to receive
preferential distributions, the holders of the shares of our common stock will
be entitled to receive distributions in the form of dividends if and when
declared by our Board of Directors out of funds legally available therefor and,
upon our liquidation, each outstanding share of common stock will be entitled to
participate pro rata in the assets remaining after payment of, or adequate
provision for, all of our known debts and liabilities, including debts and
liabilities arising out of its status as general partner of the Operating
Partnership, and any liquidation preference of issued and outstanding preferred
stock. We intend to continue paying quarterly distributions.
The holder of each outstanding share of common stock is entitled to one
vote on all matters presented to stockholders for a vote, subject to the
provisions of the Articles of Incorporation regarding Excess Stock described
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below. As described below, the Board of Directors has, and may in the future,
grant holders of one or more series of Preferred Stock the right to vote with
respect to certain matters when it fixes the attributes of such series of
Preferred Stock. Pursuant to the MGCL, we cannot dissolve, amend its Articles of
Incorporation, merge with or into another entity, sell all or substantially all
its assets, engage in a share exchange or engage in similar transactions unless
such action is approved by stockholders holding a majority of the outstanding
shares entitled to vote on such matter. In addition, the Second Amended and
Restated Partnership Agreement of the Operating Partnership, as amended,
requires that any merger or sale of all or substantially all of the assets of
the Operating Partnership be approved by partners holding a majority of the
outstanding Units, excluding Units held by us or Home Properties Trust. Our
Articles of Incorporation provide that our bylaws may be amended by our Board of
Directors.
The holder of each outstanding share of our common stock is entitled to
one vote in the election of directors who serve for terms of one year. Holders
of the shares of common stock will have no right to cumulative voting for the
election of directors. Consequently, at each annual meeting of stockholders, the
holders of a majority of the shares entitled to vote in the election of
directors will be able to elect all of the directors, subject to certain rights
of the holders of preferred stock. Directors may be removed only for cause and
only with the affirmative vote of the holders of a majority of the shares
entitled to vote in the election of directors.
PREFERRED STOCK
For a description of the outstanding Preferred Stock, see pages 10 to
11 in the accompanying prospectus.
RESTRICTIONS ON TRANSFER/OWNERSHIP LIMITS
Our Articles of Incorporation contain certain restrictions on the
number of shares of capital stock that stockholders may own. For us to qualify
as a REIT under the Internal Revenue Code, no more than 50% in value of our
outstanding shares of capital stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Internal Revenue Code to include
certain entities) during the last half of a taxable year or during a
proportionate part of a shorter taxable year. The capital stock must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year or during a proportionate part of a shorter taxable year. Because we expect
to continue to qualify as a REIT, our Articles of Incorporation contain
restrictions on the ownership and transfer of shares of our capital stock
intended to ensure compliance with these requirements.
Subject to certain exceptions specified in our Articles of
Incorporation, no holder may own, or be deemed to own by virtue of the
attribution provisions of the Internal Revenue Code, more than 8.0% (the
"Ownership Limit") of the value of the issued and outstanding shares of our
capital stock. Certain entities, such as qualified pension plans, are treated as
if their beneficial owners were the holders of the common stock held by such
entities. Stockholders ("Existing Holders") whose holdings exceeded the
Ownership Limit immediately after our initial public offering of common stock,
assuming that all Units of the Operating Partnership are counted as shares of
common stock, are permitted to continue to hold the number of shares they held
on such date and may acquire additional shares of capital stock upon (i) the
exchange of Units for shares, (ii) the exercise of stock options or receipt of
grants of shares of capital stock pursuant to a stock benefit plan, (iii) the
acquisition of shares of capital stock pursuant to a dividend reinvestment plan,
(iv) the transfer of shares of capital stock from another Existing Holder or the
estate of an Existing Holder by devise, gift or otherwise, or (v) the
foreclosure on a pledge of shares of capital stock; provided, no such
acquisition may cause any Existing Holder to own, directly or by attribution,
more than 17.5% (the "Existing Holder Limit") of the issued and outstanding
shares of common stock, subject to certain additional restrictions.
Our Board of Directors may increase or decrease the Ownership Limit and
Existing Holder Limit from time to time, but may not do so to the extent that
after giving effect to such increase or decrease (i) five beneficial owners of
shares could beneficially own in the aggregate more than 49.5% of the aggregate
value of our outstanding capital stock or (ii) any beneficial owner of capital
stock would violate the Ownership Limit or Existing Holder Limit as a result of
a decrease. Our Board of Directors may waive the Ownership Limit or the Existing
Holder Limit with respect to a holder if such holder provides evidence
acceptable to the Board of Directors that such holder's
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ownership will not jeopardize our status as a REIT. Waivers of the Ownership
Limit have been granted to certain institutional investors in connection with
the sale of our preferred stock.
Any transfer of our outstanding capital stock ("Outstanding Stock")
that would (i) cause any holder, directly or by attribution, to own capital
stock having a value in excess of the Ownership Limit or Existing Holder Limit,
(ii) result in shares of capital stock other than Excess Stock, if any, to be
owned by fewer than 100 persons, (iii) result in us being closely held within
the meaning of section 856(h) of the Internal Revenue Code, or (iv) otherwise
prevent us from satisfying any criteria necessary for it to qualify as a REIT,
is null and void, and the purported transferee acquires no rights to such
Outstanding Stock.
Outstanding Stock owned by or attributable to a stockholder or shares
of Outstanding Stock purportedly transferred to a stockholder which cause such
stockholder or any other stockholder to own shares of capital stock in excess of
the Ownership Limit or Existing Holder Limit will automatically convert into
shares of Excess Stock. Such Excess Stock will be transferred by operation of
law to a separate trust, with us acting as trustee, for the exclusive benefit of
the person or persons to whom such Outstanding Stock may be ultimately
transferred without violating the Ownership Limit or Existing Holder Limit.
Excess Stock is not treasury stock, but rather constitutes a separate class of
our issued and outstanding stock. While the Excess Stock is held in trust, it
will not be entitled to vote, will not be considered for purposes of any
stockholder vote or the determination of a quorum for such vote and will not be
entitled to participate in dividends or other distributions. Any record owner or
purported transferee of Outstanding Stock which has converted into Excess Stock
(the "Excess Holder") who receives a dividend or distribution prior to the
discovery by us that such Outstanding Stock has been converted into Excess Stock
must repay such dividend or distribution upon demand. While Excess Stock is held
in trust, we will have the right to purchase it from the trust for the lesser of
(i) the price paid for the Outstanding Stock which converted into Excess Stock
by the Excess Holder (or the market value of the Outstanding Stock on the date
of conversion if no consideration was given for the Outstanding Stock) or (ii)
the market price of shares of capital stock equivalent to the Outstanding Stock
which converted into Excess Stock (as determined in the manner set forth in the
Articles of Incorporation) on the date we exercise our option to purchase. We
must exercise this right within the 90-day period beginning on the date on which
it receives written notice of the transfer or other event resulting in the
conversion of Outstanding Stock into Excess Stock. Upon our liquidation,
distributions will be made with respect to such Excess Stock as if it consisted
of the Outstanding Stock from which it was converted.
Any Excess Holder, with respect to each trust created upon the
conversion of Outstanding Stock into Excess Stock, may designate any individual
as a beneficiary of such trust; provided, such person would be permitted to own
the Outstanding Stock which converted into the Excess Stock held by the trust
under the Ownership Limit or Existing Holder Limit and the consideration paid to
such Excess Holder in exchange for designating such person as the beneficiary is
not in excess of the price paid for the Outstanding Stock which converted into
Excess Stock by the Excess Holder (or the market value of the Outstanding Stock
on the date of conversion if no consideration was given for the Outstanding
Stock). Our redemption right must have expired or been waived prior to such
designation. Immediately upon the designation of a permitted beneficiary, the
Excess Stock, if any, will automatically convert into shares of the Outstanding
Stock from which it was converted and we, as trustee of the trust, will transfer
such shares, if any, and any proceeds from redemption or liquidation to the
beneficiary.
If the restrictions on ownership and transfer, conversion provisions or
trust arrangements in our Articles of Incorporation are determined to be void or
invalid by virtue of any legal decision, statute, rule or regulation, then the
Excess Holder of any Outstanding Stock that would have converted into shares of
Excess Stock if the conversion provisions of the Articles of Incorporation were
enforceable and valid shall be deemed to have acted as an agent on our behalf in
acquiring such Outstanding Stock and to hold such Outstanding Stock on our
behalf unless we waive our right to this remedy.
The foregoing ownership and transfer limitations may have the effect of
precluding acquisition of control of us without the consent of our Board of
Directors. All certificates representing shares of capital stock will bear a
legend referring to the restrictions described above. The foregoing restrictions
on transferability and ownership will not apply if the Board of Directors
determines, and the stockholders concur, that it is no longer in our best
interest to
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attempt to qualify, or to continue to qualify, as a REIT. Approval of the
limited partners of the Operating Partnership to terminate REIT status is also
required.
OWNERSHIP REPORTS
Every owner of more than 5% of our issued and outstanding shares of
capital stock must file a written notice with us containing the information
specified in the Articles of Incorporation no later than January 30 of each
year. In addition, each stockholder shall, upon demand, be required to disclose
to Home Properties in writing such information as we may request in order to
determine the effect of such stockholder's direct, indirect and attributed
ownership of shares of capital stock on our status as a REIT or to comply with
any requirements of any taxing authority or other governmental agency.
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CERTAIN OTHER PROVISIONS OF MARYLAND LAW AND OUR ARTICLES OF INCORPORATION
The following discussion summarizes certain provisions of MGCL and our
Articles of Incorporation and bylaws. This summary does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Articles of Incorporation and bylaws, copies of which are filed as exhibits to
the Registration Statement of which this prospectus constitutes a part. The
Articles of Incorporation and bylaws limit the liability of our directors and
officers and our stockholders to the fullest extent permitted from time to time
by the MGCL and require us to indemnify our directors, officers and certain
other parties to the fullest extent permitted from time to time by the MGCL.
BUSINESS COMBINATIONS. Under the MGCL, certain "business combinations"
(including a merger, consolidation, share exchange or, in certain circumstances,
an asset transfer or issuance or reclassification of equity securities) between
a Maryland corporation and any person who beneficially owns 10% or more of the
voting power of the outstanding voting stock of the corporation or an affiliate
or associate of the corporation who, at any time within the two-year period
immediately prior to the date in question, was the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the then-outstanding voting
stock of the corporation (an "Interested Stockholder") or an affiliate thereof,
are prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, in addition to any
other required vote, any such business combination must be recommended by the
board of directors of such corporation and approved by the affirmative vote of
at least (i) 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation, voting together as a single voting
group, and (ii) two-thirds of the votes entitled to be cast by holders of voting
stock of the corporation (other than voting stock held by the Interested
Stockholder who will, or whose affiliate will, be a party to the business
combination or by an affiliate or associate of the Interested Stockholder)
voting together as a single voting group. The extraordinary voting provisions do
not apply if, among other things, the corporation's stockholders receive a price
for their shares determined in accordance with the MGCL and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of the MGCL do not apply, however,
to business combinations that are approved or exempted by the board of directors
of the corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The Articles of Incorporation contain a provision
exempting from these provisions of the MGCL any business combination involving
the Leenhoutses (or their affiliates) or any other person acting in concert or
as a group with any of the foregoing persons.
CONTROL SHARE ACQUISITIONS. The MGCL provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by the affirmative vote of two- thirds of
the votes entitled to be cast on the matter other than "interested shares"
(shares of stock in respect of which any of the following persons is entitled to
exercise or direct the exercise of the voting power of shares of stock of the
corporation in the election of directors: an "acquiring person," an officer of
the corporation or an employee of the corporation who is also a director).
"Control shares" are shares of stock which, if aggregated with all other such
shares of stock owned by the acquiring person, or in respect of which such
person is entitled to exercise or direct the exercise of voting power of shares
of stock of the corporation in electing directors within one of the following
ranges of voting power: (i) one-tenth or more but less than one-third, (ii)
one-third or more but less than a majority, or (iii) a majority or more of all
voting power. Control shares do not include shares the acquiring person is
entitled to vote as a result of having previously obtained stockholder approval.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the Articles of
Incorporation or bylaws of the corporation. A person who has made or proposes to
make a control share acquisition, under certain conditions (including an
undertaking to pay expenses), may compel the board of directors to call a
special meeting of stockholders to be held within 50 days of demand to consider
the voting rights of the control shares upon delivery of an acquiring person
statement containing certain information required by the MGCL, including a
representation that the acquiring person has the financial capacity to make the
proposed control share acquisition, and a written undertaking to pay the
corporation's expenses of the special meeting (other than the expenses of those
opposing approval of the voting rights). If no request for a meeting is made,
the corporation may itself present the question at any stockholders meeting. If
voting rights are not approved at the meeting or if the acquiring person does
not deliver an acquiring person statement as required by the MGCL, then, subject
to certain conditions and limitations, the corporation may redeem any or all of
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the control shares (except those for which voting rights have previously been
approved) for fair value, determined without regard to the absence of voting
rights for control shares, as of the date of the last control share acquisition
or, if a stockholder meeting is held, as of the date of the meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders'
meeting before the control share acquisition and the acquiring person becomes
entitled to exercise or direct the exercise of a majority or more of all voting
power, all other stockholders may exercise rights of objecting stockholders
under Maryland law to receive the fair value of their shares. The fair value of
the shares for such purposes may not be less than the highest price per share
paid by the acquiring person in the control share acquisition. Certain
limitations and restrictions otherwise applicable to the exercise of objecting
stockholders' rights do not apply in the context of a control share acquisition.
The Articles of Incorporation contain a provision exempting from the control
share acquisition statute any and all acquisitions to the extent that such
acquisitions would not violate the Ownership Limit or Existing Owner Limit.
There can be no assurance that such provision will not be amended or eliminated
at any point in the future.
FEDERAL INCOME TAX CONSIDERATIONS
The following description of certain federal income tax considerations
completely replaces the description in the accompanying prospectus, except where
we specifically refer to that prospectus.
The following summary of material federal income tax consequences
regarding our taxation as a REIT and the taxation of the holders of our common
stock is based on current law, is for general information only and is not tax
advice. The information in this section is based on the Internal Revenue Code as
currently in effect, current, temporary and proposed Treasury Regulations
promulgated under the Internal Revenue Code, the legislative history of the
Internal Revenue Code, current administrative interpretations and practices of
the IRS, including its practices and policies as expressed in private letter
rulings which are not binding on the IRS except with respect to the particular
taxpayers who requested and received such rulings, and court decisions, all as
of the date of this prospectus. There is no assurance that future legislation,
Treasury Regulations, administrative interpretations and practices or court
decisions will not adversely affect existing interpretations. Any change could
apply retroactively to transactions preceding the date of the change.
We have not requested, and do not plan to request, any rulings from the
IRS concerning our tax treatment and the statements in this prospectus are not
binding on the IRS or a court. Thus, we can provide no assurance that these
statements will not be challenged by the IRS or sustained by a court if
challenged by the IRS. The tax treatment to holders of our common stock will
vary depending on a holder's particular situation and this discussion does not
purport to deal with all aspects of taxation that may be relevant to a holder of
our common stock in light of his or her personal investments or tax
circumstances, or to stockholders subject to special treatment under the federal
income tax laws except to the extent discussed under the headings "Taxation of
Tax-Exempt Stockholders" and "Taxation of Non-U.S. Stockholders." Stockholders
subject to special treatment include, without limitation, insurance companies,
financial institutions or broker-dealers, tax-exempt organizations, stockholders
holding securities as part of a conversion transaction or hedge or hedging
transaction or as a position in a straddle for tax purposes, foreign
corporations and persons who are not citizens or residents of the United States.
In addition, the summary below does not consider the effect of any
foreign, state, local or other tax laws that may be applicable to holders of our
common stock. If we meet the detailed requirements in the Internal Revenue Code
for qualification as a REIT, which are summarized below, we will be treated as a
REIT for federal income tax purposes. In this case, we generally will not be
subject to federal corporate income taxes on our net income that is currently
distributed to our stockholders. This treatment substantially eliminates the
"double taxation" that generally results from investments in a corporation.
Double taxation refers to the imposition of corporate level tax on income earned
by a corporation and taxation at the stockholder level on funds distributed to a
corporation's stockholders. If we fail to qualify as a REIT in any taxable year,
we would not be allowed a deduction for dividends paid to our stockholders in
computing taxable income and would be subject to federal income tax at regular
corporate rates. Unless entitled to relief under specific statutory provisions,
we would be ineligible to be taxed as a REIT for the four succeeding tax years.
As a result, the funds available for distribution to our stockholders would be
reduced. Each prospective purchaser should consult his or her own tax advisor
regarding the
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specific tax consequences of the purchase, ownership and sale of
common stock, including the federal, state, local, foreign and other tax
consequences of such purchase, ownership and sale and of potential changes in
applicable tax laws.
TAXATION OF HOME PROPERTIES
GENERAL. We elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code, commencing with our taxable year ended December 31, 1994.
We believe we have been organized and have operated in a manner so as to qualify
for taxation as a REIT under the Internal Revenue Code commencing with our
taxable year ended December 31, 1994. We intend to continue to operate in this
manner. However, our qualification and taxation as a REIT depends upon our
ability to meet, through actual annual operating results, asset diversification,
distribution levels and diversity of stock ownership, the various qualification
tests imposed under the Internal Revenue Code. Accordingly, there is no
assurance that we have operated or will continue to operate in a manner so as to
qualify or remain qualified as a REIT. Further, legislative, administrative or
judicial action may change, perhaps retroactively, the anticipated income tax
treatment described in this prospectus. See "Failure to Qualify."
In the opinion of Nixon Peabody LLP, commencing with its taxable year
ended December 31, 1994, Home Properties was organized in conformity with the
requirements for qualification as a REIT, and its method of operation has
enabled it to meet the requirements for qualification and taxation as a REIT
under the Internal Revenue Code and its proposed method of operation will enable
it to continue to so qualify. This opinion is based on certain assumptions and
is conditioned upon certain representations made by us as to certain factual
matters relating to our organization, manner of operation, income and assets.
Nixon Peabody LLP is not aware of any facts or circumstances that are
inconsistent with these assumptions and representations. Our qualification and
taxation as a REIT will depend upon satisfaction of the requirements necessary
to be classified as a REIT, discussed below, on a continuing basis. Nixon
Peabody LLP will not review compliance with these tests on a continuing basis.
Therefore, no assurance can be given that we will satisfy such tests on a
continuing basis.
The sections of the Internal Revenue Code that relate to the
qualification and operation as a REIT are highly technical and complex. The
following sets forth the material aspects of the sections of the Internal
Revenue Code that govern the federal income tax treatment of a REIT and its
stockholders. This summary is qualified in its entirety by the applicable
Internal Revenue Code provisions, relevant rules and regulations promulgated
under the Internal Revenue Code, and administrative and judicial interpretations
of the Internal Revenue Code, and these rules and these regulations.
If we qualify for taxation as a REIT, we generally will not be subject
to federal corporate income tax on our net income that is currently distributed
to our stockholders. This treatment substantially eliminates the "double
taxation" 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; provided,
however, that properly designated undistributed capital gains will effectively
avoid taxation at the stockholder level. A REIT's "REIT taxable income" is the
otherwise taxable income of the REIT subject to certain adjustments, including a
deduction for dividends paid.
Second, we may be subject to the "alternative minimum tax" on our items
of tax preference under some circumstances.
Third, if we have (a) net income from the sale or other disposition of
"foreclosure 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 this
income. Foreclosure property is defined generally as Property we acquired
through foreclosure or after a default on a loan secured by the Property or a
lease of the Property.
