PROSPECTUS SUPPLEMENT
(To prospectus dated May 26, 1998)
2,087,000 SHARES
HOME PROPERTIES OF NEW YORK, INC.
9.00% SERIES F CUMULATIVE REDEEMABLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
We are offering 2,087,000 shares of our 9.00% Series F Cumulative
Redeemable Preferred Stock, par value $.01 per share. We will receive all of the
net proceeds from the sale of the Series F Preferred Stock.
We will pay cumulative dividends on the Series F Preferred Stock, from
the date of original issuance, in the amount of $2.25 per share each year, which
is equivalent to 9.00% of the $25.00 liquidation preference per share. Dividends
on the Series F Preferred Stock will be payable quarterly in arrears, beginning
on May 31, 2002. We may not redeem the Series F Preferred Stock before March 25,
2007, except in order to preserve our status as a real estate investment trust.
On and after March 25, 2007, we may, at our option, redeem the Series F
Preferred Stock, in whole or in part, by paying $25.00 per share, plus any
accumulated, accrued and unpaid dividends. The Series F Preferred Stock has no
stated maturity, will not be subject to any sinking fund or mandatory redemption
and will not be convertible into any of our other securities. Investors in the
Series F Preferred Stock will generally have no voting rights, but will have
limited voting rights if we fail to pay dividends for six or more quarters and
in certain other events.
The New York Stock Exchange, Inc. has authorized, upon official notice
of issuance, the listing of the shares of the Series F Preferred Stock under the
symbol "HME PrF." We expect that trading on the New York Stock Exchange will
commence within 30 days after the initial delivery of the Series F Preferred
Stock.
INVESTING IN THE SERIES F PREFERRED STOCK INVOLVES CERTAIN RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE S-6 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 IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------
PER SHARE TOTAL
--------- -----
Public offering price............................... $25.00 $52,175,000
Underwriting discounts and commissions.............. $0.7875 $ 1,643,512
Proceeds, before expenses, to us.................... $24.2125 $50,531,488
---------------
The underwriters are severally underwriting the shares being offered.
The underwriters have an option to purchase up to an additional 313,050 shares
of Series F Preferred Stock from us to cover over-allotments, if any.
The underwriters expect that the Series F Preferred Stock will be ready
for delivery in book-entry form through The Depository Trust Company on or about
March 25, 2002.
BEAR, STEARNS & CO. INC.
A.G. EDWARDS & SONS, INC. BB&T CAPITAL MARKETS
MCDONALD INVESTMENTS INC. STIFEL, NICOLAUS & COMPANY
INCORPORATED
U.S. BANCORP PIPER JAFFRAY WACHOVIA SECURITIES
The date of this prospectus supplement is March 18, 2002
SUMMARY
This summary highlights information from this prospectus supplement. It
may not contain all of the information that is important to you in deciding
whether to invest in our company. To understand this offering fully, you should
read carefully this entire prospectus supplement and the accompanying
prospectus, including the risk factors beginning on page S-6 of this prospectus
supplement, as well as the documents we have filed with the Securities and
Exchange Commission which are incorporated by reference. In this prospectus
supplement and the accompanying prospectus, unless otherwise indicated, the
"company," "we," "us" and "our" refer to Home Properties of New York, Inc. and
its subsidiaries, the "operating partnership" refers to Home Properties of New
York, L.P. and the "management companies" refers to Home Properties Management,
Inc. and Home Properties Resident Services, Inc. Unless otherwise indicated, all
information in this prospectus supplement assumes that the underwriters do not
exercise the over-allotment option described in "Underwriting."
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 (a "REIT"). With operations in select Northeast, Midwest and Mid-Atlantic
markets, we own, operate, acquire, rehabilitate and develop apartment
communities. As of December 31, 2001, we operated 293 communities containing an
aggregate of 49,745 apartment units. Of these, we owned 39,007 units in 143
communities, we partially owned and managed as general partner 8,035 units in
132 communities, and we managed for other owners 2,703 units in 18 communities.
We also managed 2.2 million square feet of commercial space. While our portfolio
is geographically diverse, our primary focus is in the following metropolitan
areas: Baltimore, Philadelphia, Detroit, suburban Washington, D.C. and
Rochester, New York.
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. 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 of our
subsidiaries: Home Properties Management, Inc. and Home Properties Resident
Services, Inc. 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.
Our principal executive offices are located at 850 Clinton Square,
Rochester, New York 14604. Our telephone number is (585) 546-4900.
RECENT DEVELOPMENTS
On January 24, 2002, we sold six properties with a total of 339 units
in two unrelated transactions for an aggregate sale price of approximately $13.6
million. A gain on sale of approximately $300,000 is expected to be reported in
the first quarter of 2002 from the sale of these properties. On March 1, 2002,
we completed the acquisition of six properties with a total of 1,031 units and
expect to close on five additional properties with 657 units under contract from
the same group of related sellers (the "Holiday Portfolio") in the near future.
The total purchase price for the 11 properties with a total of 1,688 units in
the Holiday Portfolio is expected to be approximately $147.3 million. In
addition, since December 31, 2001, we discontinued the management of one
property for a third party and we sold one property managed as a general
partner. As a result of the transactions completed in 2002, we now operate 291
communities containing an aggregate of 50,278 apartment units. Of these, we own
39,699 units in 143 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 continue to manage 2.2 million square feet of commercial space.
Our owned and managed apartment communities and commercial space are referred to
herein as the "Properties."
On February 14, 2002, the holder of our 8.36% Series B Convertible
Cumulative Preferred Stock converted one million of its shares into 839,771
shares of our common stock, leaving outstanding an aggregate of one million
shares of the Series B Preferred Stock. On February 28, 2002, we closed two
separate common equity offerings totaling an aggregate of 704,602 shares of our
common stock at a weighted average price of $30.99 per share resulting in
aggregate net proceeds to us of approximately $21.8 million.
S-1
THE OFFERING
ISSUER..............................Home Properties of New York, Inc.
SECURITIES OFFERED..................2,087,000 shares of 9.00% Series F
Cumulative Redeemable Preferred Stock (the
"Series F Preferred Stock") (2,400,050
shares if the underwriters' over-allotment
option is exercised in full).
DIVIDENDS...........................Dividends are cumulative from the date of
original issue and are payable quarterly in
arrears on or about the last day of
February, May, August and November of each
year, when and as declared, beginning on May
31, 2002. We will pay cumulative dividends
on the Series F Preferred Stock at the fixed
rate of $2.25 per share each year, which is
equivalent to 9.00% of the $25.00
liquidation preference. The first dividend
we pay on May 31, 2002 will be for less than
a full quarter. Dividends on the Series F
Preferred Stock will continue to accumulate
even if any of our agreements prohibits the
current payment of dividends, we do not have
earnings or funds legally available to pay
such dividends or we do not declare the
payment of dividends.
LIQUIDATION PREFERENCE..............$25.00 per share of Series F Preferred
Stock, plus an amount equal to accumulated,
accrued and unpaid dividends, whether or not
declared.
OPTIONAL REDEMPTION.................The Series F Preferred Stock is not
redeemable prior to March 25, 2007, except
in limited circumstances relating to the
preservation of our qualification as a REIT.
On and after March 25, 2007, the Series F
Preferred Stock will be redeemable at our
option for cash, in whole or from time to
time in part, at a price per share equal to
the liquidation preference, plus
accumulated, accrued and unpaid dividends,
if any, to the redemption date.
RANKING.............................The Series F Preferred Stock will rank
senior to our common stock and on a parity
with our outstanding 8.36% Series B
Convertible Cumulative Preferred Stock
($25.00 liquidation preference), our 8.75%
Series C Convertible Cumulative Preferred
Stock ($100.00 liquidation preference), our
8.78% Series D Convertible Cumulative
Preferred Stock ($100.00 liquidation
preference) and our 8.55% Series E
Convertible Cumulative Preferred Stock
($100.00 liquidation preference) and any
other parity securities that we may issue in
the future, in each case with respect to the
payment of distributions and amounts upon
liquidation, dissolution or winding up.
VOTING RIGHTS.......................Holders of the Series F Preferred Stock will
generally have no voting rights. However, if
dividends on any outstanding Series F
Preferred Stock have not been paid for six
or more quarterly periods (whether or not
consecutive), or if we fail to meet the 1.75
to 1.0 fixed charge coverage covenant
described below for six consecutive
quarterly periods, holders of the Series F
Preferred Stock and the holders of all other
shares of any class or series ranking on a
parity with the Series F Preferred Stock
which are entitled to similar voting rights
(voting as a single class) will be entitled
to elect two additional directors to our
Board of Directors to serve until all unpaid
dividends have been paid or declared and set
apart for payment or until we meet the fixed
charge coverage ratio for the preceding
fiscal quarter, as the case may be. In
addition, certain material and adverse
changes to the terms of the Series F
Preferred Stock cannot be made without the
affirmative vote of holders of at least 66
2/3% of the outstanding shares of Series F
Preferred Stock.
S-2
FIXED CHARGE COVERAGE
COVENANT............................For each fiscal quarter, we will maintain a
ratio of EBITDA to fixed charges, as defined
herein, of greater than 1.75 to 1.0. See
"Description of Series F Cumulative
Redeemable Preferred Stock - Fixed Charge
Coverage Covenant." For the past four fiscal
quarters our fixed charge coverage ratio was
2.10:1 for the first quarter of 2001, 2.45:1
for the second quarter of 2001, 2.52:1 for
the third quarter of 2001, and 2.52:1 for
the fourth quarter of 2001.
OWNERSHIP LIMIT.....................To maintain our qualification as a REIT for
federal income tax purposes, no person or
entity may acquire more than 8.0% of the
aggregate value of all outstanding shares of
our common and preferred stock.
LISTING.............................The New York Stock Exchange, Inc. (the
"NYSE") has authorized, upon official notice
of issuance, the listing of the shares of
the Series F Preferred Stock under the
symbol "HME PrF." We expect that trading on
the NYSE will commence within 30 days after
the initial delivery of the Series F
Preferred Stock.
FORM................................The Series F Preferred Stock will be issued
and maintained in book-entry form registered
in the name of the nominee of The Depositary
Trust Company except under limited
circumstances.
USE OF PROCEEDS.....................The net proceeds from this offering will be
used to repay existing indebtedness
outstanding under our line of credit and for
general corporate purposes, including
funding future acquisitions of additional
properties and revenue-enhancing upgrades at
certain of our Properties.
For additional information regarding the terms of the Series F
Preferred Stock, see "Description of Series F Cumulative Redeemable Preferred
Stock" beginning on page S-20.
RISK FACTORS
Your investment in the Series F Preferred Stock will involve certain
risks. You should carefully consider the information under "Risk Factors,"
beginning on page S-6 of this prospectus supplement and all other information
included in or incorporated by reference into this prospectus supplement and the
accompanying prospectus before deciding whether an investment in the Series F
Preferred Stock is suitable for you.
S-3
SUMMARY FINANCIAL INFORMATION
The following table contains summary historical operating and balance
sheet data as of and for the years ended December 31, 2001, 2000 and 1999,
derived from our audited financial statements for those years. Since this
information is only a summary, you should read it in conjunction with the more
detailed information contained in our consolidated financial statements and
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, which is incorporated by reference into
this prospectus supplement.
FOR THE YEARS ENDED DECEMBER 31,
2001 2000 1999
-------- -------- --------
(Dollars in thousands, except per share data)
OPERATING DATA:
Total revenues................................................ $ 367,523 $319,048 $234,463
========= ======== ========
Total expenses................................................ $ 295,508 $250,491 $191,152
========= ======== ========
Income before minority interest and extraordinary item........ $ 98,256 $67,171 $43,768
======== ======= =======
Net income available to common stockholders................... $ 46,825 $29,278 $25,129
======== ======= =======
Net income before extraordinary item per common share:
Basic...................................................... $2.12 $1.42 $1.35
===== ===== =====
Diluted.................................................... $2.11 $1.41 $1.34
===== ===== =====
Net income per common share:
Basic...................................................... $2.12 $1.42 $1.34
===== ===== =====
Diluted.................................................... $2.11 $1.41 $1.34
===== ===== =====
Cash dividends declared per common share...................... $2.31 $2.16 $1.97
===== ===== =====
BALANCE SHEET DATA (AT PERIOD END):
Real estate, before accumulated depreciation.................. $2,135,078 $1,895,269 $1,480,753
Total assets.................................................. $2,063,789 $1,871,888 $1,503,617
Total debt.................................................... $ 992,858 $ 832,783 $ 669,701
8.36% Series B Convertible Cumulative Preferred Stock......... $ 48,733 $ 48,733 $ 48,733
Stockholders' equity.......................................... $ 620,596 $ 569,528 $ 448,390
OTHER DATA:
Funds from operations (1)..................................... $ 136,604 $ 120,854 $ 80,784
Cash available for distribution (2)........................... $ 120,994 $ 107,300 $ 78,707
Net cash provided by operating activities..................... $ 148,389 $ 127,197 $ 90,526
Net cash used in investing activities......................... ($ 139,106) ($ 178,445) ($ 190,892)
Net cash (used in) provided by financing activities........... ($ 9,013) $ 56,955 $ 71,662
Weighted average number of common shares outstanding:
Basic................................................... 22,101,027 20,639,241 18,697,731
Diluted................................................. 22,227,521 20,755,721 18,800,907
Total communities owned at end of period...................... 143 147 126
Total apartment units owned at end of period.................. 39,007 39,041 33,807
---------------------------------
(1) Our management considers funds from operations ("FFO") to be an appropriate measure of
performance of an equity REIT. FFO is generally defined as net income (loss) before gains
(losses) from the sale of property and business and extraordinary items, before minority
interest in the operating partnership, plus real estate depreciation. Our management believes
that in order to facilitate a clear understanding of the combined historical operating results
of the company, FFO should be considered in conjunction with net income as presented in the
consolidated financial statements incorporated herein. FFO does not represent cash generated
from operating activities in accordance with generally accepted accounting principles and is
not necessarily indicative of cash available to fund cash needs. FFO should not be considered
as an alternative to net income as an indication of our performance or to cash flow as a
measure of liquidity. All REITs may not be using the same definition for FFO. Accordingly, the
presentation above may not be comparable to other similarly titled measures of "FFO" of other
REITs.
(2) We define "cash available for distribution" as FFO less an annual reserve for anticipated
recurring, non-revenue generating capitalized costs of $400 ($375 for 1999 and 2000) per
apartment unit. It is our policy to fund our investing activities and financing activities with
the proceeds from our line of credit, new debt, by the issuance of additional units of limited
partner interests ("Units") in the operating partnership, or proceeds from property
dispositions. We believe that because this calculation begins with FFO, it is appropriate to
present this measure of performance. See discussion of FFO under Note (1) above.