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Fourth, we will be subject to a 100% tax on any net income from
prohibited transactions. Prohibited transactions generally include sales or
other dispositions of Property held primarily for sale to customers in the
ordinary course of business, other than the sale or disposition of foreclosure
property.
Fifth, if we fail to satisfy the 75% gross income test or the 95% gross
income test but have maintained our qualification as a REIT because we satisfied
other requirements, 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. The gross income tests are discussed below.
Sixth, if we fail to distribute during each calendar year at least the
sum of: 85% of our REIT ordinary income for the year, 95% of our REIT capital
gain net income for the year, and any undistributed taxable income from prior
periods, then we will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
Seventh, if we acquire any asset from a corporation which is or has
been a C corporation in a transaction in which the basis of the acquired asset
in our hands is determined by reference to the basis of such asset in the hands
of the C corporation, and we subsequently recognize gain on the disposition of
such asset during the ten-year period beginning on the date on which we acquired
the asset, then we will be subject to tax at the highest regular corporate tax
rate on this gain to the extent of the "built-in-gain" of the asset. The
built-in- gain of an asset equals the excess of (a) the fair market value of the
asset over (b) our adjusted basis in the asset, determined as of the date we
acquired the asset from the C corporation. A C corporation is generally a
corporation subject to full corporate-level tax. The results described in this
paragraph with respect to the recognition of built-in gain assume that we will
not make an election pursuant to proposed and temporary Treasury Regulations to
have such gain taxed currently upon such an acquisition.
Eighth, we will be subject to a 100% tax on amounts received through
arrangements between us, our tenants and a taxable REIT subsidiary (as defined
below) that are not arm's length.
REQUIREMENTS FOR QUALIFICATION AS A REIT. The Internal Revenue Code defines a
REIT as a corporation, trust or association that:
(1) is managed by one or more trustees or directors;
(2) uses transferable shares or transferable certificates to
evidence beneficial ownership;
(3) would be taxable as a domestic corporation, but for Sections
856 through 860 of the Internal Revenue Code;
(4) is not a financial institution referred to in Section 582(c)
of the Internal Revenue Code or an insurance company to which
subchapter L of the Internal Revenue Code applies;
(5) is beneficially owned by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in
value of its outstanding stock is owned, actually or constructively, by
five or fewer individuals, as defined in the Internal Revenue Code to
include the entities set forth in Section 542(a)(2) of the Internal
Revenue Code; and
(7) meets other tests, described below, regarding the nature of
its income and assets and the amount of its distributions.
The Internal Revenue Code provides that conditions (1) to (4), inclusive, must
be met during the entire taxable year and that condition (5) must be met during
at least 335 days of a taxable year of twelve months, or during a proportionate
part of a taxable year of less than twelve months. Conditions (5) and (6) do not
apply until after the
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first taxable year for which an election made to be taxed as a REIT. For
purposes of condition (6), pension funds and some other tax-exempt entities are
treated as individuals, subject to a "look-through" exception in the case of
pension funds. We have satisfied condition (5) and believe that we have
sufficient diversity of ownership to satisfy condition (6). In addition, our
articles of incorporation provides for restrictions regarding ownership and
transfer of shares. These restrictions are intended to assist us in continuing
to satisfy the share ownership requirements described in (5) and (6) above.
These ownership and transfer restrictions are described in "Restrictions on
Transfer Ownership Limits." Primarily, though not exclusively, as a result of
fluctuations in value among the different classes of our stock, these
restrictions may not ensure that we will, in all cases, be able to satisfy the
share ownership requirements described in conditions (5) and (6) above. If we
fail to satisfy these share ownership requirements, our status as a REIT could
terminate. However, if we comply with the rules contained in applicable Treasury
Regulations that require us to ascertain the actual ownership of our shares and
we do not know, or would not have known through the exercise of reasonable
diligence, that we failed to meet the requirement described in condition (6)
above, we will be treated as having met this requirement. See "Failure to
Qualify."
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. We have and will continue to have a calendar
taxable year.
TAXABLE REIT SUBSIDIARIES. A taxable REIT subsidiary is a corporation other than
a REIT in which we directly or indirectly hold stock and that has made a joint
election with us to be treated as a taxable REIT subsidiary. A taxable REIT
subsidiary also includes any corporation other than a REIT with respect to which
a taxable REIT subsidiary of ours owns securities possessing more than 35% of
the total voting power or value of the outstanding securities of such
corporation. However, a taxable REIT subsidiary does not include certain health
care and lodging facilities. A taxable REIT subsidiary is subject to regular
federal income tax, and state and local income tax where applicable, as a
regular "C" corporation. In addition, a taxable REIT subsidiary of ours may be
limited in its ability to deduct interest paid to us, or we may be subject to a
100% excise tax on payments between us and our taxable REIT subsidiaries to the
extent such payments exceed amounts that would be paid to unrelated parties in
an arms-length transaction. We jointly made our election with the following
entities for such entities to be treated as taxable REIT subsidiaries of ours
effective January 1, 2001: Home Properties Resident Services, Inc. and Home
Properties Management, Inc.
QUALIFIED REIT SUBSIDIARIES. If a REIT owns a corporate subsidiary that is a
"qualified REIT subsidiary," the separate existence of that subsidiary will be
disregarded for federal income tax purposes. Generally, a qualified REIT
subsidiary is a corporation, other than a taxable REIT subsidiary, all of the
capital stock of which is owned by the REIT. All assets, liabilities and items
of income, deduction and credit of the qualified REIT subsidiary are treated as
assets, liabilities and items of income, deduction and credit of the REIT
itself. A qualified REIT subsidiary of ours will not be subject to federal
corporate income taxation, although it may be subject to state and local
taxation in some states.
OWNERSHIP OF A PARTNERSHIP INTEREST. 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 the assets of the partnership. Also, a partner in a
partnership will be deemed to be entitled to the income of the partnership
attributable to its proportionate share. The character of the assets and gross
income of the partnership retains the same character in the hands of Home
Properties for purposes of Section 856 of the Internal Revenue Code, including
satisfying the gross income tests and the asset tests. Thus, our proportionate
share of the assets, liabilities and items of income of the Operating
Partnership, including the Operating Partnership's share of these items for any
partnership or limited liability company, are treated as our assets, liabilities
and items of income for purposes of applying the requirements described in this
prospectus.
We have included a summary of the rules governing the federal income
taxation of partnerships and their partners below in "Tax Aspects of the
Operating Partnership." We have direct control of the Operating Partnership and
will continue to operate it consistent with the requirements for our
qualification as a REIT.
INCOME TESTS. We must satisfy two gross income requirements annually to maintain
our qualification as a REIT. First, each taxable year we must derive at least
75% of our gross income from investments relating to real property
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or mortgages on real property, including "rents from real property" and, in
specific circumstances, interest, or from particular types of temporary
investments. Gross income from prohibited transactions is excluded for purposes
of determining if we satisfy this test. Second, each taxable year we must derive
at least 95% of our gross income from the real property investments previously
described, dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing. Gross income from
prohibited transactions is excluded for purposes of determining if we satisfy
this test.
The term "interest" generally does not include any amount received or
accrued, directly or indirectly, if the determination of the amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Rents we receive 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 Internal Revenue Code provides that rents received from a
"related party tenant" will not qualify as "rents from real property" in
satisfying the gross income tests. A related party tenant is generally a tenant
that we, or one or more actual or constructive owners of 10% or more of us,
actually or constructively own in the aggregate 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 personal property will
not qualify as "rents from real property."
Finally, for rents received to qualify as "rents from real property,"
we are allowed only to directly provide services that are both "usually or
customarily rendered" in connection with the rental of real property and not
otherwise considered "rendered to the occupant." Income received from any other
services will be treated as "impermissible tenant service income" unless the
services are provided through an independent contractor that bears the expenses
of providing the services and from whom we derive no revenue or through a
taxable REIT subsidiary, subject to specified limitations. The amount of
impermissible tenant service income with respect to a particular service is
deemed to be the greater of the amount actually received by us for that
particular service or 150% of our direct cost of providing the service. If the
impermissible tenant service income exceeds 1% of our total income from a
Property, then all of the income from that Property will fail to qualify as
rents from real property. If the total amount of impermissible tenant service
income from a Property does not exceed 1% of our total income from that
Property, the income will not cause the rent paid by tenants of that Property to
fail to qualify as rents from real property, but the impermissible tenant
service income itself will not qualify as rents from real property.
It is expected that our real estate investments will continue to give
rise to income that will enable it to satisfy all of the income tests described
above. Substantially all of our income will be derived from its interest in the
Operating Partnership, which will, for the most part, qualify as "rents from
real property" for purposes of the 75% and the 95% gross income tests. We
generally do not and do not intend to:
- charge rent for any Property that is based in whole or in part on the
income or profits of any person, except by reason of being based on a
percentage of receipts or sales, as described above;
- rent any Property to a related party tenant (except for leases to a
taxable REIT subsidiary);
- derive rental income attributable to personal property, other than
personal property leased in connection with the lease of real property,
the amount of which is less than 15% of the total rent received under
the lease; or
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- perform services considered to be rendered to the occupant of the
Property, other than through an independent contractor from whom we
derive no revenue or through a taxable REIT subsidiary.
Notwithstanding the foregoing, we may have taken and may continue to take the
actions set forth above to the extent these actions will not, based on the
advice of our tax counsel, jeopardize our status as a REIT.
We may receive certain types of income with respect to the properties
we own that will not qualify for the 75% or 95% gross income test. In addition,
dividends received from stock in any non-controlled subsidiaries or taxable REIT
subsidiaries will not qualify under the 75% gross income test. We believe,
however, that the aggregate amount of such fees and other non-qualifying income
in any taxable year will not cause us to exceed the limits on non-qualifying
income under the 75% and 95% income 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 the year if we
are entitled to relief under specific provisions of the Internal Revenue Code.
Generally, we may avail ourselves of the relief provisions if:
- our failure to meet these tests was due to reasonable cause and not
due to willful neglect;
- we attach a schedule of the sources of our income to our federal
income tax 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 these relief provisions. For example, if we fail to
satisfy the gross income tests because non-qualifying income that we
intentionally incur exceeds the limits on non-qualifying income, the IRS could
conclude that our failure to satisfy the tests was not due to reasonable cause.
If we fail to satisfy the gross income tests and these relief provisions do not
apply, we will not qualify as a REIT. As discussed above in "Taxation of Home
Properties -General," even if these relief provisions apply, and we retain our
status as a REIT, a tax would be imposed with respect to our excess net income.
We may not always be able to maintain compliance with the gross income tests for
REIT qualification despite our periodic monitoring of our income.
PROHIBITED TRANSACTION INCOME. 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, including our share of any such
gain realized by the Operating Partnership, will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. 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 surrounding the particular transaction.
The Operating Partnership intends to hold its properties for investment
with a view to long-term appreciation, to engage in the business of acquiring,
developing, owning, and operating its properties and to make occasional sales of
the properties as are consistent with the Operating Partnership's investment
objectives. However, the IRS may contend that one or more of these sales is
subject to the 100% penalty tax.
ASSET TESTS. At the close of each quarter of our taxable year, we also must
satisfy certain tests relating to the nature and diversification of our assets.
First, at least 75% of the value of our total assets must be
represented by real estate assets, cash, cash items and government securities.
Our real estate assets include, for purposes of this test, our allocable share
of real estate assets held by the partnerships in which we own an interest and
the non-corporate subsidiaries of those partnerships, as well as stock or debt
instruments held for one year or less that are purchased with the proceeds of an
offering of shares or long-term (at least five years) debt.
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Second, not more than 25% of our total assets may be represented by
securities, other than those securities includable in the 75% asset test.
Third, except for investments in REITs, qualified REIT subsidiaries,
taxable REIT subsidiaries, and qualified debt, the value of any one issuer's
securities owned by us may not exceed 5% of the value of our total assets.
Fourth, except for investments in REITs, qualified REIT subsidiaries
and taxable REIT subsidiaries, Home Properties may not own more than 10% of any
one issuer's outstanding voting securities.
Fifth, except for investments in REITs, qualified REIT subsidiaries,
taxable REIT subsidiaries, and qualified debt, we may not own more than 10% of
the total value of the outstanding securities of any one issuer.
Sixth, not more than 20% of the value of our total assets may be
represented by the securities of one or more taxable REIT subsidiaries.
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 fail
to satisfy the asset tests, we can cure this failure by disposing of sufficient
non-qualifying assets within 30 days after the close of that quarter. We have
maintained and will continue to maintain adequate records of the value of our
assets to ensure compliance with the asset tests and to take such other actions
within the 30 days after the close of any quarter as may be required to cure any
noncompliance. If we fail to cure noncompliance with the asset tests within this
time period, we would cease to qualify as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS. To maintain our qualification as a REIT, we
are required to distribute dividends, other than capital gain dividends, to our
stockholders in an amount at least equal to:
- the sum of:
- 90% of our "REIT taxable income," computed without regard to
the dividends paid deduction and our net capital gain, and
- 90% of the after tax net income, if any, from foreclosure
property;
- minus:
- the excess of the sum of particular items of noncash income
over 5% of "REIT taxable income" as described above.
These distributions must be declared and paid in the taxable year to
which they relate, or in the following taxable year if they are declared before
we timely file our tax return for such year and if paid on or before the first
regular dividend payment after such declaration. These distributions are taxable
to holders of our stock, other than tax-exempt entities, as discussed below, in
the year in which paid, subject to an exception for dividends with declaration
and record dates falling the in the last three months of the calendar year, and
paid by the end of the January immediately following such year. This is so even
though these distributions relate to the prior year for purposes of our 90%
distribution requirement. In order to qualify for a dividends paid deduction,
amounts distributed must not be preferential (e.g., every stockholder of the
class of stock to which a distribution is made must be treated the same as every
other stockholder of that class, and no class of stock may be treated otherwise
than in accordance with its dividend rights as a class).
To the extent that we do not distribute all of our net capital gain or
distribute at least 90%, but less than 100%, of our "REIT taxable income," as
adjusted, we will be subject to tax thereon at regular ordinary and capital gain
corporate tax rates. We have made and intend to make timely distributions
sufficient to satisfy the annual
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distribution requirements. We expect that our REIT taxable income will be less
than our cash flow due to the allowance of depreciation and other non-cash
charges in computing REIT taxable income. Accordingly, we anticipate that we
will generally have sufficient cash or liquid assets to enable us to satisfy the
distribution requirements described above. In this regard, the Partnership
Agreement of the Operating Partnership authorizes us, as general partner, to
take such steps as may be necessary to cause the Operating Partnership to
distribute to its partners an amount sufficient to permit us to meet these
distribution requirements. However, from time to time, we may not have
sufficient cash or other liquid assets to meet these distribution requirements
due to timing differences between the actual receipt of income and actual
payment of deductible expenses, and the inclusion of income and deduction of
expenses in arriving at our taxable income. If these timing differences occur,
in order to meet the distribution requirements, we may need to arrange for
short-term, or possibly long-term, borrowings or need to pay dividends in the
form of taxable stock dividends. Under specific circumstances identified in the
Internal Revenue Code, we may be able to rectify a failure to meet the
distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends. However, we will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
Furthermore, if we should fail to distribute during each calendar year,
or in the case of distributions with declaration and record dates falling in the
last three months of the calendar year, by the end of January immediately
following such year, at least the sum of:
- 85% of our REIT ordinary income for such year,
- 95% of our REIT capital gain income for the year, and
- any undistributed taxable income from prior periods,
we would be subject to a 4% excise tax on the excess of the required
distribution over the amounts actually distributed.
Any REIT taxable income and net capital gain on which this excise tax
is imposed for any year is treated as an amount distributed during that year for
purposes of calculating such tax.
Failure to Qualify
If we fail to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, we will be subject to tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. Distributions to stockholders in any year in which we fail to qualify as
a REIT will not be deductible by us and we will not be required to distribute
any amounts to our stockholders. As a result, our failure to qualify as a REIT
would reduce the cash available for distribution by us to our stockholders.
In addition, if we fail to qualify as a REIT, all distributions to
stockholders will be taxable as ordinary income to the extent of our current and
accumulated earnings and profits, and subject to limitations identified in the
Internal Revenue Code, corporate distributees may be eligible for the dividends
received deduction. Unless entitled to relief under specific statutory
provisions, we will also be ineligible to be taxed as a REIT for the four tax
years following the year during which we lost our qualification. It is not
possible to state whether in all circumstances we would be entitled to this
statutory relief.
Taxation of Taxable U.S. Stockholders
As used below, the term "U.S. stockholder" means a holder of shares of
common stock who, for United States federal income tax purposes: is a citizen or
resident of the United States; is a corporation, or other entity created or
organized in or under the laws of the United States or of any state thereof or
in the District of Columbia, is an estate the income of which is subject to
United States federal income taxation regardless of its source; or 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. Notwithstanding the preceding
sentence, to the extent provided in Treasury Regulations, some trusts in
existence on August 20, 1996,
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and treated as United States persons prior to this date that elect to continue
to be treated as United States persons, are also considered U.S. stockholders.
DISTRIBUTIONS GENERALLY. As long as we qualify as a REIT, distributions out of
our current or accumulated earnings and profits, other than capital gain
dividends discussed below, will constitute dividends taxable to our taxable U.S.
stockholders as ordinary income. These distributions will not be eligible for
the dividends-received deduction in the case of U.S. stockholders that are
corporations. To the extent that we make distributions, other than capital gain
dividends discussed below, in excess of our current and accumulated earnings and
profits, these distributions will be treated first as a tax-free return of
capital to each U.S. stockholder. This treatment will reduce the adjusted basis
which each U.S. stockholder has in his or her shares of stock for tax purposes
by the amount of the distribution. This reduction will not, however, reduce a
holder's adjusted basis below zero. Distributions in excess of a U.S.
stockholder's adjusted basis in his or her shares will be taxable as capital
gain, provided that the shares have been held as a capital asset. In addition,
these distributions will be taxable as long-term capital gain if the shares have
been held for more than one year.
Dividends that we declare in October, November, or December of any year
and that are payable to a stockholder of record on a specified date in any of
these months shall be treated as both paid by us and received by the stockholder
on December 31 of that year, provided we actually pay the dividend on or before
January 31 of the following calendar year. Stockholders may not include in their
own income tax returns any of our net operating losses or capital losses.
CAPITAL GAIN DISTRIBUTIONS. Distributions that we properly designate as capital
gain dividends will be taxable to U.S. stockholders as gains, to the extent that
they do not exceed our actual net capital gain for the taxable year, from the
sale or disposition of a capital asset. Capital gain dividends are taxed to U.S.
stockholders as gain from the sale or exchange of a capital asset held for more
than one year. This tax treatment applies regardless of the period the
stockholder has held its shares. If we designate any portion of a dividend as a
capital gain dividend, a U.S. stockholder will receive an Internal Revenue
Service Form 1099-DIV indicating the amount that will be taxable to the
stockholder as capital gain. U.S. stockholders that are corporations may,
however, be required to treat up to 20% of some capital gain dividends as
ordinary income.
PASSIVE ACTIVITY LOSSES AND INVESTMENT INTEREST LIMITATIONS. Distributions we
make and gain arising from the sale or exchange by a U.S. stockholder of our
shares will not be treated as passive activity income. As a result, U.S.
stockholders generally will not be able to apply any "passive losses" against
this income or gain. Distributions we make, to the extent they do not constitute
a return of capital, generally will be treated as investment income for purposes
of computing the investment income limitation. Gain arising from the sale or
other disposition of our shares, however, will not be treated as investment
income under some circumstances.