S-4
RATIO OF EARNINGS AND FREE CASH FLOW TO FIXED CHARGES
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Ratio of earnings to fixed charges (1)................. 2.45x 2.16x 2.08x 2.31x 1.96x
Ratio of earnings to combined fixed charges and
preferred stock dividends (2)....................... 1.94x 1.79x 2.03x 2.31x 1.96x
Ratio of free cash flow to interest expense(3)(4)...... 3.09x 3.10x 2.81x 3.05x 2.77x
Ratio of free cash flow to combined interest
expense and preferred stock dividends (3)(5)........ 2.44x 2.56x 2.73x 3.05x 2.77x
-----------------------------
(1) The ratio of earnings to fixed charges was computed by dividing earnings by fixed charges. We
define "earnings" as income before minority interest and extraordinary item plus fixed charges
(other than interest which has been capitalized); and "fixed charges" as interest costs,
whether expensed or capitalized, amortization of debt issue costs, and the interest portion of
rent expense.
(2) The ratio of earnings to combined fixed charges and preferred stock dividends was computed by
dividing earnings by combined fixed charges and preferred stock dividends. We define "earnings"
and "fixed charges" as described in Note (1) above. We define "preferred stock dividends" as
the amount of net income that would be required to cover preferred stock dividend requirements.
(3) We are presenting the ratios of free cash flow to interest and free cash flow to interest
expense and preferred stock dividends for additional information. We do not consider these
ratios more important than the ratios of earnings to fixed charges and earnings to combined
fixed charges and preferred stock dividends. We believe that because the calculation of free
cash flow to interest and free cash flow to interest and preferred stock dividends begins with
FFO, it is appropriate to present this measure of performance. We consider FFO to be an
appropriate measure of performance of an equity REIT. See discussion of FFO under Note (1) to
the table on page S-4.
(4) The ratio of free cash flow to interest expense was computed by dividing free cash flow by
interest expense. We define "free cash flow" as FFO less a reserve for capital replacements of
$400 ($375 for 1998 through 2000 and $350 for 1997) per apartment unit, plus interest expense
and preferred stock dividends. "Interest expense" consists of interest expense (including
amortization of loan costs).
(5) The ratio of free cash flow to combined interest expense and preferred stock dividends was
computed by dividing free cash flow by interest expense plus preferred stock dividends. We
define "free cash flow," "interest expense" and "preferred stock dividends" as described in
Notes (2) and (4) above.
S-5
RISK FACTORS
An investment in our Series F Preferred 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, results of operations and prospects
could be materially and adversely affected. 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 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
S-6
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 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 "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 recourse
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
S-7
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 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 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 Code, corporate distributees may be eligible for the
dividends received deduction with respect to these distributions). See "Certain
Federal Income Tax Consequences - Failure to Qualify" in this prospectus
supplement.
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 of 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 "Certain Federal Income Tax Consequences - Taxation
of Home Properties - Asset Tests" in this prospectus supplement. Also, the
imposition of a corporate tax on the operating partnership would reduce
significantly the amount of cash available for distribution to its partners.
S-8
See "Certain Federal Income Tax Consequences - Tax Aspects of the Operating
Partnership" in this prospectus supplement.
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 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 aggregate value of our 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 the accompanying prospectus 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 ensure 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, some of our executive officers
own most of their interest in us through Units. As a result of their status as
holders of Units, these 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 consequences 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, those 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 partnership agreement.
S-9
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, some of 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. 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.
S-10
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the Series F
Preferred Stock of approximately $50,411,487 ($57,991,211) if the underwriters'
over-allotment option is exercised in full) after deducting the underwriting
discounts and commissions and estimated offering expenses. We intend to use the
net proceeds to repay existing indebtedness outstanding under our line of credit
and for general corporate purposes, including funding future acquisitions of
additional properties and revenue-enhancing upgrades at certain of our
Properties. Our $100 million line of credit with M&T Bank had approximately
$11.0 million outstanding at March 18, 2002. Borrowings under our line of credit
bear interest at a floating rate of 1.25% over the one-month LIBOR rate. Our
line of credit expires on September 1, 2002.
S-11
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
2001:
o on a historical basis;
o as adjusted to give effect to the conversion of one million shares of
our 8.36% Series B Convertible Cumulative Preferred Stock into 839,771
shares of our common stock on February 4, 2002 and the sale of an
aggregate of 704,602 shares of our common stock at a weighted average
sale price of $30.99 on February 28, 2002 and the application of the
net proceeds therefrom (together, the "2002 Capital Transactions");
o as adjusted to give effect to the acquisition in March 2002 of six of
the properties of the Holiday Portfolio and the disposition in January
2002 of six properties previously owned by us (together, the "2002
Acquisitions and Dispositions");
o as adjusted to give effect to the sale of 2,087,000 shares of Series F
Preferred Stock at $25.00 per share and the application of the net
proceeds from this offering as described in "Use of Proceeds"; and
o on a pro forma basis as adjusted to give effect to the 2002 Capital
Transactions, the 2002 Acquisitions and Dispositions and the offering
of the Series F Preferred Stock and the application of the net
proceeds from this offering as described in "Use of Proceeds."
The information set forth in the following table should be read in
conjunction with, and is qualified in its entirety by, the consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2001, which is incorporated by
reference into this prospectus supplement.
AT DECEMBER 31, 2001
--------------------------------------------------------------------------
ADJUSTED FOR ADJUSTED FOR ADJUSTED
2002 CAPITAL 2002 ACQUISITIONS FOR THIS
HISTORICAL TRANSACTIONS AND DISPOSITIONS OFFERING PRO FORMA
---------- ------------ ---------------- -------- ---------
(Dollars in thousands)
DEBT:
Line of credit......................... $32,500 ($21,829) ($10,671) -
Mortgage notes payable................. 960,358 $100,000 $1,060,358
------- -------- -------- -------- ----------
Total Debt........................ 992,858 (21,829) 100,000 (10,671) 1,060,358
------- -------- ------- -------- ---------
Minority interest in operating
partnership 341,854 341,854
------- -------
8.36% Series B Preferred Stock (1)..... 48,733 (24,367) 24,366
------ -------- ------
STOCKHOLDERS' EQUITY:
8.75% Series C Preferred Stock (2)..... 59,500 59,500
8.78% Series D Preferred Stock (3)..... 25,000 25,000
8.55% Series E Preferred Stock (4)..... 29,500 29,500
9.00% Series F Preferred Stock (5)..... - 52,175 52,175
Common stock (6)....................... 240 15 255
Additional paid-in capital............. 572,273 46,181 (1,764) 616,690
Distributions in excess of
accumulated earnings................ (57,768) (57,768)
Accumulated other comprehensive loss... (532) (532)
Officer and director notes for stock
purchases........................... (7,617) (7,617)
--------- ------- ----------- -------- --------
TOTAL STOCKHOLDERS' EQUITY...... 620,596 46,196 - 50,411 717,203
--------- -------- ----------- -------- ---------
TOTAL CAPITALIZATION............$2,004,041 $ - $100,000 $39,740 $2,143,781
========== ============ ======== ======= ==========
S-12
---------------------------
(1) 8.36% Series B Convertible Cumulative Preferred Stock, $.01 par value; 2,000,000 shares
authorized; 2,000,000 shares issued and outstanding on a historical basis and 1,000,000 shares
issued and outstanding on an as adjusted and pro forma basis; $25.00 liquidation preference.