RETENTION OF NET LONG-TERM CAPITAL GAINS. We may elect to retain, rather than
distribute as a capital gain dividend, our net long-term capital gains. If we
make this election, we would pay tax on our retained net long-term capital
gains. In addition, to the extent we designate, a U.S. stockholder generally
would: include its proportionate share of our undistributed long-term capital
gains in computing its long-term capital gains in its return for its taxable
year in which the last day of our taxable year falls subject to limitations as
to the amount that is includable; be deemed to have paid the capital gains tax
imposed on us on the designated amounts included in the U.S. stockholder's
long-term capital gains; receive a credit or refund for the amount of tax deemed
paid by it; increase the adjusted basis of its common stock by the difference
between the amount of includable gains and the tax deemed to have been paid by
it; and in the case of a U.S. stockholder that is a corporation, appropriately
adjust its earnings and profits for the retained capital gains in accordance
with Treasury Regulations to be prescribed by the IRS.
CLASSIFICATION OF CAPITAL GAIN DIVIDEND. We will classify portions of any
designated capital gain dividend as either:
- a 20% gain distribution, which would be taxable to non-corporate U.S.
stockholders at a maximum rate of 20%; or
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- an "unrecaptured Section 1250 gain" distribution, which would be
taxable to non-corporate U.S. stockholders at a maximum rate of 25%.
We must determine the maximum amounts that it may designate as 20% and 25%
capital gain dividends by performing the computation required by the Internal
Revenue Code as if the REIT were an individual whose ordinary income were
subject to a marginal tax rate of at least 28%.
DISPOSITIONS OF COMMON STOCK
If you are a U.S. stockholder and you sell or dispose of your shares of
common stock, you will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between the amount of cash and the fair market
value of any Property you receive on the sale or other disposition and your
adjusted basis in the shares for tax purposes. This gain or loss will be capital
if you have held the common stock as a capital asset and will be long-term
capital gain or loss if you have held the common stock for more than one year.
The Internal Revenue Service has the authority to prescribe, but had not yet
prescribed, regulations that would apply a capital gain tax rate of 25%, which
is generally higher than the long-term capital gain tax rate for non-corporate
stockholders, to a portion of capital gain realized by a non-corporate
stockholder on the sale of REIT shares that would correspond to the REIT's
"unrecaptured Section 1250 gain." Stockholders are advised to consult with their
own tax advisors with respect to their capital gain tax liability.
In general, if you are a U.S. stockholder and you recognize loss upon
the sale or other disposition of common stock that you have held for six months
or less, after applying holding period rules set forth in the Internal Revenue
Code, the loss you recognize will be treated as a long-term capital loss, to the
extent you received distributions from us which were required to be treated as
long-term capital gains.
BACKUP WITHHOLDING
We report to our U.S. stockholders and the IRS the amount of dividends
paid during each calendar year, and the amount of any tax withheld. Under the
backup withholding rules, a stockholder may be subject to backup withholding
with respect to dividends paid unless the holder is a corporation or comes
within other exempt categories and, when required, demonstrates this fact, or
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding, and otherwise complies with applicable requirements of
the backup withholding rules. A U.S. stockholder that does not provide us with
his correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against the stockholder's income tax liability. In addition, we may be required
to withhold a portion of capital gain distributions to any stockholders who fail
to certify their non-foreign status. See "Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified
REIT do not constitute unrelated business taxable income when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt stockholder,
except tax-exempt stockholders described below, has not held its shares as "debt
financed property" within the meaning of the Internal Revenue Code and the
shares are not otherwise used in a trade or business, dividend income from us
will not be unrelated business taxable income to a tax-exempt stockholder.
Similarly, income from the sale of shares will not constitute unrelated business
taxable income unless a tax-exempt stockholder has held its shares as "debt
financed property" within the meaning of the Internal Revenue Code or has used
the shares in its trade or business.
For tax-exempt stockholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Internal
Revenue Code Section 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively,
income from an investment in our shares will constitute unrelated business
taxable income unless the organization is able to properly deduct amounts set
aside or placed in reserve for certain purposes so as to offset the income
generated by its investment in our
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shares. These prospective investors should consult their own tax advisors
concerning these "set aside" and reserve requirements.
Notwithstanding the above, a portion of dividends paid by a "pension
held REIT" shall be treated as unrelated business taxable income as to any trust
which: is described in Section 401(a) of the Internal Revenue Code; is
tax-exempt under Section 501(a) of the Internal Revenue Code; and holds more
than 10%, by value, of the interests in a REIT. Tax-exempt pension funds that
are described in Section 401(a) of the Internal Revenue Code are referred to
below as "qualified trusts." A REIT is a "pension held REIT" if: it would not
have qualified as a REIT but for the fact that Section 856(h)(3) of the Internal
Revenue Code provides that stock owned by qualified trusts shall be treated, for
purposes of the "not closely held" requirement, as owned by the beneficiaries of
the trust, rather than by the trust itself; and either at least one such
qualified trust holds more than 25%, by value, of the interests in a REIT, or
one or more such qualified trusts, each of which owns more than 10%, by value,
of the interests in a REIT, holds in the aggregate more than 50%, by value, of
the interests in the REIT.
The percentage of any REIT dividend treated as unrelated business
taxable income is equal to the ratio of: the unrelated business taxable income
earned by us, treating us as if we were a qualified trust and therefore subject
to tax on unrelated business taxable income, to our total gross income. A de
minimis exception applies where the percentage is less than 5% for any year. The
provisions requiring qualified trusts to treat a portion of REIT distributions
as unrelated business taxable income will not apply if we are able to satisfy
the "not closely held" requirement without relying upon the "look-through"
exception with respect to qualified trusts. As a result of the limitations on
the transfer and ownership of stock contained in our Articles of Incorporation,
we are not and do not expect to be classified as a "pension held REIT."
TAXATION OF NON-U.S. STOCKHOLDERS
When we use the term "non-U.S. stockholders," we mean holders of shares
of common stock that are nonresident alien individuals, foreign corporations,
foreign partnerships or foreign estates or trusts. The rules governing United
States federal income taxation of the ownership and disposition of stock by
persons that are non-U.S. stockholders are complex. No attempt is made in this
prospectus to provide more than a brief summary of these rules. Accordingly,
this discussion does not address all aspects of United States federal income tax
and does not address state, local or foreign tax consequences that may be
relevant to a non-U.S. stockholder in light of such holder's particular
circumstances. In addition, this discussion is based on current law, which is
subject to change, and assumes that we qualify for taxation as a REIT.
Prospective non- U.S. stockholders should consult with their own tax advisors to
determine the impact of federal, state, local and foreign income tax laws with
regard to an investment in stock, including any reporting requirements.
DISTRIBUTIONS. If we make a distribution that is not attributable to gain from
the sale or exchange of a United States real property interest and is not
designated as a capital gain dividend, then the distribution will be treated as
a dividend of ordinary income to the extent it is made out of current or
accumulated earnings and profits. These distributions ordinarily will be subject
to withholding of United States federal income tax on a gross basis at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
However, if the dividends are treated as effectively connected with the conduct
by the non-U.S. stockholder of a United States trade or business, or if an
income tax treaty applies, as attributable to a United States permanent
establishment of the non-U.S. stockholder, the dividends will be subject to tax
on a net basis at graduated rates, in the same manner as domestic stockholders
are taxed with respect to such dividends and are generally not subject to
withholding. Any such dividends received by a non-U.S. stockholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Under some treaties, lower withholding rates generally applicable to dividends
do not apply to dividends from a REIT. Certification and disclosure requirements
must be satisfied to be exempt from withholding under the effectively connected
income and permanent establishment exemptions discussed above. Home Properties
expects to withhold U.S. income tax at the rate of 30% on any dividend
distributions, not designated as (or deemed to be) capital gain dividends, made
to a non-U.S. stockholder unless:
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- a lower treaty rate applies and the non-U.S. stockholder files an IRS
Form W-8BEN evidencing eligibility for that reduced rate with Home
Properties; or
- the non-U.S. stockholder files an IRS Form W-8ECI with Home
Properties claiming that the distribution is effectively connected
income.
Distributions we make in excess of our current or accumulated earnings
and profits will not be taxable to a non-U.S. stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's stock, but rather
will reduce the adjusted basis of such stock. To the extent that these
distributions exceed the adjusted basis of a non-U.S. stockholder's stock, they
will give rise to gain from the sale or exchange of his stock. The tax treatment
of this gain is described below. Home Properties may be required to withhold at
least 10% of any distribution in excess of its current and accumulated earnings
and profits, even if a lower treaty rate applies or the non-U.S. stockholder is
not liable for tax on the receipt of that distribution. However, a non-U.S.
stockholder may seek a refund of these amounts.
Distributions to a non-U.S. stockholder that we designate at the time
of distribution as capital gains dividends, other than those arising from the
disposition of a United States real property interest, generally will not be
subject to United States federal income taxation, unless: investment in the
stock is effectively connected with the non-U.S. stockholder's United States
trade or business, in which case the non-U.S. stockholder will be subject to the
same treatment as domestic stockholders with respect to such gain, except that a
stockholder that is a foreign corporation may also be subject to the 30% branch
profits tax, as discussed above; or the non-U.S. stockholder is a nonresident
alien individual who is present in the United States for 183 days or more during
the taxable year and 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 gains.
Distributions to a non-U.S. stockholder that are attributable to gain
from our sale or exchange of United States real property interests will cause
the non- U.S. stockholder to be treated as recognizing this gain as if it were
income effectively connected with a United States trade or business. Non-U.S.
stockholders would thus generally be taxed at the same rates applicable to
domestic stockholders, subject to a special alternative minimum tax in the case
of nonresident alien individuals. Also, this gain may be subject to a 30% branch
profits tax in the hands of a non-U.S. stockholder that is a corporation, as
discussed above. We are required to withhold 35% of any such distribution. That
amount is creditable against the non-U.S. stockholder's United States federal
income tax liability. We or any nominee (e.g., a broker holding shares in street
name) may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the disposition
of United States real property interests. A domestic person who holds shares of
common stock on behalf of a non-U.S. stockholder will bear the burden of
withholding, provided that we have properly designated the appropriate portion
of a distribution as a capital gain dividend.
SALE OF STOCK. If you are a non-U.S. stockholder and you recognize gain upon the
sale or exchange of shares of stock, the gain generally will not be subject to
United States taxation unless the stock constitutes a "United States real
property interest" within the meaning of FIRPTA. If we are a "domestically
controlled REIT," then the stock will not constitute a "United States real
property interest." A "domestically-controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock is
held directly or indirectly by non-U.S. stockholders. Because our shares of
stock are publicly traded, there is no assurance that we are or will continue to
be a "domestically-controlled REIT." Notwithstanding the foregoing, if you are a
non-U.S. stockholder and you recognize gain upon the sale or exchange of shares
of stock and the gain is not subject to FIRPTA, the gain will be subject to
United States taxation if: your investment in the stock is effectively connected
with a United States trade or business, or, if an income treaty applies, is
attributable to a United States permanent establishment; or you are a
nonresident alien individual who is present in the United States for 183 days or
more during the taxable year and you have a "tax home" in the United States. In
this case, a nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
If we are not or cease to be a "domestically-controlled REIT" whether
gain arising from the sale or exchange by a non-U.S. stockholder of shares of
stock would be subject to United States taxation under FIRPTA as
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a sale of a "United States real property interest" will depend on whether the
shares are "regularly traded," as defined by applicable Treasury Regulations, on
an established securities market and on the size of the selling non-U.S.
stockholder's interest in our shares. If gain on the sale or exchange of shares
of stock were subject to taxation under FIRPTA, the non-U.S. stockholder would
be subject to regular United States income tax on this gain in the same manner
as a U.S. stockholder and the purchaser of the stock would be required to
withhold and remit to the Internal Revenue Service 10% of the purchase price. In
addition in this case, non- U.S. stockholders would be subject to any applicable
alternative minimum tax, nonresident alien individuals may be subject to a
special alternative minimum tax and foreign corporations may be subject to the
30% branch profits tax.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
GENERAL. Substantially all of our investments will be held indirectly through
the Operating Partnership. In general, partnerships are "pass-through" entities
which are not subject to federal income tax. Rather, partners are allocated
their proportionate shares of the items of income, gain, loss, deduction and
credit of a partnership, and are potentially subject to tax thereon, without
regard to whether the partners receive a distribution from the partnership. We
will include in our income our proportionate share of the foregoing partnership
items for purposes of the various REIT income tests and in the computation of
our REIT taxable income. Moreover, for purposes of the REIT asset tests, we will
include our proportionate share of assets held by the Operating Partnership. See
"Taxation of Home Properties."
ENTITY CLASSIFICATION. Our interests in the Operating Partnership involve
special tax considerations, including the possibility of a challenge by the IRS
of the status of the Operating Partnership as a partnership, as opposed to an
association taxable as a corporation, for federal income tax purposes. If the
Operating Partnership were treated as an association, it would be taxable as a
corporation and therefore be subject to an entity-level tax on its income. In
such a situation, the character of our assets and items of gross income would
change and preclude us from satisfying the asset tests and possibly the income
tests (see "Taxation of Home Properties - Asset Tests" and "-Income Tests").
This, in turn, would prevent us from qualifying as a REIT. See "Taxation of Home
Properties - Failure to Qualify" above for a discussion of the effect of our
failure to meet these tests for a taxable year. In addition, a change in the
Operating Partnership's status for tax purposes might be treated as a taxable
event. If so, we might incur a tax liability without any related cash
distributions.
Treasury Regulations that apply for tax period beginning on or after
January 1, 1997 provide that an "eligible entity" may elect to be taxed as a
partnership for federal income tax purposes. An eligible entity is a domestic
business entity not otherwise classified as a corporation and which has at least
two members. Unless it elects otherwise, an eligible entity in existence prior
to January 1, 1997, will have the same classification for federal income tax
purposes that it claimed under the entity classification Treasury Regulations in
effect prior to this date. In addition, an eligible entity which did not exist,
or did not claim a classification, prior to January 1, 1997, will be classified
as a partnership for federal income tax purposes unless it elects otherwise. The
Operating Partnership intends to claim classification as a partnership under
these regulations.
Even if the Operating Partnership is taxable as a partnership under
these Treasury Regulations, it could be treated as a corporation for federal
income tax purposes under the "publicly traded partnership" rules of Section
7704 of the Internal Revenue Code. A publicly traded partnership is a
partnership whose interests trade on an established securities market or are
readily tradable on a secondary market, or the substantial equivalent thereof.
While units of the Operating Partnership are not and will not be traded on an
established trading market, there is some risk that the IRS might treat the
units held by the limited partners of the Operating Partnership as readily
tradable because, after any applicable holding period, they may be exchanged for
our common stock, which is traded on an established market. A publicly traded
partnership will be treated as a corporation for federal income tax purposes
unless at least 90% of such partnership's gross income for a taxable year
consists of "qualifying income" under the publicly traded partnership provisions
of Section 7704 of the Internal Revenue Code. "Qualifying income" under Section
7704 of the Internal Revenue Code includes interest, dividends, real property
rents, gains from the disposition of real property, and certain income or gains
from the exploitation of natural resources. Therefore, qualifying income under
Section 7704 of the Internal Revenue Code generally includes any income that is
qualifying income for purposes of the 95% gross income test applicable to REITs.
We anticipate that the
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Operating Partnership will satisfy the 90% qualifying income test under Section
7704 of the Internal Revenue Code and, thus, will not be taxed as a corporation.
There is one significant difference, however, regarding rent received
from related party tenants. For a REIT, rent from a tenant does not qualify as
rents from real property if the REIT and/or one or more actual or constructive
owners of 10% or more of the REIT actually or constructively own 10% or more of
the tenant. See "Taxation of Home Properties - Income Tests." Under Section 7704
of the Internal Revenue Code, rent from a tenant is not qualifying income if a
partnership and/or one or more actual or constructive owners of 5% or more of
the partnership actually or constructively own 10% or more of the tenant.
Accordingly, we will need to monitor compliance with both the REIT
rules and the publicly traded partnership rules. The Operating Partnership has
not requested, nor does it intend to request, a ruling from the IRS that it will
be treated as a partnership for federal income tax purposes. In the opinion of
Nixon Peabody LLP, which is based on the provisions of the partnership agreement
of the Operating Partnership and on certain factual assumptions and
representations of Home Properties, the Operating Partnership has since its
formation and will continue to be taxed as a partnership rather than an
association taxable as a corporation. Nixon Peabody LLP's opinion is not binding
on the IRS or the courts.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Under Section 704(c) of the
Internal Revenue Code, income, gain, loss and deduction attributable to
appreciated or depreciated Property that is contributed to a partnership in
exchange for an interest in the partnership, must be allocated in a manner so
that the contributing partner is charged with the "book-tax difference"
associated with the Property at the time of the contribution. The book-tax
difference with respect to Property that is contributed to a partnership is
generally equal to the difference between the fair market value of contributed
Property at the time of contribution and the adjusted tax basis of the Property
at the time of contribution. These allocations are solely for federal income tax
purposes and do not affect the book capital accounts or other economic or legal
arrangements among the partners. The Operating Partnership was formed by way of
contributions of appreciated Property. Moreover, subsequent to the formation of
the Operating Partnership, additional persons have contributed appreciated
Property to the Operating Partnership in exchange for interests in the Operating
Partnership.
The partnership agreement requires that allocations be made in a manner
consistent with Section 704(c) of the Internal Revenue Code. In general, limited
partners of the Operating Partnership who acquired their limited partnership
interests through a contribution of appreciated Property will be allocated
depreciation deductions for tax purposes which are lower than if determined on a
pro rata basis. In addition, in the event of the disposition of any of the
contributed assets which have a book-tax difference all income attributable to
the book-tax difference will generally be allocated to the limited partners who
contributed the Property, and we will generally be allocated only our share of
capital gains attributable to appreciation, if any, occurring after the time of
contribution to the Operating Partnership. This will tend to eliminate the
book-tax difference over the life of the Operating Partnership. However, the
special allocation rules of Section 704(c) do 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 assets
in the hands of the Operating Partnership may cause us to be allocated lower
depreciation and other deductions and an amount of taxable income in excess of
the economic or book income allocated to us as a result of the sale of a
contributed property. This may cause us to recognize taxable income in excess of
cash proceeds, which might adversely affect our ability to comply with the REIT
distribution requirements. In addition, because such allocations may result in
decreased depreciation deductions or increased taxable income allocated to us, a
higher portion of our distributions will be taxable as ordinary income. See
"Taxation of Home Properties - Annual Distribution Requirements."
OTHER TAX CONSEQUENCES
STATE AND LOCAL TAX CONSIDERATIONS. We may be subject to state or local taxation
in various state or local jurisdictions, including those in which we transact
business and our stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which they reside. Our
state and local tax treatment may not conform to the federal income tax
consequences discussed above. In addition, your state and local tax
S-26
treatment may not conform to the federal income tax consequences discussed
above. Consequently, you should consult your own tax advisors regarding the
effect of state and local tax laws on an investment in our shares.
POSSIBLE FEDERAL TAX DEVELOPMENTS. The rules dealing with federal income
taxation are constantly under review by the IRS, the Treasury Department and
Congress. New federal tax legislation or other provisions may be enacted into
law or new interpretations, rulings or Treasury Regulations could be adopted,
all of which could affect the taxation of Home Properties or of its
stockholders. No prediction can be made as to the likelihood of passage of any
new tax legislation or other provisions either directly or indirectly affecting
Home Properties or its stockholders. Consequently, the tax treatment described
herein may be modified prospectively or retroactively by legislative, judicial
or administrative action.
PLAN OF DISTRIBUTION
Subject to the terms and conditions of a purchase agreement, dated
February 25, 2002, the Fund has agreed to purchase, and we have agreed to sell
to the Fund, the number of shares of common stock set forth on the cover of this
prospectus supplement. The purchase agreement provides that the obligations of
the Fund to purchase the common stock included in this offering are subject to
the approval of certain legal matters by counsel and certain other conditions.
Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as our
placement agent, on a best efforts basis, in connection with the sale of our
shares of common stock to the Fund, for which Merrill Lynch will receive a
placement agent fee of $512,499. Merrill Lynch is also acting as an underwriter
in the initial public offering of the common shares of the Fund, for which
services Merrill Lynch will receive customary fees. We have agreed to indemnify
the placement agent against certain liabilities, including certain liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
placement agent may be required to make because of any of those liabilities.
The expenses of the offering, including the placement agent fee, are
estimated at $542,500. We will pay these expenses.
Merrill Lynch has from time to time provided, and in the future may
provide, certain investment banking services to us and our affiliates, for which
they had received, and in the future would receive, customary fees.
LEGAL MATTERS
The legality of the shares of common stock offered hereby and certain
legal matters under "Material Federal Income Tax Considerations" in this
prospectus supplement will be passed upon for us by Nixon Peabody LLP,
Rochester, New York.
S-27
PROSPECTUS
$413,750,000
HOME PROPERTIES OF NEW YORK, INC.
COMMON STOCK
PREFERRED STOCK
COMMON STOCK PURCHASE
RIGHTS OR WARRANTS
DEBT SECURITIES
Home Properties of New York, Inc., a Maryland corporation (the "Company"),
may from time to time offer in one or more series (i) shares of its common
stock, par value $.01 per share (the "Common Stock"); (ii) shares of its
preferred stock, par value $.01 per share (the "Preferred Stock"); (iii)
rights or warrants to purchase shares of its Common Stock (the "Common Stock
Purchase Rights") and (iv) one or more series of debt securities ("Debt
Securities"), which may be either senior debt securities or subordinated debt
securities, with an aggregate public offering price of up to $413,750,000. The
Common Stock, Preferred Stock, Common Stock Purchase Rights or Warrants and
Debt Securities (collectively, the "Offered Securities") may be offered,
separately or together, in separate classes or series, in amounts, at prices
and on terms to be determined at the time of offering and set forth in a
supplement to this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Offered Securities in respect of 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 Common
Stock, any public offering price; (ii) in the case of Preferred Stock, the
specific title and stated value, any distribution, any return of capital,
liquidation, redemption, conversion, voting and other rights, and any initial
public offering price; (iii) in the case of Common Stock Purchase Rights, the
duration, offering price, exercise price and any reallocation of Purchase
Rights not initially subscribed, and (iv) in the case of Debt Securities, the
title, aggregate principal amount, denominations, maturity, rate (which may be
fixed or variable) or method of calculation thereof, time of payment of any
interest, any terms for redemption at the option of the holder or the Company,
any terms for sinking fund payments, rank, any conversion or exchange rights,
any listing on a securities exchange, and the initial public offering price
and any other terms in connection with the offering and sale of any Debt
Securities. In addition, such specific terms may include limitations on direct
or beneficial ownership and restrictions on transfer of the Offered
Securities, in each case as may be appropriate to preserve the status of the
Company as a real estate investment trust (a "REIT") for federal income tax
purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about all material United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered
Securities covered by such Prospectus Supplement. The Common Stock is listed
on the New York Stock Exchange under the symbol "HME." Any Common Stock
offered pursuant to a Prospectus Supplement will be listed on such exchange,
subject to official notice of issuance.
The Offered Securities may be offered 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 Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them will be set forth, or will be
calculable from the information set forth, in the applicable Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be sold
without delivery of the applicable Prospectus Supplement describing the method
and terms of the offering of such class or series of the Offered Securities.
SEE "RISK FACTORS" (BEGINNING ON PAGE 4) FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
The date of this Prospectus is May 26, 1998
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 under the Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder, with respect to the Offered Securities. This
Prospectus, which is part of such Registration Statement, does not contain all
of the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Offered
Securities, reference is hereby made to the Registration Statement and such
exhibits, copies of which may be examined without charge at, or obtained upon
payment of prescribed fees from, the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the locations described above. Copies of such
materials can be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding the Company at http://www.sec.gov.
In addition, the Common Stock is listed on the New York Stock Exchange and
similar information concerning the Company can be inspected at the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company furnishes its stockholders with annual reports containing
audited financial statements with a report thereon by its independent public
accountants.
FORWARD LOOKING STATEMENTS
Certain information contained herein or incorporated by reference may
contain forward-looking statements. Although the Company believes expectations
reflected in such forward-looking statements are based on reasonable
assumptions, it can give no assurance that its expectations will be achieved.
Factors that may cause actual results to differ include the general economic
and local real estate conditions, the weather and other conditions that might
affect operating expenses, the timely completion of repositioning activities,
the actual pace of acquisitions, and the continued access to capital to fund
growth.
2
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, which have been filed by the Company (Commission
File No. 1-13136) under the Exchange Act are incorporated into this Prospectus
by reference: the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, filed on March 24, 1998; the Company's Current
Reports on Form 8-K filed on February 20, 1998, as amended by Form 8-K/A filed
on March 24, 1998, on March 26, 1998 and on April 15, 1998, the Company's
Current Report on Form 8-K/A filed January 12, 1998 amending its Current
Report on Form 8-K filed on October 7, 1997, the Company's registration
statement with respect to its Common Stock on Form 8-A effective July 27, 1994
and two current Reports on Form 8-K filed on May 22, 1998.
Documents incorporated herein by reference are available to any stockholder
of the Company, on written or oral request, without charge, from the Company.
Requests should be directed to David P. Gardner, Chief Financial Officer, Home
Properties of New York, Inc., 850 Clinton Square, Rochester, New York 14604,
telephone (716) 546-4900. Copies of documents so requested will be sent by
first class mail, postage paid.
All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the
filing of a post-effective amendment which indicates that all securities
offered hereby have been sold or which deregisters all securities then
remaining unsold, shall be deemed to be incorporated by reference in, and to
be a part of, this Prospectus from the date of filing of such reports and
documents (provided, however, that the information referred to in Instruction
8 to Item 402(a)(3) of Regulation S-K promulgated by the Securities and
Exchange Commission is not incorporated herein by reference).
Any statement or information contained in a document incorporated or deemed
to be 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, in the Registration Statement containing this Prospectus or
in any subsequently filed documents which also is or is deemed to be
incorporated by reference 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.
THE COMPANY
As used in this section, the terms "Home Properties" and "Company," include
Home Properties of New York, Inc., a Maryland Corporation, Home Properties of
New York, L.P. (the "Operating Partnership"), a New York Limited Partnership,
Home Properties Trust (the "Trust"), a Maryland Real Estate Investment Trust,
and the two management companies (the "Management Companies")-Home Properties
Management, Inc. ("HP Management") and Conifer Realty Corporation ("Conifer
Realty"), both of which are Maryland corporations.
The Company is a self-administered, self-managed and fully integrated real
estate investment trust ("REIT") formed in November, 1993 to continue and
expand the multifamily residential real estate business of Home Leasing
Corporation, which was organized in 1967. The Company is one of the largest
owners and operators of multifamily residential properties in upstate New York
(based on the number of apartment units owned and managed).
The Company, as of May 11, 1998, operates 231 communities (the "Properties")
containing 26,090 apartment units. Of these, 17,103 units in 71 communities
are owned outright by the Company, 6,139 units are managed by the Company as
general partner of a limited partnership, and 2,848 units are managed for
third-party owners. The Properties are located throughout the Northeast, Mid-
Atlantic and Midwest. In addition, the Company manages 1.7 million square feet
of commercial space.
3
The Company conducts substantially all of its business and owns all of its
properties through the Operating Partnership and the Management Companies. To
comply with certain technical requirements of the Internal Revenue Code of
1986, as amended (the "Code"), applicable to REITs, the Operating Partnership
carries out portions of its property management and development activities
through the Management Companies, which are beneficially owned by the
Operating Partnership but controlled by one or more officers of the Company.
The Company owns a 1% general partnership interest in the Operating
Partnership and, through its wholly owned subsidiary the Trust, a 53.9%
limited partnership interest in the Operating Partnership as of March 31,
1998.
The Company's executive offices are located at 850 Clinton Square,
Rochester, New York 14604. Its telephone number is (716) 546-4900.
RISK FACTORS
An investment in the Offered Securities involves various risks. In addition to
general investment risks and those factors set forth elsewhere in this
Prospectus, prospective investors should consider, among other things, the
following factors:
ASSIMILATION OF A SUBSTANTIAL NUMBER OF NEW ACQUISITIONS
The Company has undertaken a strategy of aggressive growth through
acquisitions. From January 1, 1997 through April 30, 1998, the Company has
acquired 44 new communities with 10,551 apartment units, more than doubling
the number of its owned multifamily units. The Company's ability to manage its
growth effectively will require the Company, among other things, to
successfully apply its experience in managing its existing portfolio to an
increased number of properties. In addition, the Company will be required to
successfully manage the integration of a substantial number of new personnel.
There can be no assurances that the Company will be able to integrate and
manage these operations effectively or maintain or improve on their historical
financial performance.
REAL ESTATE FINANCING RISKS
General. The Company is subject to the customary risks associated with debt
financing including the potential inability to refinance existing mortgage
indebtedness upon maturity on favorable terms. If a property is mortgaged to
secure payment of indebtedness and the Company is unable to meet its debt
service obligations, the property could be foreclosed upon. This could
adversely affect the Company's cash flow and, consequently, the amount
available for distributions to stockholders.
No Limitation on Debt. The Board of Directors has adopted a policy of
limiting the Company's indebtedness to approximately 50% of its total market
capitalization (i.e., the market value of issued and outstanding shares of
Common Stock and limited partnership interest in the Operating Partnership
("Units") plus total debt), but the organizational documents of the Company do
not contain any limitation on the amount or percentage of indebtedness, funded
or otherwise, the Company may incur. Accordingly, the Board of Directors could
alter or eliminate its current policy on borrowing. If this policy were
changed, the Company could become more highly leveraged, resulting in an
increase in debt service that could adversely affect the Company's ability to
make expected distributions to its stockholders and an increased risk of
default on the Company's indebtedness.
The Company's debt to total market capitalization ratio fluctuates based on
the timing of acquisitions and financings. At December 31, 1997, the ratio of
the Company's indebtedness to its total capitalization was 33%, based on a
year-end closing price of the Company's Stock of $27.1875, and at March 31,
1998 was 32%, based on the closing price of the Company's Common Stock on that
date of $27.75.
4
Existing Debt Maturities. The Company is subject to the risks normally
associated with debt financing, including the risk that the Company's cash
flow will be insufficient to meet the required payments of principal and
interest. Because much of the financing is not fully self-amortizing, the
Company anticipates that only a portion of the principal of the Company's
indebtedness will be repaid prior to maturity. So, it will be necessary for
the Company to refinance debt. Accordingly, there is a risk that existing
indebtedness will not be able to be refinanced or that the terms of such
refinancing will not be as favorable as the terms of the existing
indebtedness. The Company aims to stagger its debt maturities with the goal of
minimizing the amount of debt which must be refinanced in any year.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Although the Company believes that it was organized and has operated to
qualify as a REIT under the Code, no assurance can be given that the Company
will remain so qualified. Qualification as a REIT involves the application of
highly technical and complex Code provisions and REIT qualification rules,
which include (i) maintaining ownership of specified minimum levels of real
estate related assets; (ii) generating specified minimum levels of real estate
related income; (iii) maintaining diversity of ownership of Common Stock; and
(iv) distributing at least 95% of all real estate investment taxable income on
an annual basis.
If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction in computing its taxable income for
distributions to stockholders and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. As a result, the amount available for distribution to
the Company's stockholders would be reduced for the year or years involved. In
addition, unless entitled to relief under certain statutory provisions, the
Company would also be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification was lost.
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. If the Company's communities do not generate revenues sufficient to meet
operating expenses, including debt service and capital expenditures, the
Company's cash flow and ability to make distributions to its stockholders will
be adversely affected. A multifamily apartment community's revenues and value
may be adversely affected by the general economic climates; the local economic
climate; local real estate considerations (such as over supply of or reduced
demand for apartments); the perception by prospective residents of the safety,
convenience and attractiveness of the communities or neighborhoods in which
they are located and the quality of local schools and other amenities; and
increased operating costs (including real estate taxes and utilities). Certain
significant fixed expenses are generally not reduced when circumstances cause
a reduction in income from the investment.
Operating Risks. The Company is dependent on rental income to pay operating
expenses and to generate cash to enable the Company to make distributions to
its stockholders. If the Company is unable to attract and retain residents or
if its residents are unable, due to an adverse change in the economic
condition of the region or otherwise, to pay their rental obligations, the
Company's ability to make expected distributions will be adversely affected.
Dependence on Primary Markets. The Properties are located in the Northeast,
Midwest and Mid-Atlantic regions of the United States. At April 30, 1998,
6,550 of the Company's owned multifamily units were located in the upstate New
York region and 3,482 units were located in markets surrounding Detroit,
Michigan (representing approximately 38.3% and approximately 20.4% of the
units respectively of the Company's portfolio). Accordingly, the Company's
performance is partially linked to economic conditions and the demand for
apartments in upstate New York and the Detroit, Michigan area. A decline in
the economy in these regions particularly, or in any other areas where the
Company has a concentration of apartment units, may result in a decline in the
demand for apartments which may adversely affect the ability of the Company to
make distributions to stockholders.
5
Illiquidity of Real Estate. Real estate investments are relatively illiquid
and, therefore, the Company has limited ability to vary its portfolio quickly
in response to changes in economic or other conditions. In addition, the
prohibition in the Code on REITs holding property for sale and related
regulations may affect the Company's ability to sell properties without
adversely affecting distributions to stockholders. A significant number of the
Company's properties acquired using Units restrict the Company's ability to
sell such properties in transactions which would create currrent taxable
income to the former owners.
Compliance with Laws and Regulations. Many laws and governmental regulations
are applicable to the Properties and changes in these laws and regulations, or
their interpretation by agencies and the courts, occur frequently. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. These requirements became effective in
1992. Compliance with the ADA requires removal of structural barriers to
handicapped access in certain public areas of the Properties, where such
removal is "readily achievable." The ADA does not, however, consider
residential properties, such as apartment communities, to be public
accommodations or commercial facilities, except to the extent portions of such
facilities, such as a leasing office, are open to the public. A number of
additional federal, state and local laws exist which also may require
modifications to the Properties, or restrict certain further renovations
thereof, with respect to access thereto by disabled persons. For example, the
Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment
communities first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with the ADA or the FHAA could result in the
imposition of fines or an award of damages to private litigants. Although
management believes that the Properties are substantially in compliance with
present requirements, the Company may incur additional costs in complying with
the ADA for both existing properties and properties acquired in the future.
The Company believes that the Properties that are subject to the FHAA are in
compliance with such laws.
Under the federal Fair Housing Act and state fair housing laws,
discrimination on the basis of certain protected classes is prohibited. The
Company has a policy against any kind of discriminatory behavior and trains
its employees to avoid discrimination or the appearance of discrimination.
There is no assurance, however, that an employee will not violate the
Company's policy against discrimination and violate the fair housing laws.
Such a violation could subject the Company to legal action and the possible
awards of damages.
Under various laws, ordinances and regulations relating to the protection of
the environment, a current or previous owner or operator of real estate may be
held liable for the costs of removal or remediation of certain hazardous or
toxic substances located on, under or in the property. These laws often impose
liability without regard to whether the owner or operator was responsible for,
or even knew of, the presence of such substances. The presence of
contamination from hazardous or toxic substances, or the failure to remediate
such contaminated property properly, may adversely affect the owner's ability
to rent or sell the property or use the property as collateral. Independent
environmental consultants conducted "Phase I" environmental audits (which
involve visual inspection but not soil or groundwater analysis) of
substantially all of the Properties owned by the Company prior to their
acquisition by the Company. The Phase I audit reports did not reveal any
significant issues of environmental concern, nor is the Company aware of any
environmental liability that management believes would have a material adverse
effect on the Company. There is no assurance that Phase I reports would reveal
all environmental liabilities or that environmental conditions not known to
the Company may exist now or in the future on existing properties or those
subsequently acquired which would result in liability to the Company for
remediation or fines, either under existing laws and regulations or future
changes to such requirements.
If compliance with the various laws and regulations, now existing or
hereafter adopted, exceeds the Company's budgets for such items, the Company's
ability to make expected distributions could be adversely affected.
Competition. The Company plans to continue to acquire additional multifamily
residential properties in the Northeast, Mid-Atlantic and Midwest regions of
the United States. There are a number of multifamily developers and other real
estate companies that compete with the Company in seeking properties for
acquisition,
6
prospective residents and land for development. Most of the Company's
Properties are in developed areas where there are other properties of the same
type. Competition from other properties may affect the Company's ability to
attract and retain residents, to increase rental rates and to minimize
expenses of operation. Virtually all of the leases for the Properties are
short-term leases (i.e., one year or less).
Uninsured Losses. Certain extraordinary losses may not be covered by the
Company's comprehensive liability, fire, extended and rental loss insurance.
If an uninsured loss occurred, the Company could lose its investment in and
cash flow from the affected Property (but would be required to repay any
indebtedness secured by that Property and related taxes and other charges).
LIMITS ON OWNERSHIP
Ownership Limit. In order for the Company to maintain its qualification as a
REIT, not more than 50% in value of the outstanding stock of the Company may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities) at any time during the last half of its
taxable year. The Company has limited ownership of the issued and outstanding
shares of Common Stock by any single stockholder to 8.0% of the outstanding
shares. Shares of Common Stock held by certain entities, such as qualified
pension plans, are treated as if the beneficial owners of such entities were
the holders of the Common Stock. Norman and Nelson Leenhouts will be permitted
to acquire additional shares, except to the extent that such acquisition
results in 50% or more in value of the outstanding Common Stock of the Company
being owned, directly or indirectly, by five or fewer individuals. These
restrictions can be waived by the Board of Directors if it were satisfied,
based upon the advice of tax counsel or otherwise, that such action would be
in the best interests of the Company. Shares acquired or transferred in breach
of the limitation may be redeemed by the Company for the lesser of the price
paid or the average closing price for the ten trading days immediately
preceding redemption or may be sold at the direction of the Company. A
transfer of Shares to a person who, as a result of the transfer, violates the
ownership limit will be void and the Shares will automatically be converted
into shares of "Excess Stock," which is subject to a number of limitations.
See "Description of Capital Stock -- Restrictions on Transfer" for additional
information regarding the ownership limits.
CHANGE OF CONTROL
The Articles of Amendment and Restatement of the Articles of Incorporation,
as amended (the "Articles of Incorporation"), authorize the Board of Directors
to issue up to a total of fifty million shares of Common Stock and ten million
shares of preferred stock and to establish the rights and preferences of any
shares issued. No shares of preferred stock are currently issued or
outstanding. Further, under the Articles of Incorporation, the stockholders do
not have cumulative voting rights.
The percentage ownership limit, the issuance of preferred stock in the
future and the absence of cumulative voting rights could have the effect of
(i) delaying or preventing a change of control of the Company even if a change
in control were in the stockholders' interest; (ii) deterring tender offers
for the Common Stock that may be beneficial to the stockholders; or (iii)
limiting the opportunity for stockholders to receive a premium for their
Common Stock that might otherwise exist if an investor attempted to assemble a
block of Shares in excess of the percentage ownership limit or otherwise to
effect a change of control of the Company.
POTENTIAL CONFLICTS OF INTEREST
Unlike persons acquiring Common Stock, the Company's executive officers own
most of their interest in the Company through Units. As a result of their
status as holders of Units, the executive officers and other limited partners
may have interests that conflict with stockholders with respect to business
decisions affecting the Company and the Operating Partnership. In particular,
certain executive officers may suffer different or more adverse tax
consequences than the Company upon the sale or refinancing of some of the
Properties as a result of unrealized gain attributable to certain Properties.