(2) 8.75% Series C Convertible Cumulative Preferred Stock, $.01 par value; 600,000 shares
authorized; 600,000 shares issued and outstanding on a historical and pro forma basis; $100.00
liquidation preference.
(3) 8.78% Series D Convertible Cumulative Preferred Stock, $.01 par value; 250,000 shares
authorized; 250,000 shares issued and outstanding on a historical and pro forma basis; $100.00
liquidation preference.
(4) 8.55% Series E Convertible Cumulative Preferred Stock, $.01 par value; 300,000 shares
authorized; 300,000 shares issued and outstanding on a historical and pro forma basis; $100.00
liquidation preference.
(5) 9.00% Series F Cumulative Redeemable Preferred Stock, $.01 par value; 3,000,000 shares
authorized, no shares issued and outstanding on a historical basis and 2,087,000 shares issued
and outstanding on an as adjusted and pro forma basis; $25.00 liquidation preference.
(6) Common stock, $.01 par value; 80,000,000 shares authorized; 24,010,855 issued and outstanding
on a historical basis and 25,555,228 issued and outstanding on an as adjusted and pro forma
basis. Does not include adjustments for outstanding options, shares or rights under our
employee stock benefit plans or our stock purchase and dividend reinvestment plans, which were
exercised or purchased during the period from January 1, 2002 to March 18, 2002.
S-13
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.
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. 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 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.
Our principal executive offices are located at 850 Clinton Square,
Rochester, New York 14604. Our telephone number is (585) 546-4900.
RECENT DEVELOPMENTS
On January 24, 2002, we sold six properties with a total of 339 units
in two unrelated transactions for an aggregate sale price of approximately $13.6
million, or an average of $41,100 per unit. A gain on sale of approximately
$300,000 is expected to be reported in the first quarter of 2002 from the sale
of these properties. In addition, since December 31, 2001, we discontinued
management of one property for a third party and we sold one property managed by
us as a general partner.
On March 1, 2002, we completed the acquisition of six of the properties
in the Holiday Portfolio, containing a total of 1,031 units. We expect to close
on the five remaining properties in the Holiday Portfolio under contract in the
near future. The acquisition price to be paid for the 11 properties in the
Holiday Portfolio, containing a total of 1,688 units, is expected to be
approximately $147.3 million, which will be funded by approximately $65.0
million of assumed debt and $82.3 million of cash on hand. Ten of the properties
in the Holiday Portfolio are located on Long Island, New York (four in Nassau
County and six in Suffolk County) and one property is located in Kingston,
Pennsylvania, a suburb of Wilkes-Barre.
For the six properties we acquired on March 1, 2002, the total purchase
price of approximately $100.3 million, including closing costs, equates to
approximately $95,800 per unit. Consideration for these properties included
approximately $47.0 million of assumed debt and $53.3 million in cash. The
weighted average interest rate on the assumed debt is 7.4% with a weighted
average maturity of 6.25 years. Cash for the closing was derived from borrowings
on our line of credit (which was then repaid with the net proceeds from the
offerings of our common stock in February 2002) and a portion of various
non-recourse mortgage loans totaling approximately $56.7 million on six of our
Properties provided by Freddie Mac through Manufacturers and Traders Trust
Company. The six financed Properties (unrelated to the acquisition of the
properties in the Holiday Portfolio) were financed at a weighted average fixed
rate of 6.76% with a thirty-year amortization for a term of ten years. The $25.2
million proceeds of the mortgage financing not needed for the acquisition of the
six properties on March 1, 2002 were used to pay down our line of credit.
The six properties acquired from the Holiday Portfolio, all containing
two story, garden-style apartments, currently are 95.2% occupied with monthly
rents averaging $1,173. The unit mix at these properties consists of 32 studio
units, 492 one-bedroom units, 473 two-bedroom units and 34 three-bedroom units.
The buildings, built primarily in the late 1960s, have a combination of brick,
brick veneer, cedar shake and aluminum siding. Five of these properties have
pitched roofs. Several of these properties have balconies or wood decks.
Community amenities at these properties include swimming pools, fitness or
recreation centers, and laundry facilities.
We expect to spend approximately $17.9 million over the next several
years on improvements on the Holiday Portfolio properties to correct deferred
maintenance, upgrade kitchens, add community centers and generally improve the
properties.
S-14
On February 14, 2002, the holder of our 8.36% Series B Convertible
Cumulative Preferred Stock converted one million of its shares into 839,771
shares of our common stock, leaving outstanding an aggregate of one million
shares of Series B Preferred Stock. On February 28, 2002, we closed two common
equity offerings, totaling an aggregate of 704,602 shares of our common stock at
a weighted average sale price of $30.99 per share and resulting in aggregate net
proceeds to us of approximately $21.8 million. In one of the offerings, Salomon
Smith Barney Inc. purchased 398,230 shares of our common stock at $31.01 per
share generating approximately $12.3 million in net proceeds to us. Salomon
Smith Barney Inc. contributed these shares of our common stock to a newly-formed
unit investment trust, The Equity Focus Trusts-REIT Portfolio Series, 2002-A. In
the other offering, Cohen & Steers Quality Income Realty Fund, Inc. purchased
306,372 shares of our common stock resulting in net proceeds to us of
approximately $9.5 million, equivalent to a price of $30.97 per share.
OUR PORTFOLIO
As of December 31, 2001, we operated 293 communities containing 49,745
apartment units. Of these, we owned 39,007 units in 143 communities, we
partially owned and managed as general partner 8,035 units in 132 communities,
and we manage for other owners 2,703 units in 18 communities. We also managed
2.2 million square feet of commercial space. While our portfolio is
geographically diverse, our primary focus is in the following metropolitan
areas: Baltimore, Philadelphia, Detroit, suburban Washington, D.C. and
Rochester, New York.
As of December 31, 2001, we concentrated our activities in the
following market areas:
% OF APTS. %
APTS. APTS. MANAGED AS APTS. FEE APT. OWNED AND
MARKET AREA OWNED OWNED GENERAL PARTNER MANAGED TOTALS MANAGED
----------- ----- ----- --------------- ------- ------ -------
Baltimore, MD....................... 6,322 16.2% - 2,158 8,480 17.0%
Philadelphia/Lehigh Valley, PA...... 6,276 16.1 - - 6,276 12.6
Detroit, MI......................... 5,694 14.6 - 108 5,802 11.7
Suburban Washington, D.C............ 4,277 11.0 - - 4,277 8.6
Rochester, NY....................... 2,565 6.6 1,747 365 4,677 9.4
Northern NJ......................... 2,520 6.5 352 - 2,872 5.8
Chicago, IL......................... 2,242 5.7 - - 2,242 4.5
Long Island, NY..................... 1,933 5.0 - - 1,933 3.9
Buffalo, NY......................... 1,644 4.2 156 - 1,800 3.6
Syracuse, NY........................ 1,565 4.0 1,486 - 3,051 6.1
South Bend, IN...................... 706 1.8 168 - 874 1.8
Albany/Hudson Valley, NY............ 684 1.7 777 61 1,522 3.1
Central VA.......................... 664 1.7 - - 664 1.3
Portland, ME........................ 595 1.5 - - 595 1.2
Hamden, CT.......................... 498 1.3 - - 498 1.0
Delaware............................ 432 1.1 - - 432 0.9
Columbus, OH........................ 242 0.6 948 - 1,190 2.4
Western PA.......................... 148 0.4 2,401 11 2,560 5.1
------- ------- ------ ------- ------- -------
Total Number of Apartment Units.. 39,007 100.0% 8,035 2,703 49,745 100.0%
====== ====== ===== ===== ====== =====
Total Number of Communities...... 143 132 18 293
=== === == ===
As a result of the transactions completed in 2002, as of March 14,
2002, we operate 291 communities containing an aggregate of 50,278 apartment
units. Of these, we own 39,699 units in 143 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.