Thus, executive officers and the stockholders may have different objectives
regarding the appropriate pricing and timing of any sale or refinancing of
Properties. In addition, executive officers of the Company, as limited
partners of the Operating Partnership, have the right to approve certain
fundamental transactions such as the sale of all or substantially all of the
assets of the Operating Partnership, merger or consolidation or dissolution of
the Operating Partnership and certain amendments to the Operating Partnership
Agreement.
7
The Company manages multifamily residential properties through the Operating
Partnership and commercial and development properties and certain multifamily
residential properties not owned by the Company through the Management
Companies. As a result, officers of the Company will devote a significant
portion of their business time and efforts to the management of properties not
owned by the Company.
Some officers of the Company have a significant interest in certain of the
managed properties as the only stockholders of the general partners of the
partnerships that own such managed properties and as holders of other
ownership interests. Accordingly, such officers will have conflicts of
interest between their fiduciary obligations to the partnerships that own such
managed properties and their fiduciary obligations as officers and directors
of the Company, particularly with respect to the enforcement of the management
contracts and timing of the sale of the managed properties.
In order to comply with technical requirements of the Code pertaining to the
qualification of REITs, the Operating Partnership owns all of the outstanding
non-voting common stock (990 shares) of one of the Management Companies, Home
Properties Management, Inc., and Norman and Nelson Leenhouts own all of the
outstanding voting common stock (10 shares). The Operating Partnership also
owns all of the outstanding non-voting common stock (891 shares) of the other
Management Company, Conifer Realty Corporation, and Norman and Nelson
Leenhouts and Richard Crossed own all of the outstanding voting common stock
(9 shares). As a result, although the Company will receive substantially all
of the economic benefits of the business carried on by the Management
Companies through the Company's right to receive dividends, the Company will
not be able to elect directors and officers of the Management Companies and,
therefore, the Company's ability to cause dividends to be declared or paid or
influence the day-to-day operations of the Management Companies will be
limited. Furthermore, although the Company will receive a management fee for
managing the managed properties, this fee has not been negotiated at arm's
length and may not represent a fair price for the services rendered.
SHARES AVAILABLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
or the perception that such sales might occur could adversely affect the
market price of the Common Stock. The Operating Partnership has issued an
aggregate of 8,989,512 Units through April 30, 1998 to persons other than the
Company which may be exchanged on a one-for-one basis for shares of Common
Stock under certain circumstances. The Operating Partnership has also issued a
Class A Interest which is presently convertible into 1,666,667 shares of
Common Stock (which number will be adjusted under certain circumstances to
prevent such interest from being diluted). In addition, as of April 30, 1998,
the Company has granted options to purchase an aggregate of 836,102 shares of
Common Stock to certain directors, officers and employees of the Company.
All of the shares of Common Stock issuable upon the exchange of Units or the
exercise of options will be "restricted securities" within the meaning of Rule
144 under the Securities Act and may not be transferred unless they are
registered under the Securities Act or are otherwise transferrable under Rule
144. The Company has filed or expects to file registration statements with
respect to such shares of Common Stock, thereby allowing shares issuable under
the Company's stock benefit plans and in exchange for Units to be transferred
or resold without restriction under the Securities Act, unless held by
directors, executive officers or other affiliates of the Company.
RATIO OF EARNINGS TO FIXED CHARGES
ORIGINAL PROPERTIES*
-----------------------
YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 4- JANUARY 1- YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, AUGUST 3 DECEMBER 31,
1997 1996 1995 1994 1994 1993
- ------------ ------------ ------------ ------------ ---------- ------------
2.06 1.52 1.68 2.77 1.23 1.33
* Original Properties is not a legal entity but rather a combination of twelve
entities which were owned by the predecessor corporation and its affiliates
prior to the Company's initial public offering.
8
For purposes of computing the ratio of earnings to combined fixed charges,
"earnings" consists of income from operations before Federal income taxes and
fixed charges. "Fixed charges" consists of interest expense, capitalized
interest, amortization of debt expense, such portion of rental expense as can
be demonstrated to be representative of the interest factor in the particular
case and preferred stock dividend requirements.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Offered
Securities for the acquisition of multifamily residential properties as
suitable opportunities arise, the expansion and improvement of certain
properties in the Company's portfolio, the payment of development costs for
new multifamily residential properties, the repayment of certain indebtedness
outstanding at such time and for general corporate purposes.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50 million shares of
Common Stock, par value $.01 per share ("Common Stock"), 10 million shares of
excess stock ("Excess Stock"), par value $.01 per share, and 10 million shares
of preferred stock ("Preferred Stock"), par value $.01 per share. The
following summary description of the Common Stock, the Preferred Stock and the
Common Stock Purchase Rights or Warrants and Debt Securities sets forth
certain general terms and conditions of the capital stock of the Company to
which any Prospectus Supplement may relate. The descriptions below do not
purport to be complete and are qualified entirely by reference to the
Company's Articles of Incorporation, as amended, any certificate of
designations with respect to Preferred Stock and any applicable Prospectus
Supplement.
COMMON STOCK
All shares of Common Stock offered will be duly authorized, fully paid, and
nonassessable. Holders of the Common Stock will have no conversion,
redemption, sinking fund or preemptive rights; however, shares of Common Stock
will automatically convert into shares of Excess Stock as described below.
Under the Maryland General Corporation Law ("MGCL"), stockholders are
generally not liable for the Company's debts or obligations, and the holders
of shares will not be liable for further calls or assessments by the Company.
Subject to the provisions of the Company's Articles of Incorporation regarding
Excess Stock described below, all shares of Common Stock have equal dividend,
distribution, liquidation and other rights and will have no preference or
exchange rights.
Subject to the right of any holders of Preferred Stock to receive
preferential distributions, the holders of the shares of Common Stock will be
entitled to receive distributions in the form of dividends if and when
declared by the Board of Directors of the Company out of funds legally
available therefor, and, upon liquidation of the Company, each outstanding
share of Common Stock will be entitled to participate pro rata in the assets
remaining after payment of, or adequate provision for, all known debts and
liabilities of the Company, including debts and liabilities arising out of its
status as general partner of the Operating Partnership, and any liquidation
preference of issued and outstanding Preferred Stock. The Company intends to
continue paying quarterly distributions.
The holder of each outstanding share of Common Stock will be entitled to one
vote on all matters presented to stockholders for a vote, subject to the
provisions of the Company's Articles of Incorporation regarding Excess Stock
described below. As described below, the Board of Directors of the Company
may, in the future, grant holders of one or more series of Preferred Stock the
right to vote with respect to certain matters when it fixes the attributes of
such series of Preferred Stock. Pursuant to the MGCL, the Company cannot
dissolve, amend its charter, merge with another entity, sell all or
substantially all its assets, engage in a share exchange or engage in similar
transactions unless such action is approved by stockholders holding a majority
of the outstanding shares
9
entitled to vote on such matter. In addition, the Second Amended and Restated
Partnership Agreement of the Operating Partnership, as amended (the
"Partnership Agreement") requires that any merger or sale of all or
substantially all of the assets of the Operating Partnership be approved by
partners holding a majority of the outstanding Units, excluding Operating
Partnership Units held by the Company. The Company's Articles of Incorporation
provide that its Bylaws may be amended by its Board of Directors.
The holder of each outstanding share of Common Stock will be entitled to one
vote in the election of directors who serve for terms of one year. Holders of
the shares of Common Stock will have no right to cumulative voting for the
election of directors. Consequently, at each annual meeting of stockholders,
the holders of a majority of the shares entitled to vote in the election of
directors will be able to elect all of the directors. Directors may be removed
only for cause and only with the affirmative vote of the holders of a majority
of the shares entitled to vote in the election of directors. The State
Treasurer of the State of Michigan, as custodian of various public employee
retirement systems (the "Michigan Retirement System"), owns the Class A
interest in the Operating Partnership which is, under certain circumstances,
convertible into 1,666,667 shares of Common Stock (subject to adjustment).
Under the purchase agreement with respect to that Class A interest, the
Michigan Retirement System has the right to nominate one person to stand for
election to the Company's Board of Directors. If the preferred return on the
Class A interest is not paid by the Operating Partnership, the Michigan
Retirement System may nominate additional directors.
PREFERRED STOCK
Preferred Stock may be issued from time to time, in one or more series, as
authorized by the Board of Directors of the Company. The Board of Directors
will fix the attributes of any Preferred Stock that it authorizes for
issuance. Because the Board of Directors has the power to establish the
preferences and rights of each series of Preferred Stock, it may afford the
holders of any series of Preferred Stock preferences, powers and rights,
voting or otherwise, senior to the rights of holders of shares of Common
Stock. The issuance of Preferred Stock could have the effect of delaying or
preventing a change in control of the Company.
The applicable Prospectus Supplement will describe specific terms of the
shares of Preferred Stock offered thereby, including, among other things: (i)
the title or designation of the series of Preferred Stock; (ii) the number of
shares of the series of Preferred Stock offered, the liquidation preference
per share and the offering price of the Preferred Stock; (iii) the dividend
rate(s), period(s) and/or payment date(s) or method(s) of calculation thereof
applicable to the Preferred Stock; (iv) the date from which dividends on such
Preferred Stock shall accumulate, if at all; (v) any restrictions on the
issuance of shares of the same series or of any other class or series; (vi)
the provision for a sinking fund, if any, for such Preferred Stock; (vii) the
provision for redemption, if applicable, of such Preferred Stock; (viii) any
listing of such Preferred Stock on any securities exchange; (ix) the terms and
conditions, if applicable, upon which such Preferred Stock will be convertible
into Common Stock of the Company, including the conversion price (or manner of
calculation thereof); (x) any other specific terms, preferences, rights,
limitations or restrictions of such Preferred Stock, including any voting
rights; (xi) a discussion of federal income tax considerations applicable to
such Preferred Stock; (xii) the relative ranking and preferences of such
Preferred Stock as to dividend rights and rights upon liquidation, dissolution
or winding up of the affairs of the Company; (xiii) any limitations on
issuance of any series of Preferred Stock, ranking senior to or on a parity
with such series of Preferred Stock as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company; and
(xiv) 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.
Unless otherwise specified in the Prospectus Supplement, the Preferred Stock
will, with respect to dividend rights and rights upon liquidation, dissolution
or winding up of the Company, rank (i) senior to all classes or series of
Common Stock and to all other equity securities ranking junior to such
Preferred Stock, (ii) on a parity with all equity securities issued by the
Company the terms of which specifically provide that such equity securities
rank on a parity with the Preferred Stock, and (iii) junior to all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank senior to the Preferred Stock. The term "equity
securities" does not include convertible debt securities.
10
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 shares of Common Stock, any Excess Shares or any
other class or series of capital stock of the Company ranking junior to the
Preferred Stock in the distribution of assets upon any liquidation,
dissolution or winding up of the Company, the holders of shares of each series
of Preferred Stock shall be entitled to receive out of assets of the Company
legally available for distribution to stockholders liquidating distributions
in the amount of the liquidation preference per share (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 dividends for prior dividend periods if such shares of
Preferred Stock do not have cumulative dividend). After payment of the full
amount of the liquidating distributions to which they are entitled, the
holders of shares of Preferred Stock will have no right or claim to any of the
remaining assets of the Company. In the event that, upon any such voluntary or
involuntary liquidation, dissolution or winding up, the available assets of
the Company are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of Preferred Stock and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with such shares of Preferred
Stock in the distribution of assets, then the holders of such shares of
Preferred Stock and all other such classes or series of capital stock shall
share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
COMMON STOCK PURCHASE RIGHTS
The applicable Prospectus Supplement will describe the specific terms of any
rights or warrants to purchase Common Stock offered thereby, including, among
other things: the duration, offering price and exercise price of the Common
Stock Purchase Rights and any provisions for the reallocation of Purchase
Rights not initially subscribed. The Prospectus Supplement will describe the
persons to whom the Common Stock Purchase Rights will be issued (the Company's
stockholders, the general public or others) and any conditions to the offer
and sale of the Common Stock Purchase Rights offered thereby.
RESTRICTIONS ON TRANSFER
Ownership Limits. The Company's Articles of Incorporation contain certain
restrictions on the number of shares of capital stock that stockholders may
own. For the Company to qualify as a REIT under the Code, no more than 50% in
value of its outstanding shares of capital stock 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 or during a
proportionate part of a shorter taxable year. The capital stock must also be
beneficially owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year. Because
the Company expects to continue to qualify as a REIT, its Articles of
Incorporation contain restrictions on the ownership and transfer of shares of
its capital stock intended to ensure compliance with these requirements.
Subject to certain exceptions specified in the Articles of Incorporation, no
holder may own, or be deemed to own by virtue of the attribution provisions of
the Code, more than 8.0% (the "Ownership Limit") of the value of the issued
and outstanding shares of capital stock of the Company. Certain entities, such
as qualified pension plans, are treated as if their beneficial owners were the
holders of the Common Stock held by such entities. Stockholders ("Existing
Holders") whose holdings exceeded the Ownership Limit immediately after the
Company's initial public offering of its Common Stock, assuming that all Units
of the Operating Partnership are counted as shares of Common Stock, are
permitted to continue to hold the number of shares they held on such date and
may acquire additional shares of capital stock upon (i) the exchange of Units
for Shares, (ii) the exercise of stock options or receipt of grants of shares
of capital stock pursuant to a stock benefit plan, (iii) the acquisition of
shares of capital stock pursuant to a dividend reinvestment plan, (iv) the
transfer of shares of capital stock from another Existing Holder or the estate
of an Existing Holder by devise, gift or otherwise, or (v) the foreclosure on
a pledge of shares of capital stock; provided, no such acquisition may cause
any Existing Holder to own, directly or by attribution, more than 17.5% (the
"Existing Holder Limit") of the issued and outstanding Shares, subject to
certain additional restrictions. The Board of Directors of the Company may
increase or
11
decrease the Ownership Limit and Existing Holder Limit from time to time, but
may not do so to the extent that after giving effect to such increase or
decrease (i) five beneficial owners of Shares could beneficially own in the
aggregate more than 49.5% of the aggregate value of the outstanding capital
stock of the Company or (ii) any beneficial owner of capital stock would
violate the Ownership Limit or Existing Holder Limit as a result of a
decrease. The Board of Directors may waive the Ownership Limit or the Existing
Holder Limit with respect to a holder if such holder provides evidence
acceptable to the Board of Directors that such holder's ownership will not
jeopardize the Company's status as a REIT.
Any transfer of outstanding capital stock of the Company ("Outstanding
Stock") that would (i) cause any holder, directly or by attribution, to own
capital stock having a value in excess of the Ownership Limit or Existing
Holder Limit, (ii) result in shares of capital stock other than Excess Stock,
if any, to be owned by fewer than 100 persons, (iii) result in the Company
being closely held within the meaning of section 856(h) of the Code, or (iv)
otherwise prevent the Company from satisfying any criteria necessary for it to
qualify as a REIT, is null and void, and the purported transferee acquires no
rights to such Outstanding Stock.
Outstanding Stock owned by or attributable to a stockholder or shares of
Outstanding Stock purportedly transferred to a stockholder which cause such
stockholder or any other stockholder to own shares of capital stock in excess
of the Ownership Limit or Existing Holder Limit will automatically convert
into shares of Excess Stock. Such Excess Stock will be transferred by
operation of law to a separate trust, with the Company acting as trustee, for
the exclusive benefit of the person or persons to whom such Outstanding Stock
may be ultimately transferred without violating the Ownership Limit or
Existing Holder Limit. Excess Stock is not treasury stock, but rather
constitutes a separate class of issued and outstanding stock of the Company.
While the Excess Stock is held in trust, it will not be entitled to vote, will
not be considered for purposes of any stockholder vote or the determination of
a quorum for such vote and will not be entitled to participate in dividends or
other distributions. Any record owner or purported transferee of Outstanding
Stock which has converted into Excess Stock (the "Excess Holder") who receives
a dividend or distribution prior to the discovery by the Company that such
Outstanding Stock has been converted into Excess Stock must repay such
dividend or distribution upon demand. While Excess Stock is held in trust, the
Company will have the right to purchase it from the trust for the lesser of
(i) the price paid for the Outstanding Stock which converted into Excess Stock
by the Excess Holder (or the market value of the Outstanding Stock on the date
of conversion if no consideration was given for the Outstanding Stock) or (ii)
the market price of shares of capital stock equivalent to the Outstanding
Stock which converted into Excess Stock (as determined in the manner set forth
in the Articles of Incorporation) on the date the Company exercises its option
to purchase. The Company must exercise this right within the 90-day period
beginning on the date on which it receives written notice of the transfer or
other event resulting in the conversion of Outstanding Stock into Excess
Stock. Upon the liquidation of the Company, distributions will be made with
respect to such Excess Stock as if it consisted of the Outstanding Stock from
which it was converted.
Any Excess Holder, with respect to each trust created upon the conversion of
Outstanding Stock into Excess Stock, may designate any individual as a
beneficiary of such trust; provided, such person would be permitted to own the
Outstanding Stock which converted into the Excess Stock held by the trust
under the Ownership Limit or Existing Holder Limit and the consideration paid
to such Excess Holder in exchange for designating such person as the
beneficiary is not in excess of the price paid for the Outstanding Stock which
converted into Excess Stock by the Excess Holder (or the market value of the
Outstanding Stock on the date of conversion if no consideration was given for
the Outstanding Stock). The Company's redemption right must have expired or
been waived prior to such designation. Immediately upon the designation of a
permitted beneficiary, the Excess Stock, if any, will automatically convert
into shares of the Outstanding Stock from which it was converted and the
Company as trustee of the trust will transfer such shares, if any, and any
proceeds from redemption or liquidation to the beneficiary.
If the restrictions on ownership and transfer, conversion provisions or
trust arrangements in the Company's Articles of Incorporation are determined
to be void or invalid by virtue of any legal decision, statute, rule or
regulation, then the Excess Holder of any Outstanding Stock that would have
converted into shares of Excess
12
Stock if the conversion provisions of the Articles of Incorporation were
enforceable and valid shall be deemed to have acted as an agent on behalf of
the Company in acquiring such Outstanding Stock and to hold such Outstanding
Stock on behalf of the Company unless the Company waives its right to this
remedy.
The foregoing ownership and transfer limitations may have the effect of
precluding acquisition of control of the Company without the consent of its
Board of Directors. All certificates representing shares of capital stock will
bear a legend referring to the restrictions described above. The foregoing
restrictions on transferability and ownership will not apply if the Board of
Directors determines, and the stockholders concur, that it is no longer in the
best interests of the Company to attempt to qualify, or to continue to
qualify, as a REIT. Approval of the limited partners of the Operating
Partnership to terminate REIT status is also required.
Ownership Reports. Every owner of more than 5% of the issued and outstanding
shares of capital stock of the Company must file a written notice with the
Company containing the information specified in the Articles of Incorporation
no later than January 31 of each year. In addition, each stockholder shall,
upon demand, be required to disclose to the Company in writing such
information as the Company may request in order to determine the effect of
such stockholder's direct, indirect and attributed ownership of shares of
capital stock on the Company's status as a REIT or to comply with any
requirements of any taxing authority or other governmental agency.
CERTAIN OTHER PROVISIONS OF MARYLAND LAW AND CHARTER DOCUMENTS
The following discussion summarizes certain provisions of MGCL and the
Company's Articles of Incorporation and Bylaws. This summary does not purport
to be complete and is subject to and qualified in its entirety by reference to
the Articles of Incorporation and Bylaws, copies of which are filed as
exhibits to the Registration Statement of which this Prospectus constitutes a
part. See "Additional Information."
Limitation of Liability and Indemnification. The Articles of Incorporation
and Bylaws limit the liability of directors and officers to the Company and
its stockholders to the fullest extent permitted from time to time by the MGCL
and require the Company to indemnify its directors, officers and certain other
parties to the fullest extent permitted from time to time by the MGCL.
Business Combinations. Under the MGCL, certain "business combinations"
(including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and any person who beneficially
owns 10% or more of the voting power of the outstanding voting stock of the
corporation or an affiliate or associate of the corporation who, at any time
within the two-year period immediately prior to the date in question, was the
beneficial owner, directly or indirectly, of 10% or more of the voting power
of the then-outstanding voting stock of the corporation (an "Interested
Stockholder") or an affiliate thereof, are prohibited for five years after the
most recent date on which the Interested Stockholder became an Interested
Stockholder. Thereafter, in addition to any other required vote, any such
business combination must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (i) 80% of the
votes entitled to be cast by holders of outstanding shares of voting stock of
the corporation, voting together as a single voting group, and (ii) two-thirds
of the votes entitled to be cast by holders of voting stock of the corporation
(other than voting stock held by the Interested Stockholder who will, or whose
affiliate will, be a party to the business combination or by an affiliate or
associate of the Interested Stockholder) voting together as a single voting
group. The extraordinary voting provisions do not apply if, among other
things, the corporation's stockholders receive a price for their shares
determined in accordance with the MGCL and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The Articles of Incorporation of the Company
13
contain a provision exempting from these provisions of the MGCL any business
combination involving the Leenhoutses (or their affiliates) or any other
person acting in concert or as a group with any of the foregoing persons.
Control Share Acquisitions. The MGCL provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by the affirmative vote of two-thirds of
the votes entitled to be cast on the matter other than "interested shares"
(shares of stock in respect of which any of the following persons is entitled
to exercise or direct the exercise of the voting power of shares of stock of
the corporation in the election of directors: an "acquiring person," an
officer of the corporation or an employee of the corporation who is also a
director). "Control shares" are shares of stock which, if aggregated with all
other such shares of stock owned by the acquiring person, or in respect of
which such person is entitled to exercise or direct the exercise of voting
power of shares of stock of the corporation in electing directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a
majority or more of all voting power. Control shares do not include shares the
acquiring person is entitled to vote as a result of having previously obtained
stockholder approval. The control share acquisition statute does not apply to
shares acquired in a merger, consolidation or share exchange if the
corporation is a party to the transaction, or to acquisitions approved or
exempted by the charter or bylaws of the corporation.
A person who has made or proposes to make a control share acquisition, under
certain conditions (including an undertaking to pay expenses), may compel the
board of directors to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the control shares upon
delivery of an acquiring person statement containing certain information
required by the MGCL, including a representation that the acquiring person has
the financial capacity to make the proposed control share acquisition, and a
written undertaking to pay the corporation's expenses of the special meeting
(other than the expenses of those opposing approval of the voting rights). If
no request for a meeting is made, the corporation may itself present the
question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the MGCL, then,
subject to certain conditions and limitations, the corporation may redeem any
or all of the control shares (except those for which voting rights have
previously been approved) for fair value, determined without regard to the
absence of voting rights for control shares, as of the date of the last
control share acquisition or, if a stockholder meeting is held, as of the date
of the meeting of stockholders at which the voting rights of such shares are
considered and not approved. If voting rights for control shares are approved
at a stockholders' meeting before the control share acquisition and the
acquiring person becomes entitled to exercise or direct the exercise of a
majority or more of all voting power, all other stockholders may exercise
rights of objecting stockholders under Maryland law to receive the fair value
of their Shares. The fair value of the Shares for such purposes may not be
less than the highest price per share paid by the acquiring person in the
control share acquisition. Certain limitations and restrictions otherwise
applicable to the exercise of objecting stockholders' rights do not apply in
the context of a control share acquisition.
The Articles of Incorporation contain a provision exempting from the control
share acquisition statute any and all acquisitions to the extent that such
acquisitions would not violate the Ownership Limit or Existing Owner Limit.
There can be no assurance that such provision will not be amended or
eliminated at any point in the future.
14
DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the Debt Securities sets forth
certain general terms and provisions of the Debt Securities to which any
Prospectus Supplement may relate. The particular terms of the Debt Securities
offered by any Prospectus Supplement and the extent, if any, to which such
general provisions may apply to the Debt Securities so offered will be
described in the Prospectus Supplement relating to such Debt Securities.
The Debt Securities are to be issued in one or more series under an
Indenture, a copy of which is incorporated as an Exhibit to the Registration
Statement of which this Prospectus forms a part, as amended or supplemented by
one or more supplemental indentures (the "Indenture"), to be entered into
between the Company and a financial institution as Trustee (the "Trustee").
The statements herein relating to the Debt Securities and the Indenture are
summaries and are subject to the detailed provisions of the applicable
Indenture. The following summaries of certain provisions of the Indenture do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Indenture, including
the definitions therein of certain terms capitalized in this Prospectus.
GENERAL
The Indenture does not limit the aggregate amount of Debt Securities which
may be issued thereunder, nor does it limit the incurrence or issuance of
other secured or unsecured debt of the Company.
The Debt Securities will be unsecured general obligations of the Company and
will rank with all other unsecured and unsubordinated obligations of the
Company as described in the applicable Prospectus Supplement. The Indenture
provides that the Debt Securities may be issued from time to time in one or
more series. The Company may authorize the issuance and provide for the terms
of a series of Debt Securities pursuant to a supplemental indenture.
Reference is made to the Prospectus Supplement relating to the particular
series of Debt Securities being offered thereby for the terms of such Debt
Securities, including, where applicable: (1) the specific designation of such
Debt Securities; (2) any limit upon the aggregate principal amount of such
Debt Securities; (3) the date or dates on which the principal of and premium,
if any, on such Debt Securities will mature or the method of determining such
date or dates; (4) the rate or rates (which may be fixed, variable or zero) at
which such Debt Securities will bear interest, if any, or the method of
calculating such rate or rates; (5) the date or dates from which interest, if
any, will accrue or the method by which such date or dates will be determined;
(6) the date or dates on which interest, if any, will be payable and the
record date or dates therefor; (7) the place or places where principal of,
premium, if any, and interest, if any, on such Debt Securities may be
redeemed, in whole or in part, at the option of the Company; (8) the
obligation, if any, of the Company to redeem or purchase such Debt Securities
pursuant to any sinking fund or analogous provisions or upon the happening of
a specified event and the period or periods within which, the price or prices
at which and the other terms and conditions upon which, such Debt Securities
shall be redeemed or purchased, in whole or in part, pursuant to such
obligations; (9) the denominations in which such Debt Securities are
authorized to be issued; (10) the currency or currency unit for which Debt
Securities may be purchased or in which Debt Securities may be denominated
and/or the currency or currencies (including currency unit or units) in which
principal of, premium, if any, and interest, if any, on such Debt Securities
will be payable and whether the Company or the holders of any such Debt
Securities may elect to receive payments in respect of such Debt Securities in
a currency or currency unit other than that in which such Debt Securities are
stated to be payable; (11) if the amount of payments of principal of and
premium, if any, or any interest, if any, on such Debt Securities may be
determined with reference to an index based on a currency or currencies other
than that in which such Debt Securities are stated to be payable, the manner
in which such amount shall be determined; (12) if 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 changes in the prices of particular
securities or commodities or otherwise by application of a formula, the manner
in which such amount shall be determined; (13) if other than the entire
principal amount thereof, the portion of the principal amount of such Debt
Securities
15
which will be payable upon declaration of the acceleration of the maturity
thereof or the method by which such portion shall be determined; (14) the
person to whom any interest on any such Debt Security shall be payable if
other than the person in whose name such Debt Security is registered on the
applicable record date; (15) any addition to, or modification or deletion of,
any Event of Default or any covenant of the Company specified in the Indenture
with respect to such Debt Securities; (16) the application, if any, of such
means of defeasance as may be specified for such Debt Securities; and (17) any
other special terms pertaining to such Debt Securities. Unless otherwise
specified in the applicable Prospectus Supplement, the Debt Securities will
not be listed on any securities exchange.
Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities will be issued only in fully registered form without coupons.
Unless the Prospectus Supplement relating thereto specifies otherwise, Debt
Securities will be denominated in U.S. dollars and will be issued only in
denominations of U.S. $1,000 and any integral multiple thereof.
Debt Securities may be sold at a substantial discount below their stated
principal amount and may bear no interest or interest at a rate which at the
time of issuance is below market rates. Certain federal income tax
consequences and special considerations applicable to any such Debt Securities
will be described in the applicable Prospectus Supplement.
If the amount of payments of principal of and premium, if any, or any
interest on Debt Securities of any series is determined with reference to any
type of index or formula or changes in prices of particular securities or
commodities, the federal income tax consequences, specific terms and other
information with respect to such Debt Securities and such index or formula and
securities or commodities will be described in the applicable Prospectus
Supplement.
If the principal of and premium, if any, or any interest on Debt Securities
of any series are payable in a foreign or composite currency, the
restrictions, elections, federal income tax consequences, specific terms and
other information with respect to such Debt Securities and such currency will
be described in the applicable Prospectus Supplement.
The Prospectus Supplement, with respect to any particular series of Debt
Securities being offered thereby which provide for optional redemption,
prepayment or conversion of such Debt Securities on the occurrence of certain
event, such as a change of control of the Company, will provide: (1) a
discussion of the effects that such provisions may have in deterring certain
mergers, tender offers or other takeover attempts, as well as any possible
adverse effect on the market price of the Company's securities or the ability
to obtain additional financing in the future; (2) a statement the Company will
comply with any applicable provisions of the requirements of Rule 14e-1 under
the Securities Exchange Act of 1934 and any other applicable securities laws
in connection with any optional redemption, prepayment or conversion
provisions and any related offers by the Company (including, if such Debt
Securities are convertible, Rule 13e-4); (3) a disclosure of any cross-
defaults in other indebtedness which may result as a consequence of the
occurrence of certain events so that the payments on such Debt Securities
would be effectively subordinated; (4) a disclosure of effect of any failure
to repurchase under the applicable Indenture, including in the event of a
change of control of the Company; (5) a disclosure of any risk that sufficient
funds may not be available at the time of any event resulting in a repurchase
obligation; and (6) a discussion of any definition of "change of control"
contained in the applicable Indenture.
PAYMENT, REGISTRATION, TRANSFER AND EXCHANGE
Unless otherwise provided in the applicable Prospectus Supplement, payments
in respect of the Debt Securities will be made in the designated currency at
the office or agency of the Company maintained for that purpose as the Company
may designate from time to time, except that, at the option of the Company,
interest payments, if any, on Debt Securities in registered form may be made
by checks mailed to the holders of Debt Securities entitled thereto at their
registered addresses. Unless otherwise indicated in an applicable Prospectus
16
Supplement, payment of any installment of interest on Debt Securities in
registered form will be made to the person in whose name such Debt Security is
registered at the close of business on the regular record date for such
interest.
Unless otherwise provided in the applicable Prospectus Supplement, Debt
Securities in registered form will be transferable or exchangeable at the
agency of the Company maintained for such purpose as designated by the Company
from time to time. Debt Securities may be transferred or exchanged without
service charge, other than any tax or other governmental charge imposed in
connection therewith.
CONSOLIDATION, MERGER OR SALE BY THE COMPANY
Under the terms of the Indenture, the Company shall not consolidate with or
merge into any other corporation or transfer or lease its assets substantially
as an entirety, unless (i) the corporation formed by such consolidation or
into which the Company is merged or the corporation which acquires its assets
is organized in the United States and expressly assumes all of the obligations
of the Company under the Debt Securities and all Indentures and (ii)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing. Upon any such consolidation,
merger or transfer, the successor corporation formed by such consolidation, or
into which the Company is merged or to which such sale is made shall succeed
to, and be substituted for the Company under the Indenture.
The Indenture contains no covenants or other specific provisions to afford
protection to holders of the Debt Securities in the event of a highly
leveraged transaction or a change in control of the Company, except to the
limited extent described above. Such covenants or provisions are not subject
to waiver by the Company's Board of Directors without the consent of the
holders of not less than a majority in principal amount of the outstanding
Debt Securities of each series affected by the waiver as described under
"Modification of the Indenture" below.
EVENTS OF DEFAULT, NOTICE AND CERTAIN RIGHTS ON DEFAULT
The Indenture provides that, if an Event of Default specified therein occurs
with respect to the Debt Securities of any series and is continuing, the
Trustee for such series or the holders of 25% in aggregate principal amount of
all of the outstanding Debt Securities of that series, by written notice to
the Company (and to the Trustee for such series, if notice is given by such
holders of Debt Securities), may declare the principal of (or, if the Debt
Securities of that series are Original Issue Discount Securities, such portion
of the principal amount specified in the Prospectus Supplement) and accrued
interest on all the Debt Securities of that series to be immediately due and
payable.
The Indenture provides that the Trustee will, subject to certain exceptions,
within a specified number of days after the occurrence of a Default with
respect to the Debt Securities of any series, give to the holders of the Debt
Securities of that series notice of all Defaults known to it unless such
Default shall have been cured or waived. "Default" means any event which is or
after notice or passage of time or both, would be an Event of Default.
The Indenture provides that the holders of a majority in aggregate principal
amount of the Debt Securities of each series affected (with each such series
voting as a class) may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee for such series, or
exercising any trust or power conferred on such Trustee.
The Indenture includes a covenant that the Company will file annually with
the Trustee a certificate as to the Company's compliance with all conditions
and covenants of the Indenture.
The holders of a majority in aggregate principal amount of any series of
Debt Securities by notice to the Trustee may waive on behalf of the holders of
all Debt Securities of such series, any past Default or Event of Default with
respect to that series and its consequences, except a Default or Event of
Default in the payment of
17
the principal of, premium, if any, or interest, if any, on any Debt Security
or a provision of the Indenture which cannot be amended without the consent of
the holder of each Outstanding Security of such series adversely affected.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Trustee to
enter into one or more supplemental indentures without the consent of the
holders of any of the Debt Securities in order (i) to evidence the succession
of another corporation to the Company and the assumption of the covenants of
the Company by a successor to the Company; (ii) to add to the covenants of the
Company or surrender any right or power of the Company; (iii) to add
additional Events of Default with respect to any series of Debt Securities;
(iv) to add or change any provisions to such extent as necessary to permit or
facilitate the issuance of Debt Securities in book entry form or, if allowed
without penalty under applicable laws and regulations, to permit payment in
respect of Debt Securities in bearer form in the United States; (v) to change
or eliminate any provision affecting Debt Securities not yet issued; (vi) to
secure the Debt Securities; (vii) to establish the form or terms of Debt
Securities; (viii) to cure any ambiguity, to correct or supplement any
provision of the Indenture which may be inconsistent with any other provision
thereof, provided that such action does not adversely affect the interests of
any holder of Debt Securities of any series; (ix) to make provision with
respect to the conversion rights of holders of Debt Securities; or (x) to
conform to any mandatory provisions of law.
The Indenture also contains provisions permitting the Company and the
Trustee, with the consent of the holders of a majority in aggregate principal
amount of the outstanding Debt Securities affected by such supplemental
indenture (with the Debt Securities of each series voting as a class), to
execute supplemental indentures adding any provisions to or changing or
eliminating any of the provisions of the Indenture or any supplemental
indenture or modifying the rights of the holders of Debt Securities of such
series, except that no such supplemental indenture may, without the consent of
the holder of each Debt Security so affected, (i) change the time for payment
of principal or premium, if any, or interest on any Debt Security; (ii) reduce
the principal of, or any installment of principal of, or premium, if any, or
interest on any Debt Security, or change the manner in which the amount of any
of the foregoing is determined; (iii) reduce the amount of premium, if any,
payable upon the redemption of any Debt Security; (iv) reduce the amount of
principal payable upon acceleration of the maturity of any Original Issue
Discount Security; (v) reduce the percentage in principal amount of the
outstanding Debt Securities affected thereby, the consent of whose holders is
required for modification or amendment of the Indenture or for waiver or
compliance with certain provisions of the Indenture or for waiver of certain
defaults; (vi) make any change which adversely affects the right to convert
convertible Debt Securities or decrease the conversion rate or increase the
conversion price; or (vii) modify the provisions relating to waiver of certain
defaults or any of the foregoing provisions.
DEFEASANCE
If so described in the Prospectus Supplement relating to Debt Securities of
a specific series, the Company may discharge its indebtedness and its
obligations or terminate certain of its obligations and covenants under the
Indenture with respect to the Debt Securities of such series by depositing
funds or obligations issued or guaranteed by the United States government with
the Trustee. The Prospectus Supplement will more fully describe the
provisions, if any, relating to such discharge or termination of obligations.
THE TRUSTEE
The Prospectus Supplement will identify the Trustee under the applicable
Indenture. The Company may also maintain banking and other commercial
relationships with any Trustee and its affiliates in the ordinary course of
business.
18
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTORY NOTES
The following is a general summary of certain federal income tax
considerations that may be relevant to a prospective holder of shares of
Common Stock. Any Prospectus Supplement which relates to a series of Preferred
Stock or of Debt Securities will set forth the federal income tax consequences
of that Preferred Stock to a prospective holder. Nixon, Hargrave, Devans &
Doyle LLP has acted as tax counsel to the Company in connection with its
formation and its election to be taxed as a REIT, has reviewed the following
discussion and is of the opinion that it fairly summarizes the federal income
tax considerations that are likely to be material to a holder of Shares. The
following discussion is not exhaustive of all possible tax considerations and
does not give a detailed discussion of any state, local or foreign tax
considerations. This discussion does not address all of the aspects of federal
income taxation that may be relevant to stockholders in light of their
particular circumstances or to certain types of stockholders subject to
special treatment under the federal income tax laws (including insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the
United States).
This discussion contains a general summary of certain Code sections that
govern the federal income tax treatment of a REIT and its stockholders. These
sections of the Code are highly technical and complex. This summary is
qualified in its entirety by the applicable Code provisions, the Treasury
Regulations promulgated thereunder and administrative and judicial
interpretations thereof, all of which are subject to change prospectively or
retroactively. The Company has not sought or obtained any ruling from the
Internal Revenue Service or any opinions of counsel specifically related to
the tax matters described below.
EACH PROSPECTIVE PURCHASER 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 SHARES OF COMMON STOCK AND THE ELECTION BY THE COMPANY
TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE,
LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE,
AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY AS A REIT
The Company has elected to be taxed as a REIT under Sections 856 through 860
of the Code commencing with its taxable year ending December 31, 1994. The
Company believes that it was organized and has operated in such a manner as to
qualify for taxation as a REIT under the Code, and the Company intends to
continue to operate in such a manner. No assurance, however, can be given that
the Company has operated or will operate in a manner so as to qualify or
remain qualified as a REIT.
In the opinion of Nixon, Hargrave, Devans & Doyle LLP, commencing with the
Company's taxable year ending December 31, 1994, the Company was organized in
conformity with the requirements for qualification as a REIT, and its method
of operation has enabled it to meet the requirements for qualification and
taxation as a REIT under the Code. This opinion is based on certain
assumptions and is conditioned upon certain representations made by the
Company as to certain factual matters relating to the Company's organization,
manner of operation, income and assets. Nixon, Hargrave, Devans & Doyle LLP is
not aware of any facts or circumstances that are inconsistent with these
assumptions and representations. The Company's qualification and taxation as a
REIT will depend upon satisfaction of the requirements necessary to be
classified as a REIT, discussed below, on a continuing basis. Nixon, Hargrave,
Devans & Doyle LLP will not review compliance with these tests on a continuing
basis. Therefore, no assurance can be given that the Company will satisfy such
tests on a continuing basis. See "-Requirements for Qualification-Failure to
Qualify" below.