S-15
BUSINESS AND GROWTH STRATEGIES
Business and Operating Strategies. We will continue to focus on
enhancing the investment returns of our Properties by:
o acquiring apartment communities at prices below new construction costs
to reposition for long-term growth;
o disposing of Properties that have reached their potential or are less
efficient to operate due to size or remote location;
o reinforcing our decentralized company philosophy, encouraging
employees' personal improvement and extensive training;
o enhancing the quality of living for our residents by improving the
quality of service and physical amenities;
o readily adopting new technology to provide efficient administration
and permitting maximum time spent attracting and serving residents;
o continuing to utilize our written "Pledge" of customer satisfaction;
and
o engaging in aggressive cost controls and taking advantage of volume
discounts.
The following table illustrates our growth in the number of apartment
units owned and average monthly rents while maintaining stable occupancies.
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
"Same-Store" Occupancy (1)........... 95.3% 94.1% 94.5% 94.7% 93.7%
Same Store Avg. Monthly Rent (1)..... $600 $627 $661 $701 $776
Owned Communities.................... 63 96 126 147 143
Owned Apartment Units................ 14,048 23,680 33,807 39,041 39,007
----------------
(1) By "same-store" we mean individual Properties held for the full 12 months of the current period
and the full 12 months of the preceding period.
Acquisition, Sale and Development Strategies. Our core strategy is to
grow primarily through acquisitions in geographic regions that have:
o enough apartments available for acquisition to achieve a critical
mass;
o easy access to our regional offices; and
o minimal investment ownership by other apartment REITs.
Targeted markets also possess other characteristics similar to our existing
markets, including a limited amount of new construction, acquisition
opportunities below replacement costs, a mature housing stock and stable or
moderate job growth. We expect that our growth will be focused in select
metropolitan areas in the Northeast, Mid-Atlantic and Midwestern regions of the
United States, where we have already established a presence. The major
metropolitan areas where we will focus include: Baltimore, Washington, D.C.,
Boston, Chicago, Detroit, New York and Philadelphia. We also expect to maintain
or grow our portfolios in our existing markets as economic/market conditions
permit. We expect continued geographic specialization to produce operating
efficiencies. We will continue to pursue the acquisition of individual
properties as well as multi-property portfolios. We may also consider strategic
investments in other apartment companies.
We will continue to contemplate the sale of several of our mature
communities in order to fund new acquisitions which are expected to generate
higher returns on investment. During 2001, we completed the sale of 14
communities with a total of 2,855 units for an aggregate consideration of
approximately $122.0 million. The properties sold were either in slower growth
markets or less efficient to operate due to their remote locations and/or
smaller size. We reinvested proceeds from the sale of these properties, which
were expected to produce an unleveraged internal rate of return ("IRR") from 9%
to 10%, by purchasing properties expected to produce an
S-16
unleveraged IRR of at least 12% and by repurchasing 1.2 million shares of our
common stock and Units in the operating partnership at an aggregate cost of
$32.5 million, or an average of $27.08 per share/Unit.
We have also identified seven Properties with over 1,700 units for
potential sale during 2002 with an estimated aggregate value of approximately
$100.0 million. These Properties are spread over several of our markets and are
less efficient to operate due to their remote locations and/or their smaller
size. We will not sell any of these Properties unless we achieve targeted prices
at levels which would allow us to reinvest the proceeds from such sales at
higher returns by making acquisitions with repositioning potential.
Effective December 31, 2000, we sold our affordable housing development
operations to Conifer Realty, LLC. In connection with the sale, we retained the
property management operations for 8,325 apartment units in 136 existing
affordable communities. These activities are expected to generate ongoing
management fees, incentive management fees and participation in residual value.
They also increase our volume purchasing ability and position us to build market
rate or affordable communities when, and if, market factors warrant.
Financing and Capital Strategies. We intend to adhere to the following
financing policies:
o maintaining a ratio of debt-to-total market capitalization (our total
debt as a percentage of the market value of our outstanding diluted
common stock and Units plus total debt) of approximately 50% or less;
o utilizing primarily fixed rate debt;
o varying debt maturities to avoid significant exposure to interest rate
changes upon refinancing; and
o maintaining a line of credit so that we can respond quickly to
acquisition opportunities.
At December 31, 2001, our outstanding debt was approximately $993.0
million and our debt-to-total market capitalization ratio was 41%, based on the
December 31, 2001 closing price of our common stock of $31.60 per share. The
weighted average interest rate on our mortgage debt as of December 31, 2001 was
7.2% and the weighted average maturity was approximately ten years. Our debt
maturities are staggered, ranging from August 2002 through June 2036. As of
December 31, 2001, we had a $100 million unsecured line of credit from M&T Bank.
This line of credit is available for acquisitions and other corporate purposes.
Borrowings under this line of credit bear interest at a rate equal to 1.25% over
the one-month LIBOR rate. As of December 31, 2001, we had approximately $33.0
million in outstanding borrowings on this line of credit.
We expect to continue to fund a significant portion of our continued
growth by taking advantage of our operating partnership structure by using Units
as currency in acquisition transactions. We issued Units valued at approximately
$19.0 million as partial consideration in acquisition transactions during 2001.
We also intend to continue to pursue other equity transactions to raise
capital with limited transaction costs. Our Dividend Reinvestment and Direct
Stock Purchase Plan has provided an inexpensive source of equity, allowing
purchases up to $1,000 a month at a discount of 2%. Through discretionary use of
waivers of the investment limit, we have balanced capital raising desires with
limiting dilution when our stock price was at or below our estimate of net asset
value.
We have also adopted a strategy to repurchase shares of our common
stock and Units of the operating partnership when our common stock is trading at
a discount to our estimate of the underlying net asset value, thereby continuing
to build value for long-term shareholders. We have authority from our Board of
Directors to purchase from time to time an additional 1,135,800 shares of common
stock and/or Units in the operating partnership in open market or privately
negotiated transactions.