19
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on net income that it currently
distributes to its stockholders. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. However, the Company will be
subject to federal income tax in the following circumstances. 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 by the Company by foreclosure or otherwise on
default on a loan secured by the 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 (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed in "Requirements
for Qualification--Income Tests" below), and has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which the Company fails the 75% or 95% test, multiplied by a
fraction intended to reflect the Company's profitability. Sixth, if the
Company 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 years, 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 disposes of any asset acquired 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 (i.e., the excess of the fair market value of such
property at the time of acquisition by the Company over the adjusted basis in
such property at such time), such gain will be subject to tax at the highest
regular corporate rate applicable (as provided in Treasury Regulations that
have not yet been promulgated). The results described above with respect to
the tax on "built-in-gain" assume that the Company will elect pursuant to IRS
Notice 88-19 to be subject to the rules described in the preceding sentence if
it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION.
Generally. To qualify as a REIT, an entity must be 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) the beneficial ownership of which is held
by 100 or more persons; (6) 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); (7) that makes an election to be a REIT (or has made such
election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the Service that must be met
in order to elect and maintain REIT status; and (8) which meets certain other
tests, described below, regarding the nature of its income and assets. The
Code provides that conditions (1) to (4), inclusive, must be met during the
entire taxable year and that condition (5) must be met during at least 335
days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months. Electing REIT treatment requires that the
entity adopt a calendar year accounting period.
The Company satisfies the requirements set forth above. In addition, the
Company's Articles of Incorporation provide restrictions regarding the
transfer of its shares that are intended to assist the Company in continuing
to satisfy the share ownership requirements described in (5) and (6) above.
See "Description of Capital Stock--Restrictions on Transfer."
20
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share of
the assets of the partnership and is deemed to be entitled to the income of
the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership 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 asset tests. Thus, the Company's
proportionate share of the assets, liabilities and items of income of the
Operating Partnership and the partnerships, if any, in which the Operating
Partnership will have an interest will be 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, there are three
gross income requirements that must be satisfied annually. First, at least 75%
of the REIT's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly
from investments relating to real property or mortgages on real property
(including "rents from real property" and, in certain circumstances, interest)
or from certain types of temporary investments. Second, at least 95% of the
REIT's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived from such real property investments, and
from dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing. Third, 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 represent less than 30% of the REIT'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 of sales. Second, the Code provides that rents
received from a resident will not qualify as "rents from real property" in
satisfying the gross income tests if the Company, or an owner of 10% or more
of the Company, directly 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 or furnish or render
services to tenants, other than through an "independent contractor" who is
adequately compensated and from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent
the services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only (such as furnishing
water, heat, light and air conditioning, and cleaning windows, public
entrances and lobbies) and are not otherwise considered "rendered to the
occupant." However, all of the rental income derived by the Company with
respect to a property will not cease to qualify as "rents from real property"
if any impermissible tenant services income from such property (which is
deemed to be an amount that is no less than 150% of the Company's direct costs
of furnishing or rendering the service or providing the management or
operation) does not exceed 1% of all amounts received or accrued during the
taxable year directly or indirectly by the Company with respect to such
property.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expense directly
connected with the production of such income. "Foreclosure property" is
defined as any real property (including interests in real property) and any
personal property incident to such real property (i) that is acquired by a
REIT as the result of such REIT having bid in such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness owed to the REIT that such
property secured, (ii) for which the related loan was acquired by the REIT at
a time when default was not imminent or anticipated,
21
and (iii) for which such REIT makes a proper election to treat such property
as foreclosure property. The Company does not anticipate that it will receive
significant income from foreclosure property that is not qualifying income for
purposes of the 75% gross income test, but, if election to treat the related
property as foreclosure property.
If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes
of (receives with respect to Ineligible Property will be qualifying income for
purposes of) the 75% and 95% gross income tests.
It is expected that the Company's real estate investments will continue to
give rise to income that will enable it to satisfy all of the income tests
described above. Substantially all of the Company's income will be derived
from its interest in the Operating Partnership, which will, for the most part,
qualify as "rents from real property" for purposes of the 75% and the 95%
gross income tests.
The Operating Partnership does not anticipate charging more than a de
minimis amount of rent that is based in whole or in part on the income or
profits of any person (except by reason of being based on a percentage of
receipts or sales, as described above). The Operating Partnership does not
anticipate receiving rents in excess of a de minimis amount from Related Party
Tenants. The Operating Partnership does not anticipate holding a lease on any
property in which rents attributable to personal property constitute greater
than 15% of the total rents received under the lease. Neither the Company nor
the Operating Partnership will knowingly directly perform services considered
to be rendered to the occupant of property. The Operating Partnership will
perform all development, construction and leasing services for, and will
operate and manage, the properties owned by it directly without using an
"independent contractor." Management believes that the only material services
to be provided to lessees of these properties will be those usually or
customarily rendered in connection with the rental of space for occupancy
only. The Company does not anticipate that the Operating Partnership will
provide services that might be considered rendered primarily for the
convenience of the occupants of the property.
The Operating Partnership owns all of the non-voting common stock of the
Management Companies, corporations that are taxable as regular corporations.
The Management Companies will perform management, development, construction
and leasing services for certain properties not owned by the Company. The
income earned by and taxed to the Management Companies would be nonqualifying
income if earned by the Company through the Operating Partnership. As a result
of the corporate structure, the income will be earned by and taxed to the
Management Companies and will be received by the Operating Partnership only
indirectly as dividends that qualify under the 95% test.
To the extent the Operating Partnership does not immediately use the
proceeds of the Offering, those funds will be invested in interest-bearing
accounts and short-term, interest-bearing securities. The interest income
earned on those funds is expected to be includible under the 75% test as
"qualified temporary investment income" (which includes income earned on stock
or debt instruments acquired with the proceeds of a stock offering, not
including amounts received under a dividend reinvestment plan). Qualified
temporary investment income treatment only applies during the one-year period
beginning on the date the Company receives the new capital.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions generally will be available if the Company's failure to meet
such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and
any income information on the schedules was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of these relief provisions. As
discussed above in "Generally," even if these relief provisions apply, a 100%
tax
22
would be imposed on the net income attributable to the greater of the amount
by which the Company fails the 75% or 95% gross income test.
Although not an income test for REIT qualification, the "prohibited
transaction" penalty tax is imposed on certain types of REIT income. As
discussed below, 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 its trade or business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy two tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by
real estate assets, cash and cash items (including certain receivables) and
government securities. For this purpose real estate assets include (i) the
Company's allocable share of real estate assets held by the Operating
Partnership and partnerships in which the Operating Partnership owns an
interest or held by "qualified REIT subsidiaries" of the Company and (ii)
stock or debt instruments held for not more than one year purchased with the
proceeds of a stock offering or long-term (at least five-year) debt offering
of the Company.
For purposes of the 75% asset test, the term "interest in real property"
includes an interest in mortgage loans or land and improvements thereon, such
as buildings or other inherently permanent structures (including items that
are structural components of such buildings or structures), a leasehold of
real property, and an option to acquire real property (or a leasehold of real
property). An "interest in real property" also generally includes an interest
in mortgage loans secured by controlling equity interests in entities treated
as partnerships for federal income tax purposes that own real property, to the
extent that the principal balance of the mortgage does not exceed the fair
market value of the real property that is allocable to the equity interest.
The second asset test requires that, of the investments not included in the
75% asset class, the value of any one issuer's securities owned by the Company
may not exceed 5% of the value of the Company's total assets, and the Company
may not own more than 10% of any one issuer's outstanding voting securities
(except for its interests in the Operating Partnership, the Trust, any other
interests in any qualified REIT subsidiary or in any other entity that is
disregarded as a separate entity under Treasury Regulations dealing with
entity classification). The 1998 Budget Proposal would prohibit REITs from
holding stock possessing more than 10% of the vote or value of all classes of
stock of a corporation. This proposal would be effective with respect to stock
acquired on or after the date of first committee action. In addition, to the
extent that a REIT's stock ownership is grandfathered by virtue of this
effective date, that grandfathered status will terminate if the subsidiary
corporation engages in a trade or business that is not engaged in on the date
of first committee action or acquires substantial new assets on or after such
date. Reference to these provisions was excluded from the final language
included in the U.S. Senate Budget Committee's proposal for the 1998 budget,
but it still could be included in any number of steps required for final
budget approval.
The Company anticipates that it will continue to be able to comply with
these asset tests. The Company is deemed to hold directly its proportionate
share of all real estate and other assets of the Operating Partnership and
should be considered to hold its proportionate share of all assets deemed
owned by the Operating Partnership through its ownership of partnership
interests in other partnerships. As a result, the Company plans to hold more
than 75% of its assets as real estate assets. In addition, the Company does
not plan to hold any securities representing more than 10% of any one issuer's
voting securities, other than any qualified REIT subsidiary, nor securities of
any one issuer exceeding 5% of the value of the Company's gross assets
(determined in accordance with generally accepted accounting principles). As
previously discussed, the Company is deemed to own its proportionate share of
the assets of a partnership in which it is a partner so that the partnership
interest, itself, is not a security for purposes of this asset test.
The Operating Partnership owns all of the nonvoting common stock of the
Management Companies. The Operating Partnership does not own any of the voting
securities of the Management Companies. Management believes that the Company's
interest in the securities of the Management Companies through the Operating
Partnership does not exceed 5% of the total value of the Company's assets. No
independent appraisals have been
23
obtained. Counsel, in rendering its opinion as to the qualification of the
Company as a REIT, is relying on the conclusions of management regarding the
value of such securities of the Management Companies.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance with the asset tests, and to take such
other action within 30 days after the close of any quarter as may be required
to cure any noncompliance. However, there can be no assurance that such other
action will always be successful.
OPERATING PARTNERSHIP
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the gross income of the partnership attributable to such share. In addition,
the assets and 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 asset tests described below.
Annual Distribution Requirements. The Company, in order to avoid corporate
income taxation of the earnings that it distributes, is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (a) the sum of (i) 95% of the Company's "REIT taxable
income" (computed without regard to the dividends paid deduction and the
REIT's net capital gain) and (ii) 95% of the net income (after tax), if any,
from foreclosure property, minus (b) the sum of certain items of noncash
income. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration.
To the extent that the Company does not distribute of its "REIT taxable
income," as adjusted, it will be subject to tax on the undistributed amount at
regular capital gains and ordinary corporate tax rates. The Company may elect,
however, to pay the tax on its undistributed long-term capital gains on behalf
of its stockholders, in which case the stockholders would include in income
their proportionate share of the undistributed long-term capital gains and
receive a credit or refund for their share of the tax paid by the Company.
Furthermore, 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 income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject
to a 4% nondeductable excise tax on the excess of such required distribution
over the amounts actually distributed (apparently regardless of whether the
Company elects (as described above) to pay the capital gains tax on
undistributed capital gains).
The Company intends to continue to make timely distributions sufficient to
satisfy the annual distribution requirements. In this regard, the Partnership
Agreement of the Operating Partnership authorizes the Company, as general
partner, to take such steps as may be necessary to cause the Operating
Partnership to distribute to its partners an amount sufficient to permit the
Company to meet these distribution requirements. It is possible, however, that
the Company, from time to time, may not have sufficient cash or other liquid
assets to meet the 95% distribution requirement due to timing differences
between the actual receipt of income and actual payment of deductible expenses
and the inclusion of such income and deduction of such expenses in arriving at
taxable income of the Company, or if the amount of nondeductible expenses such
as principal amortization or capital expenditures exceed the amount of noncash
deductions. In the event that such timing differences occur, in order to meet
the 95% distribution requirement, the Company may cause the Operating
Partnership to arrange for short-term, or possibly long-term, borrowing to
permit the payment of required dividends. If the amount of nondeductible
expenses exceeds noncash deductions, the Operating Partnership may refinance
its indebtedness to reduce principal payments and borrow funds for capital
expenditures.
24
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year that may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest to the Service based
upon the amount of any deduction taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS
Pursuant to applicable Treasury Regulations, in order to be able to elect to
be taxed as a REIT, the Company must maintain certain records and request on
an annual basis certain information from its stockholders designed to disclose
the actual ownership of its outstanding stock. The Company intends to comply
with such requirements. A REIT's failure to comply with such requirements
would result in a monetary fine imposed on such REIT. However, no penalty
would be imposed if such failure is due to reasonable cause and not to willful
neglect.
Failure To Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to stockholders in
any year in which the Company fails to qualify will not be deductible by the
Company, nor will they be required to be made. In such event, to the extent of
current and accumulated earnings and profits, distributions to stockholders
will be taxable as ordinary income to the extent of current and accumulated
earnings and profits, and, subject to certain limitations in the Code,
corporate distributees may be eligible to claim the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. It is not
possible to state whether in all circumstances the Company would be entitled
to such statutory relief.
TAXATION OF STOCKHOLDERS
Taxation Of Taxable Domestic Stockholders. As long as the Company qualifies
as a REIT, distributions made to the Company's taxable domestic stockholders
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 will not be eligible for the dividends received deduction for
corporations. As used herein, the term "U.S. Stockholder" means a holder of
Common Stock that for U.S. federal income tax purposes is (i) a citizen or
resident of the United States, (ii) a corporation, partnership, or other
entity taxable as such created or organized in or under the laws of the United
States or of any State (including the District of Columbia), (iii) an estate
whose income from sources without the United States is includible in gross
income for U.S. federal income tax purposes, regardless of its connection with
the conduct of a trade or business within the United States, or (iv) any trust
with respect to which (A) a U.S. court is able to exercise primary supervision
over the administration of such trust and (B) one or more U.S. fiduciaries
have the authority to control all substantial decisions of the trust.
Distributions that are properly designated by the Company as capital gain
dividends are subject to special treatment. According to a notice published by
the Service, until further guidance is issued, if the Company designates a
dividend as a capital gain dividend, it may also designate the dividend as (i)
a 20% rate gain distribution, (ii) an unrecaptured Section 1250 gain
distribution (25% rate) or (iii) a 28% rate gain distribution. The maximum
amount which may be designated in each class of capital gain dividends is
determined by treating the Company as an individual with capital gains that
may be subject to the maximum 20% rate, the maximum 25% rate, and the maximum
28% rate. If the Company does not designate all or part of a capital gain
dividend as within such classes, the undesignated portion will be considered
as a 28% rate gain distribution. Such designations are binding on each
stockholder, without regard to the period for which the stockholder has held
its Common Stock. However, corporate stockholders may be required to treat up
to 20% of certain capital gain dividends as ordinary income. Capital gain
dividends are not eligible for the dividends received deduction for
corporations.
25
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's Common Stock, but rather will reduce the
adjusted basis of such stock. To the extent that such distributions in excess
of current and accumulated earnings and profits exceed the adjusted basis of a
stockholder's Common Stock, such distributions will be included in income as
long-term capital gain (or short-term capital gain if the Common Stock had
been held for one year or less), assuming the Common Stock is a capital asset
in the hands of the stockholder. In addition, any distribution declared by the
Company in October, November, or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the stockholder on December 31 of
such year, provided that the distribution is actually paid by the Company
during January of the following calendar year.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, stockholders generally will not be able to
apply any passive activity losses (such as losses from certain types of
limited partnerships in which a stockholder is a limited partner) against such
income. In addition, taxable distributions from the Company generally will be
treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Common Stock (or
distributions treated as such), however, will be treated as investment income
only if the stockholder so elects, in which case such capital gains will be
taxed at ordinary income rates. The Company will notify stockholders after the
close of the Company's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income or capital gain
dividends.
Capital Gains and Losses. A capital asset generally must be held for more
than one year in order for gain or loss derived from its sale or exchange to
be treated as long-term capital gain or loss. The highest marginal individual
income tax rate is 39.6% and the tax rate on long-term capital gains
applicable to non-corporate taxpayers is 28% for sales and exchanges of assets
held for more than one year but not more than eighteen months, and 20% for
sales and exchanges of assets held for more than eighteen months. Thus, the
tax rate differential between capital gain and ordinary income for non-
corporate taxpayers may be significant. In addition, the characterization of
income as capital gain or ordinary income may affect the deductibility of
capital losses. All or a portion of any loss realized upon a taxable
disposition of the Common Stock may be disallowed if other shares of Common
Stock are purchased within 30 days before or after the disposition. Capital
losses not offset by capital gains may be deducted against a non-corporate
taxpayer's ordinary income only up to a maximum annual amount of $3,000.
Unused capital losses may be carried forward indefinitely by non-corporate
taxpayers. All net capital gain of a corporate taxpayer is subject to tax at
ordinary corporate rates. A corporate taxpayer can deduct capital losses only
to the extent of capital gains, with unused losses being carried back three
years and forward five years.
Recently enacted legislation reduces the maximum rate on long-term capital
gains of non-corporate taxpayers from 28% to 20% (10% for taxpayers in the 15%
tax bracket). However, the reduced long-term capital gains rates are only
available for sales or exchanges of capital assets held for more than 18
months. Any long-term capital gains from the sale or exchange of depreciable
real property that would be subject to ordinary income taxation (i.e.,
"depreciation recapture") if it were treated as personal property will be
subject to a maximum tax rate of 25% instead of the 20% maximum rate for gains
taken into account after July 28, 1997. Also, under the legislation, for
taxable years beginning after December 31, 2000, the maximum capital gains
rates for assets which are held more than five years are 18% and 8% (rather
than 20% and 10%). These rates will generally only apply to assets for which
the holding period begins after December 31, 2000.
The capital gains provisions in the legislation authorize the Service to
issue regulations (including regulations requiring reporting) applying the
provisions to any "pass-through entity" including a REIT and interests in such
an entity. No assurance can be given concerning the content of any such
regulations. Generally, the determination of when gain is properly taken into
account will be made at the entity level.
26
Distributions from the Company and gain from the disposition of shares will
not ordinarily be treated as passive activity income, and therefore,
stockholders generally will not be able to apply any "passive losses" against
such income. Dividends from the Company (to the extent they do not constitute
a return of capital) and gain from the disposition of shares generally will be
treated as investment income for purposes of the investment interest
limitation.
The Company will report to its domestic stockholders and the Service 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
stockholder 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, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A stockholder who
does not provide the Company with its correct taxpayer identification number
may also be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the stockholder's income tax liability.
In addition, the Company may be required to withhold a portion of capital gain
distributions made to any stockholders who fail to certify their non-foreign
status to the Company. See "Taxation Of Foreign Stockholders" below.
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 many investments in
real estate generate UBTI, the Service has issued a published ruling that
dividend distributions from 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, amounts distributed by the Company to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of the Common Stock with debt, a portion of its
income from the Company 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 paragraphs (7), (9),
(17), and (20), respectively, of Section 501(c) of the Code are subject to
different UBTI rules, which generally will require them to characterize
distributions from the Company as UBTI. See "ERISA Considerations."
Taxation Of Foreign Stockholders. The rules governing United States federal
income taxation of nonresident alien individuals, foreign corporations,
foreign partnerships and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex, and no attempt will be made herein to provide more
than a limited summary of such rules. Prospective Non-U.S. Stockholders should
consult with their own tax advisors to determine the impact of U.S. federal,
state and local income tax laws with regard to an investment in the capital
stock of the Company, including any reporting requirements, as well as the tax
treatment of such an investment under their home country laws.
Distributions that are not attributable to gain from sales or exchanges by
the Company of a U.S. real property interest and not designated by the Company
as capital gain 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 that tax. However, if income from the investment
in the shares is treated as effectively connected with the Non-U.S.
Stockholder's conduct of a United States trade or business, the Non-U.S.