S-17
SELECTED FINANCIAL DATA
The following table contains selected historical operating and balance
sheet data as of and for the years ended December 31, 2001, 2000, 1999, 1998 and
1997, derived from our audited financial statement for those years. Since this
is only selected information, you should read it in conjunction with the more
detailed information contained in our consolidated financial statements and
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in our Annual Report on Form 10-K for the
year ended December 31, 2001, which is incorporated by reference in this
prospectus supplement.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
OPERATING DATA:
Revenues:
Rental income.................................. $348,914 $298,860 $217,591 $137,557 $64,002
Other income.................................. 18,609 20,188 16,872 11,686 5,695
--------- -------- -------- -------- -------
Total revenues.......................... 367,523 319,048 234,463 149,243 69,697
-------- ------- ------- ------- ------
Expenses:
Operating and maintenance.................... 145,558 128,034 95,200 63,136 31,317
General and administrative................. 18,614 13,235 10,696 6,685 2,255
Interest................................... 66,446 56,792 39,558 23,980 11,967
Depreciation and amortization.............. 64,890 52,430 37,350 23,191 11,200
Loss on available-for-sale securities.......... - - 2,123 - -
Non-recurring acquisition expense.............. - - 6,225 - -
-------- ------- ------- ------- ------
Total expenses......................... 295,508 250,491 191,152 116,992 56,739
------- ------- ------- ------- ------
Income before gain (loss) on disposition of property and
business, minority interest and extraordinary item 72,015 68,557 43,311 32,251 12,958
Gain (loss) on disposition of property and business 26,241 (1,386) 457 - (1,283)
-------- ------- -------- ------- ------
Income before minority interest and
extraordinary item.......................... 98,256 67,171 43,768 32,251 11,675
Minority interest.................................. 33,682 25,715 17,390 12,603 4,248
------- ------- --------- ------- ------
Income before extraordinary item................. 64,574 41,456 26,378 19,648 7,427
Extraordinary item, prepayment penalties,
net of allocation to minority interest......... (68) - (96) (960) (1,037)
----------- ----------- ---------- --------- ------
Net income........................................ 64,506 41,456 26,282 18,688 6,390
Preferred dividends................................ (17,681) (12,178) (1,153) - -
-------- ------- ------- ------- ------
Net income available to common stockholders........ $46,825 $29,278 $25,129 $18,688 $6,390
======= ======= ======= ======= =====-
Net income before extraordinary item per common share:
Basic......................................... $2.12 $1.42 $1.35 $1.41 $1.00
===== ===== ===== ===== =====
Diluted........................................ $2.11 $1.41 $1.34 $1.40 $ .98
===== ===== ===== ===== =====
Net income per common share:
Basic.......................................... $2.12 $1.42 $1.34 $1.34 $ .86
===== ===== ===== ===== =====
Diluted........................................ $2.11 $1.41 $1.34 $1.33 $ .84
===== ===== ===== ===== =====
Cash dividends declared per common share......... $2.31 $2.16 $1.97 $1.83 $1.74
===== ===== ===== ===== =====
S-18
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
BALANCE SHEET DATA (AT PERIOD END):
Real estate, before accumulated depreciation....... $2,135,078 $1,895,269 $1,480,753 $940,788 $525,128
Total assets....................................... 2,063,789 1,871,888 1,503,617 1,012,235 543,823
Total debt......................................... 992,858 832,783 669,701 418,942 218,846
8.36% Series B Convertible Cumulative
Preferred Stock............................... 48,733 48,733 48,733 - -
Stockholders' equity............................... 620,596 569,528 448,390 361,956 151,432
OTHER DATA:
Funds from operations (1)......................... $136,604 $120,854 $80,784 $55,966 $24,345
Cash available for distribution (2)................ $120,994 $107,300 $78,707 $49,044 $21,142
Net cash provided by operating activities.......... $148,389 $127,197 $90,526 $60,548 $27,285
Net cash used in investing activities.............. ($139,106) ($178,445) ($190,892) ($297,788) ($102,460)
Net cash (used in) provided by financing activities ($9,013) $56,955 $71,662 $266,877 $77,461
Weighted average number of common shares outstanding:
Basic............................................ 22,101,027 20,639,241 18,697,731 13,898,221 7,415,888
Diluted.......................................... 22,227,521 20,755,721 18,800,907 14,022,329 7,558,167
Total communities owned at end of period... 143 147 126 96 63
Total apartment units owned at end of period.... 39,007 39,041 33,807 23,680 14,048
---------------------------
(1) Our management considers FFO to be an appropriate measure of performance of an equity REIT. FFO
is generally defined as net income (loss) before gains (losses) from the sale of property and
business and extraordinary items, before minority interest in the operating partnership, plus
real estate depreciation. Our management believes that in order to facilitate a clear
understanding of the combined historical operating results of the company, FFO should be
considered in conjunction with net income as presented in the consolidated financial statements
included elsewhere herein. FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily indicative of
cash available to fund cash needs. FFO should not be considered as an alternative to net income
as an indication of our performance or to cash flow as a measure of liquidity. All REITs may
not be using the same definition for FFO. Accordingly, the presentation above may not be
comparable to other similarly titled measures of "FFO" of other REITs.
(2) "Cash available for distribution" is defined as FFO less an annual reserve for anticipated
recurring, non-revenue generating capitalized costs of $400 ($375 for 1998 through 2000 and
$350 for 1997) per apartment unit. It is our policy to fund our investing activities and
financing activities with the proceeds of our line of credit, new debt, by the issuance of
additional Units, or proceeds from property dispositions. We believe that because this
calculation begins with FFO, it is appropriate to present this measure of performance. See
discussion of FFO in Note (1) above.
S-19
DESCRIPTION OF SERIES F CUMULATIVE REDEEMABLE PREFERRED STOCK
The following is a summary of the material terms and provisions of the
Series F Preferred Stock . The Series F Preferred Stock is more completely
described in the articles supplementary to our Articles of Incorporation
establishing the Series F Preferred Stock, which is available from us and is
incorporated into this prospectus supplement by reference. This description of
the particular terms of the Series F Preferred Stock supplements the description
of the general terms and provisions of our preferred stock set forth in the
accompanying prospectus. However, if the terms set forth herein differ from the
terms set forth in the accompanying prospectus, you should rely on the terms set
forth below.
GENERAL
Under our Articles of Incorporation, we are currently authorized to
issue up to 100 million shares of our capital stock, including common stock and
preferred stock. As of December 31, 2001, 80 million shares were classified as
common stock, 10 million shares were classified as preferred stock and 10
million shares were classified as excess stock.
We are authorized to issue shares of preferred stock in one or more
series, with such designations, preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, in each case, if any, as are permitted by Maryland law
and as our Board of Directors may determine by resolution. See "Description of
Preferred Stock" in the accompanying prospectus.
Prior to the completion of this offering, our Board of Directors will
adopt articles supplementary to our Articles of Incorporation determining the
number and terms of a series of preferred stock that will be designated "9.00%
Series F Cumulative Redeemable Preferred Stock." Up to 3,000,000 shares of
Series F Preferred Stock will be authorized. As of the date of this prospectus
supplement, no shares of Series F Preferred Stock are outstanding. Our other
authorized series of preferred stock are described in this prospectus supplement
under the heading "Capitalization" and in the documents incorporated by
reference into this prospectus supplement and the accompanying prospectus.
MATURITY
The Series F Preferred Stock has no stated maturity and will not be
subject to any sinking fund or mandatory redemption, except as described under
"Description of Capital Stock - Restrictions on Transfer" in the accompanying
prospectus.
RANKING
The Series F Preferred Stock will, with respect to dividend rights and
rights upon our liquidation, dissolution or winding up, rank:
o senior to all classes or series of our common stock and to all other
equity securities ranking junior to the Series F Preferred Stock with
respect to dividend rights or rights upon our liquidation, dissolution
or winding up (collectively, the "Junior Stock");
o on a parity with the other series of our outstanding preferred stock
and any other equity securities authorized or designated by us, the
terms of which specifically provide that such equity securities rank
on a parity with the Series F Preferred Stock with respect to dividend
rights or rights upon our liquidation, dissolution or winding up
(collectively, the "Parity Stock"); and
o junior to all of our existing and future indebtedness and to any class
or series of equity securities authorized or designated by us in the
future which specifically provides that such class or series ranks
senior to the Series F Preferred Stock with respect to dividend rights
or rights upon our liquidation, dissolution or winding up
(collectively, the "Senior Stock").
S-20
DIVIDENDS
Subject to the rights of series of preferred stock which may from time
to time come into existence, holders of shares of the Series F Preferred Stock
will be entitled to receive, when and as declared by our Board of Directors, out
of funds legally available for the payment of dividends, cumulative preferential
cash dividends at the rate of 9.00% per year of the Liquidation Preference (as
defined below) per share (equivalent to a fixed annual amount of $2.25 per
share).