Stockholder generally will be subject to a tax at graduated rates, in the same
manner as U.S. stockholders are taxed with respect to such dividends (and may
also be subject to the 30% branch profits tax if the stockholder is a foreign
corporation). The Company expects to withhold United States income tax at the
rate of 30% on the gross amount of any dividends paid to a Non-U.S.
Stockholder (31% if appropriate documentation evidencing such Non-U.S.
Stockholders' foreign status has not been provided) unless (1) a lower
27
treaty rate applies and the required form evidencing eligibility for that
reduced rate is filed with the Company or (2) the Non-U.S. Stockholder files
an Service Form 4224 with the Company claiming that the distribution is
"effectively connected" income. The Treasury Department issued final
regulations in October 1997 that modify the manner in which the Company
complies with the withholding requirements, generally effective for
distributions after December 31, 1998.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a stockholder to the extent that they do
not exceed the adjusted basis of the stockholder'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. Stockholder's shares,
they will give rise to tax liability if the Non-U.S. Stockholder would
otherwise be subject to tax on any gain from the sale or disposition of his
shares as described below. Because it generally cannot be determined at the
time a distribution is made whether or not such distribution will be in excess
of current and accumulated earnings and profits, amounts in excess thereof may
be withheld by the Company. However, any such excess amount withheld would be
refundable to the extent it is determined subsequently that such distribution
was, in fact, in excess of current and accumulated earnings and profits of the
Company. Under a separate provision, the Company is 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% (or 31%, if applicable) on the entire amount of any
distribution, 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 31%, if
applicable) will be subject to withholding at a rate of 10%.
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 U.S. real
property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S.
Stockholder as if such gain were effectively connected with a U.S. business.
Thus, Non-U.S. Stockholders would be taxed at the normal capital gain rates
applicable to U.S. stockholders (subject to applicable alternative minimum tax
and a special alternative minimum tax in the case of nonresident alien
individuals). Distributions subject to FIRPTA may also be subject to a 30%
branch profits tax in the hands of a corporate Non-U.S. Stockholder not
entitled to treaty relief or exemption. The Company is required to withhold
35% of any distribution that is designated by the Company as a capital gains
dividend. The amount withheld is creditable against the Non-U.S. Stockholder's
FIRPTA tax liability.
The Company will be required to withhold from distributions to Non-U.S.
Stockholders, and remit to the IRS, (a) 35% of designated capital gain
dividends (or, if greater, 35% of the amount of any distributions that could
be designated as capital gain dividends) and (b) 30% of ordinary dividends
paid out of earnings and profits. In addition, if the Company designates prior
distributions as capital gain dividends, subsequent distributions, up to the
amount of such prior distributions, will be treated as capital gain dividends
for purposes of withholding. A distribution in excess of the Company's
earnings and profits may be subject to 30% dividend withholding if at the time
of the distribution it cannot be determined whether the distribution will be
in an amount in excess of the Company's current or accumulated earnings and
profits. Tax treaties may reduce the Company's withholding obligations. If the
amount withheld by the Company with respect to a distribution to a Non-U.S.
Stockholder exceeds the stockholder's United States tax liability with respect
to such distribution (as determined under the rules described above), the Non-
U.S. Stockholder may file for a refund of such excess from the IRS. It should
be noted that the 35% withholding tax rate on capital gain dividends currently
corresponds to the maximum income tax rate applicable to corporations, but is
higher than the 28% maximum rate on capital gains of individuals.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares of capital
stock generally will not be taxed under FIRPTA if a REIT is 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 stock was held directly
or indirectly by foreign persons. It is currently anticipated that the Company
will be a "domestically controlled REIT," and 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. Stockholder if (i) investment in the
shares of capital stock is "effectively
28
connected" with the Non-U.S. Stockholder's U.S. trade or business, in which
case the Non-U.S. Stockholder will be subject to the same treatment as United
States stockholders with respect to such gain, or (ii) the Non-U.S.
Stockholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has a "tax home" in
the United States, in which case the nonresident alien individual who was
present in the U.S. will be subject to a 30% tax on the individual's capital
gains. If the gain on the sale of shares were to be subject to taxation under
FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as
U.S. stockholders with respect to such gain (subject to applicable alternative
minimum tax, possible withholding tax and a special alternative minimum tax in
the case of nonresident alien individuals). A purchaser of shares of capital
stock from a Non-U.S. Stockholder will not be required under FIRPTA to
withhold on the purchase price if the purchased shares are "regularly traded"
on an established securities market or if the Company is a domestically
controlled REIT. Otherwise, under FIRPTA the purchaser of shares may be
required to withhold 10% of the purchase price and remit such amount to the
IRS.
INCOME TAXATION OF THE OPERATING PARTNERSHIP, THE UNDERLYING PARTNERSHIPS AND
THEIR PARTNERS
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Operating
Partnership.
Classification of the Operating Partnership. The Company will be entitled to
include in its income its distributive share of the income and to deduct its
distributive share of the losses of the Operating Partnership (including the
Operating Partnership's share of the income or losses of any partnerships in
which it owns an interest) only if the Operating Partnership is classified for
federal income tax purposes as a partnership rather than an association
taxable as a corporation. On December 17, 1996, the Service issued final
Treasury Regulations regarding the classification of business entities (known
as the "check-the-box" rules) which changed the process for electing business
tax status.
The new Treasury Regulations, which were effective January 1, 1997, replaced
the former rules for classifying business organizations with a simpler
elective classification system that generally allows eligible entities to
choose to be taxed as partnerships or corporations. Under the Treasury
Regulations, a limited partnership which qualifies as an eligible entity will
generally be allowed to choose to be taxed as a partnership or a corporation.
The default classification for an existing entity is the classification that
the entity claimed immediately prior to January 1, 1997. Alternatively, an
eligible entity may affirmatively elect its classification. An entity's
default classification continues until the entity elects to change its
classification by means of an affirmative election. Because the Operating
Partnership was classified as a partnership as of December 31, 1996, the
Operating Partnership will be treated as a partnership for federal income tax
purposes for periods after December 31, 1996 pursuant to the new Treasury
Regulations. The Operating Partnership confirmed this tax treatment by
electing to be treated as a partnership under the Treasury Regulations.
The Treasury Regulations state that the Service will not challenge the prior
classification of an existing eligible entity for periods before January 1,
1997 if: (1) the entity had a reasonable basis for its claimed classification;
(2) the entity and all of its partners recognized the tax consequences of any
change in the entity's classification within 60 months before January 1, 1997;
and (3) neither the entity nor any member had been notified in writing on or
before May 8, 1996, that the classification was under examination by the IRS.
Requirements (2) and (3) described in this paragraph are either not relevant
to, or have been satisfied by, the Operating Partnership. Accordingly, the
Operating Partnership's claimed classification as a partnership for periods
prior to January 1, 1997 should be respected if the Operating Partnership had
a reasonable basis for such classification.
In determining whether a reasonable basis for partnership classification
existed for periods prior to January 1, 1997, it is necessary to review the
former classification rules, under which an organization formed as a
partnership will be treated as a partnership for federal income tax purposes
rather than as a corporation only if it has no more than two of the four
corporate characteristics that the Treasury Regulations use to distinguish a
partnership from a corporation for tax purposes. These four characteristics
are continuity of life, centralization of management, limited liability, and
free transferability of interests.
29
The Operating Partnership has not requested, nor does it intend to request,
a ruling from the Service that it will be treated as a partnership for federal
income tax purposes. In the opinion of Nixon, Hargrave, Devans & Doyle LLP,
which is based on the provisions of the partnership agreement of the Operating
Partnership and on certain factual assumptions and representations of the
Company, the Operating Partnership has a reasonable basis for its claim to be
classified as a partnership for federal income tax purposes and therefore
should be taxed as a partnership rather than an association taxable as a
corporation for periods prior to January 1, 1997. Nixon, Hargrave, Devans &
Doyle LLP's opinion is not binding on the Service or the courts.
If for any reason the Operating Partnership was taxable as a corporation
rather than as a partnership for federal income tax purposes, the Company
would not be able to satisfy the income and asset requirements for REIT
status. See "Requirements for Qualification--Income Tests" and "--Requirements
for Qualification-- Asset Tests." In addition, any change in the Operating
Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur a tax liability without any related cash
distribution. See "--Requirements for Qualification--Annual Distribution
Requirements." Further, items of income and deduction of the Operating
Partnership would not pass through to its partners, and its partners would be
treated as stockholders for tax purposes. The Operating Partnership would be
required to pay income tax at corporate tax rates on its net income, and
distributions to its partners would constitute dividends that would not be
deductible in computing the Operating Partnership's taxable income.
Partners, Not Partnerships, Subject To Tax. A partnership is not a taxable
entity for federal income tax purposes. Rather, a partner is required to take
into account its allocable share of a partnership's income, gains, losses,
deductions and credits for any taxable year of the partnership ending within
or with the taxable year of the partner, without regard to whether the partner
has received or will receive any distributions from the partnership.
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and losses among partners, such allocations
may be disregarded for tax purposes under section 704(b) of the Code if they
do not have substantial economic effect. If an allocation is not recognized
for federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership,
which will be determined by taking into account all of the facts and
circumstances relating to the economic arrangement of the partners with
respect to such item. The Operating Partnership's allocations of taxable
income and loss are intended to comply with the requirements of section 704(b)
of the Code and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect To 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 partners in the
property, rather than a basis equal to the fair market value of the property
at the time of contribution. Pursuant to section 704(c) of the Code, income,
gain, loss and deduction attributable to such contributed property must be
allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of such
unrealized gain or unrealized loss is generally equal to the difference
between the fair market value of the contributed property at the time of
contribution and the adjusted tax basis of such property at the time of
contribution (a "Book-Tax Difference"). Such allocations are solely for
federal income tax purposes and do not affect the book capital accounts or
other economic or legal arrangements among the partners.
The partners of the Operating Partnership other than the Company (the
"Contributing Partners") are deemed to have contributed general or limited
partnership interests in other partnerships owning multifamily residential
properties which were acquired by Operating Partnership and which may have had
an adjusted tax basis which is less than the fair market value of such
interests (the "Contributed Interests"). Upon the merger or dissolution of
such partnerships and the transfer of the properties to the Operating
Partnership, the Contributing Partners were deemed to have contributed the
portion of the properties represented by the Contributed Interests (the
"Contributed Property") to the Operating Partnership, and the Operating
Partnership's tax basis in the Contributed Property will be the tax basis of
the Contributing Partners in the Contributed Interests. Because the
Contributed Property has a Book-Tax Difference, the Operating Partnership
Agreement will require allocations to be made in a manner consistent with
section 704(c) of the Code.
30
Under these special rules, the Contributing Partners may be allocated lower
amounts of depreciation deductions for tax purposes with respect to the
Contributed Property than the amount of such deductions that would be
allocated to them if such Contributed Property had a tax basis equal to its
fair market value at the time of contribution. In addition, in the event of
the disposition of any of the Contributed Property, all income attributable to
the Book-Tax Difference of such Contributed Property generally will be
allocated to the Contributing Partners, and the Company generally will be
allocated only its share of capital gains attributable to appreciation, if
any, occurring after the contribution of the Contributed Property. These
allocations will tend to eliminate the Book-Tax Differences with respect to
the Contributed Property over the life of the Operating Partnership. However,
the special allocation rules of Section 704(c) may not 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
Property in the hands of the Operating 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 the Contributed Property
had a tax basis equal to its fair market value at the time of contribution,
and (ii) possibly to be allocated taxable gain in the event of a sale of
Contributed Property in excess of the economic or book income allocated to the
Company as a result of such sale. These allocations possibly could cause the
Company to recognize taxable income in excess of cash proceeds, which might
adversely affect its ability to comply with the REIT distribution
requirements. See "--Requirements for Qualification--Annual Distribution
Requirements."
Depreciation. The Operating Partnership's assets other than cash will
consist largely of property treated as purchased by the Operating Partnership.
The Operating Partnership has an aggregate basis in the assets of each
partnership it acquires equal to the sum of the purchase price paid for the
partnership interests. To the extent that the Operating Partnership's basis in
a piece of depreciable property exceeds the basis of the property when it was
held by the acquired partnership, such basis should in effect be treated as a
newly acquired, separate asset and entitled to 39-year depreciation.
Section 704(c) of the Code requires that depreciation as well as gain and
loss be allocated in a manner so as to take into account the variation between
the fair market value and tax basis of the property contributed. Similarly,
amortization on intangible contracts for services contributed to the Operating
Partnership will be allocated as required by section 704(c) of the Code.
Depreciation with respect to any property purchased by the Operating
Partnership subsequent to the admission of its partners will be allocated
among the partners in accordance with their respective percentage interests in
the Operating Partnership.
Sale Of Partnership Property. Generally, any gain realized by a partnership
on the sale of property held by the partnership for more than one year will be
long-term capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture. However, under the REIT Requirements,
the Company's share as a partner of any gain realized by the Operating
Partnership on the sale of any property held as inventory or other property
held primarily for sale to customers in the ordinary course of a trade or
business will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. See "--Taxation of the Company as a REIT." Such
prohibited transaction income will also have an adverse effect upon the
Company's ability to satisfy the income tests for REIT status. See "--
Requirements for Qualification--Income Tests." 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. A
safe harbor to avoid classification as a prohibited transaction exists as to
real estate assets held for the production of rental income by a REIT for at
least four years where in any taxable year the REIT has made no more than
seven sales of property or, in the alternative, the aggregate of the adjusted
bases of all properties sold does not exceed 10% of the adjusted bases of all
of the REIT's properties during the year and the expenditures includible in a
property's basis made during the four-year period prior to disposition must
not exceed 30% of the property's net sales price. The Operating Partnership
holds its properties for investment with a view to long-term appreciation, to
engage in the business of acquiring, developing, owning, and operating and
leasing the properties and to make such occasional sales of the properties,
including adjoining land, as are consistent with the Company's and the
Operating Partnership's investment objectives. No assurance can be given,
however, that every property sale by the Operating Partnership will constitute
a sale of property held for investment.
31
OTHER TAX CONSIDERATIONS
The Management Companies. A portion of the amounts to be used to fund
distributions to stockholders is expected to come from the Management
Companies through dividends on stock of the Management Companies to be held by
the Operating Partnership. The Management Companies do not qualify as REITs
and will pay federal, state and local tax income taxes on its net income at
normal corporate tax rates. The Company expects that the Management Companies'
income, after deducting its expenses, will not give rise to significant
corporate tax liabilities. The amount of corporate tax liability will increase
if the Service disallows the items of expense which the Company expects to be
allocated to the Management Companies.
The Trust. The Trust was formed as a "qualified REIT subsidiary." As such it
is treated together with the Company as a single entity for federal income tax
purposes.
State and Local Tax Considerations. The Company and the Management Companies
will, and the Company's stockholders may, be subject to state or local
taxation in various states or local jurisdictions, including those in which
the Company, its stockholders or the Operating Partnership transact business
or reside. The state and local tax treatment of the Company and its
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws on their investment
in the Company.
Possible Federal Tax Developments. The rules dealing with federal income
taxation are constantly under review by the IRS, the Treasury Department and
Congress. New federal tax legislation or other provisions may be enacted into
law or new interpretations, rulings or Treasury Regulations could be adopted,
all of which could affect the taxation of the Company or of its stockholders.
No prediction can be made as to the likelihood of passage of any new tax
legislation or other provisions either directly or indirectly affecting the
Company or its stockholders. Consequently, the tax treatment described herein
may be modified prospectively or retroactively by legislative, judicial or
administrative action.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan ("Plan") subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), should consider the fiduciary standards under
ERISA in the context of the Plan's particular circumstances before authorizing
an investment of any of such Plan's assets in shares of the Company's capital
stock. Accordingly, such fiduciary should consider whether the investment (i)
satisfies the diversification requirements of section 404(a)(1)(C) of ERISA,
(ii) is in accordance with the documents and instruments governing the Plan to
the extent consistent with ERISA, (iii) is prudent and an appropriate
investment for the Plan, based on examination of the Plan's overall investment
portfolio and (iv) is for the exclusive benefit of Plan participants and
beneficiaries, as required by ERISA.
In addition to the imposition of general fiduciary standards, ERISA and the
corresponding provisions of the Code prohibit a wide range of transactions
involving Plans and persons who have certain relationships to Plans ("parties
in interest" within the meaning of ERISA, "disqualified persons" within the
meaning of the Code). The Code's prohibited transaction rules also apply to
certain direct or indirect transactions between "disqualified persons" and
individual retirement accounts or annuities ("IRAs"), as defined in section
408(a) and (b) of the Code. Thus, a Plan fiduciary and an IRA considering an
investment in shares also should consider whether the acquisition or the
continued holding of shares might constitute or give rise to a prohibited
transaction.
Those persons proposing to invest on behalf of Plans should also consider
whether a purchase of one or more shares of capital stock will cause the
assets of the Company to be deemed assets of the Plan for purposes of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code. The Department of Labor (the "DOL") has issued regulations (the "DOL
Regulations") as to what constitutes assets of a Plan
32
under ERISA. Under the DOL Regulations, if a Plan acquires an equity interest
in an entity, the Plan's assets would include, for purposes of the fiduciary
responsibility provisions of ERISA and the prohibited transaction rules of
ERISA and the Code, both the equity interest and an undivided interest in each
of the entity's underlying assets unless (a) such interest is a "publicly
offered security," (b) such interest is a security issued by an investment
company registered under the Investment Company Act of 1940, as amended, or
(c) another specified exception applies.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities through underwriters or dealers,
directly to one or more purchasers, through agents or through a combination of
any such methods of sale. Any such underwriter or agent involved in the offer
and sale of the Offered Securities will be named in the applicable Prospectus
Supplement.
The distribution of the Common Stock by the Company may be affected from
time to time in one or more transactions (which may involve block
transactions) on the NYSE or otherwise pursuant to and in accordance with the
applicable rules of the NYSE, in the over-the-counter market, in negotiated
transactions, through the writing of Common Stock Warrants or through the
issuance of Preferred Stock convertible into Common Stock (whether such Common
Stock Warrants or Preferred Stock is listed on a securities exchange or
otherwise), or a combination of such methods of distribution, 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 the Offered Securities, underwriters or
agents may receive compensation from the Company or from purchasers of the
Offered Securities, for whom they may act as agents, in the form of discounts,
concessions or commissions. Underwriters may sell the Offered Securities to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agents. Underwriters, dealers and
agents that participate in the distribution of the Offered 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 sale of the
Offered 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.
Any Common Stock sold pursuant to a Prospectus Supplement will be listed on
the New York Stock Exchange, subject to official notice of issuance. Unless
otherwise specified in the applicable Prospectus Supplement, each series of
Offered Securities other than Common Stock will be a new issue with no
established trading market. The Company may elect to list any series of
Preferred Stock or other securities 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 Offered 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 Offered
Securities.
Under agreements into which the Company may enter, underwriters, dealers and
agents who participate in the distribution of the Offered 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 Offered Securities will be sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
states the Offered 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.
33
LEGAL MATTERS
The legality of the Offered Securities issued pursuant to any Prospectus
Supplement will be passed upon by Nixon, Hargrave, Devans & Doyle LLP. In
addition, Nixon, Hargrave, Devans & Doyle LLP will provide an opinion with
respect to certain tax matters which form the basis of the discussion under
"Federal Income Tax Considerations."
EXPERTS
The financial statements incorporated by reference in this Prospectus or
elsewhere in the Registration Statement have been incorporated herein in
reliance on the reports audited by Coopers & Lybrand LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
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306,372 SHARES
HOME PROPERTIES OF NEW YORK, INC.
COMMON STOCK
[HME logo]
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PROSPECTUS SUPPLEMENT
FEBRUARY 25, 2002
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