Dividends on the Series F Preferred Stock will be cumulative from the
date of original issue and will be payable quarterly in arrears on or about
February 28th, May 31st, August 31st and November 30th of each year or, if any
such day is not a business day, then on the next succeeding business day. The
first dividend will be paid on or about May 31, 2002 and will be for less than a
full quarter. Dividends payable on the Series F Preferred Stock for any partial
dividend period will be computed on the basis of a 360-day year consisting of
twelve 30-day months. Dividends will be payable to holders of record as they
appear in our stock records at the close of business on the applicable record
date, which will be the same date set for any quarterly dividend payable to
holders of our common stock or on such other date designated by our Board of
Directors that is not more than 30 nor less than 10 days prior to the applicable
dividend payment date (each, a "Dividend Record Date"). The first Dividend
Record Date for determination of stockholders entitled to receive dividends on
the Series F Preferred Stock is expected to be May 20, 2002.
No dividends on shares of the Series F Preferred Stock may be declared
by our Board of Directors or paid or set apart for payment by us at such time as
the terms and provisions of any of our agreements, including any agreement
relating to our indebtedness, prohibit such declaration, payment or setting
apart for payment or provide that such declaration, payment or setting apart for
payment would constitute a breach thereof or a default thereunder, or if such
declaration or payment is restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series F Preferred
Stock will accrue whether or not we have earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared. Accrued but unpaid dividends on the Series F
Preferred Stock will accumulate as of the dividend payment date on which they
became payable.
When dividends are not paid in full upon the Series F Preferred Stock
or any Parity Stock, or a sum sufficient for such payment is not set apart, all
dividends declared upon the Series F Preferred Stock and any Parity Stock shall
be declared ratably in proportion to the respective amounts of dividends
accumulated, accrued and unpaid on the Series F Preferred Stock and accumulated,
accrued and unpaid on such Parity Stock. Except as set forth in the preceding
sentence, unless dividends on the Series F Preferred Stock equal to the full
amount of accumulated, accrued and unpaid dividends have been or
contemporaneously are declared and paid or declared and are sufficient for the
payment thereof has been or contemporaneously is set apart for such payment, for
all past dividend periods and the then current dividend period, no dividends
shall be declared or paid or set apart for payment by us and no other
distribution of cash or other property may be declared or made, directly or
indirectly, by us with respect to any Parity Stock. Unless dividends equal to
the full amount of all accumulated, accrued and unpaid dividends on the Series F
Preferred Stock have been declared and paid, or declared and a sum sufficient
for the payment thereof has been set apart for such payment, for all past
dividend periods and the then current dividend period, no dividends (other than
dividends or distributions paid in shares of Junior Stock or options, warrants
or rights to subscribe for or purchase shares of Junior Stock) may be declared
or paid or set apart for payment by us and no other distribution of cash or
other property may be declared or made, directly or indirectly, by us with
respect to any shares of Junior Stock, nor shall any shares of Junior Stock be
redeemed, purchased or otherwise acquired (other than a redemption, purchase or
other acquisition of common stock made for purposes of any of our employee
incentive or benefit plans) for any consideration (or any monies be paid to or
made available for a sinking fund for the redemption of any shares of any such
stock), directly or indirectly, by us (except by conversion into or exchange for
shares of Junior Stock).
No interest, or sum of money in lieu of interest, will be payable in
respect of any dividend payment or payments on the Series F Preferred Stock
which may be in arrears.
S-21
Any dividend payment made on the Series F Preferred Stock will first be
credited against the earliest accrued but unpaid dividend due which remains
payable.
LIQUIDATION PREFERENCE
Subject to the rights of other series of preferred stock which may from
time to time come into existence, upon any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, before we make or set apart any
payment or distribution for the holders of any shares of Junior Stock, the
holders of shares of Series F Preferred Stock shall be entitled to be paid out
of assets legally available for distribution to our stockholders a liquidation
preference of $25.00 per share (the "Liquidation Preference"), plus an amount
equal to all accumulated, accrued and unpaid dividends (whether or not earned or
declared) to the date of final distribution to such holders. Until the holders
of the Series F Preferred Stock have been paid the Liquidation Preference in
full, plus an amount equal to all accumulated, accrued and unpaid dividends
(whether or not earned or declared) to the date of final distribution to such
holders, no payment shall be made to any holder of Junior Stock upon the
liquidation, dissolution or winding up of our affairs. If upon any liquidation,
dissolution or winding up of our affairs, our available assets, or proceeds
thereof, shall be insufficient to pay in full the amount of the liquidation
distributions on all outstanding shares of Series F Preferred Stock and the
corresponding amounts payable on any other shares of Parity Stock, then such
available assets, or the proceeds thereof, shall be distributed among the
holders of Series F Preferred Stock and any such other Parity Stock ratably in
the same proportion as the respective amounts that would be payable on such
Series F Preferred Stock and any such Parity Stock if all amounts payable
thereon were paid in full. A voluntary or involuntary liquidation, dissolution
or winding up of our affairs shall not include our consolidation or merger with
one or more entities, a sale or transfer of all or substantially all of our
assets, or a statutory share exchange. Upon any liquidation, dissolution or
winding up of our affairs, after payment shall have been made in full to the
holders of Series F Preferred Stock and any Parity Stock, any other series or
class or classes of Junior Stock shall be entitled to receive any and all assets
remaining to be paid or distributed, and the holders of the Series F Preferred
Stock and any Parity Stock shall not be entitled to share therein.
OPTIONAL REDEMPTION
We may not redeem the Series F Preferred Stock before March 25, 2007,
except in certain limited circumstances relating to maintaining our ability to
qualify as a REIT for federal income tax purposes as described under
"Description of Capital Stock - Restrictions on Transfer" in the accompanying
prospectus. On and after March 25, 2007, we may, at our option upon not less
than 30 nor more than 60 days written notice, redeem shares of the Series F
Preferred Stock, in whole or in part, at any time or from time to time, for cash
at a redemption price equal to 100% of the Liquidation Preference, plus all
accumulated, accrued and unpaid dividends thereon, if any, to the date fixed for
redemption (except as provided below), without interest.
Holders of Series F Preferred Stock to be redeemed will be required to
surrender such Series F Preferred Stock at the place designated in such notice
and will be entitled to the redemption price and any accumulated, accrued and
unpaid dividends payable upon such redemption following such surrender. If
notice of redemption of any shares of Series F Preferred Stock has been given
and if the funds necessary for such redemption have been set aside by us in
trust for the benefit of the holders of any shares of Series F Preferred Stock
so called for redemption, then from and after the redemption date dividends will
cease to accrue on such shares of Series F Preferred Stock, such shares of
Series F Preferred Stock will no longer be deemed outstanding and all rights of
the holders of such shares will terminate, except the right to receive the
redemption price. If less than all of the outstanding Series F Preferred Stock
is to be redeemed, the Series F Preferred Stock to be redeemed will be selected
on a pro rata basis (as nearly as may be practicable without creating fractional
shares) or by any other equitable method determined by us. Our ability to redeem
Series F Preferred Stock is subject to the limitation on distributions in the
Maryland General Corporation Law.
Unless dividends equal to the full amount of all accumulated, accrued
and unpaid dividends on all outstanding shares of Series F Preferred Stock have
been declared and paid, or declared and a sum sufficient for the payment thereof
set apart for such payment, for all past dividend periods and the then current
dividend period, no shares of Series F Preferred Stock or Parity Stock may be
redeemed unless all outstanding shares of Series F Preferred Stock are
simultaneously redeemed and we will not have the right to purchase or otherwise
acquire, directly or indirectly, any shares of Series F Preferred Stock (except
by exchange for Junior Stock); provided,
S-22
however, that the foregoing shall not prevent the exchange by us of Series F
Preferred Stock or Parity Stock for an equal number of shares of our excess
stock in order to ensure that we continue to meet the requirements for
qualification as a REIT for federal income tax purposes as described under
"Description of Capital Stock - Restrictions on Transfer" in the accompanying
prospectus, or the purchase or acquisition of shares of Series F Preferred Stock
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding shares of Series F Preferred Stock.
Notice of redemption will be mailed by us not less than 30 nor more
than 60 days prior to the redemption date, addressed to the respective holders
of record of the Series F Preferred Stock to be redeemed at their respective
addresses as they appear on our stock transfer records. No failure to give such
notice or any defect therein or in the mailing thereof shall affect the validity
of the proceedings for the redemption of any shares of Series F Preferred Stock
except as to the holder to whom notice was defective or not given. Each notice
will state:
o the redemption date;
o the redemption price;
o the number of shares of Series F Preferred Stock to be redeemed;
o the procedures with respect to redemption of uncertificated shares or
place or places where certificates for shares of the Series F
Preferred Stock are to be surrendered for payment of the redemption
price; and
o that dividends on the shares to be redeemed will cease to accrue on
such redemption date.
If less than all of the Series F Preferred Stock held by any holder is to be
redeemed, the notice mailed to such holder will also specify the number of
shares of Series F Preferred Stock held by such holder to be redeemed.
On any redemption of Series F Preferred Stock, we will pay, in cash,
any accumulated, accrued and unpaid dividends through the redemption date,
unless a redemption date falls after a Dividend Record Date and prior to the
corresponding dividend payment date, in which case each holder of Series F
Preferred Stock at the close of business on such Dividend Record Date will be
entitled to the dividend payable on such shares on the corresponding dividend
payment date notwithstanding the redemption of such shares between such Dividend
Record Date and the corresponding dividend payment date or our default in the
payment of the dividend due. Except as provided above, we will make no payment
or allowance for unpaid dividends, whether or not in arrears, on shares of
Series F Preferred Stock which may have been called for redemption.
The Series F Preferred Stock has no stated maturity and will not be
subject to any sinking fund or mandatory redemption. However, in order to ensure
that we continue to meet the requirements for qualification as a REIT for
federal income tax purposes, Series F Preferred Stock acquired by a stockholder
in excess of our 8.0% ownership limit will automatically be exchanged for shares
of our excess stock. See "Description of Capital Stock - Restrictions on
Transfer" in the accompanying prospectus.
Subject to applicable law and the limitation on purchases when
dividends on the Series F Preferred Stock are in arrears, we may, at any time
and from time to time, purchase any shares of Series F Preferred Stock in the
open market, by tender or by private agreement.
VOTING RIGHTS
Holders of shares of Series F Preferred Stock will not have any voting
rights, except as set forth below and except as otherwise required by applicable
law.
If we do not declare and pay dividends on our Series F Preferred Stock
or any Parity Stock for six or more quarterly periods, whether or not
consecutive, or if we do not satisfy the fixed charge coverage ratio described
below for six consecutive quarterly periods, the number of directors then
constituting our Board of Directors shall be
S-23
increased by two, if not already increased by reason of similar types of
provisions with respect to any Parity Stock which is entitled to similar voting
rights (the "Voting Preferred Stock"), and the holders of shares of Series F
Preferred Stock, together with the holders of all other Voting Preferred Stock
then entitled to exercise similar voting rights, voting as a single class
regardless of series, will be entitled to vote for the election of the two
additional directors at any annual meeting of stockholders or at a special
meeting of the holders of the Series F Preferred Stock and the Voting Preferred
Stock called for that purpose. We must call such special meeting upon the
request of any holder of Series F Preferred Stock. A quorum for any such meeting
will be deemed to exist if at least a majority of the outstanding shares of the
Series F Preferred Stock and the Voting Preferred Stock then entitled to
exercise similar voting rights are represented in person or by proxy at such
meeting. Such additional directors will be elected upon the affirmative vote of
a plurality of the shares of Series F Preferred Stock and Voting Preferred Stock
present and voting in person by proxy at a duly called and held meeting at which
a quorum is present.
Whenever dividends in arrears on outstanding shares of the Series F
Preferred Stock and the Voting Preferred Stock shall have been paid and
dividends thereon for the current quarterly dividend period shall have been paid
or declared and set apart for payment, or whenever we have a fiscal quarter
where the fixed charge coverage covenant is met, as the case may be, then the
right of the holders of the Series F Preferred Stock and the Voting Preferred
Stock to elect the additional two directors shall cease and the terms of office
of such directors will terminate and the number of directors constituting our
Board of Directors will be reduced accordingly.
The affirmative vote or consent of at least 66 2/3% of the votes
entitled to be cast by the holders of the outstanding shares of Series F
Preferred Stock will be required to effect:
o any amendment, alteration or repeal of any of the provisions of our
Articles of Incorporation, our bylaws, or our articles supplementary,
that materially and adversely affects the powers, rights or
preferences of the holders of the Series F Preferred Stock; provided,
however, that the amendment of, or supplement to, the provisions of
our Articles of Incorporation so as to authorize, create, increase or
decrease the authorized amount of any shares of Junior Stock or any
shares of Parity Stock, or the issuance of any such shares, shall not
be deemed to materially adversely affect the powers, rights or
preferences of the Series F Preferred Stock; or
o a share exchange that affects the Series F Preferred Stock, a
consolidation with or merger of the company into another entity, or a
consolidation with or merger of another entity into the company,
unless in each such case each share of Series F Preferred Stock (i)
shall remain outstanding without a material and adverse change to its
terms and rights or (ii) shall be converted into or exchanged for
preferred stock of the surviving entity having preferences, rights,
powers, restrictions, limitations as to dividends, qualifications and
terms or conditions of redemption thereof identical to that of the
Series F Preferred Stock (except for changes that do not materially
and adversely affect the holders of the Series F Preferred Stock); or
o the authorization, reclassification or creation of, or the increase in
the authorized or issued amount of, any class or series of Senior
Stock or any security convertible into any class or series of Senior
Stock; or
o any increase in the authorized amount of shares of Series F Preferred
Stock or decrease in the authorized amount of shares of Series F
Preferred Stock below the number of shares then issued and
outstanding;
provided, however, that no such vote of the holders of the Series F Preferred
Stock shall be required if, at or prior to the time such amendment, alteration
or repeal is to take effect or the issuance of any such Senior Stock or security
convertible into Senior Stock is to be made, as the case may be, provisions are
made for the redemption of all outstanding shares of Series F Preferred Stock.
S-24
FIXED CHARGE COVERAGE COVENANT
For each fiscal quarterly period, we will maintain a ratio of EBITDA,
calculated as described below, to fixed charges of greater than 1.75 to 1.0.
This ratio is called a "fixed charge coverage ratio." EBITDA is our consolidated
income before gain (loss) on disposition of property and business, minority
interest and extraordinary item, before giving effect to expenses for interest,
taxes, depreciation and amortization. "Fixed charges" means "total interest
expense" and all dividends declared and payable on our preferred stock and
preferred Units of the operating partnership, other than the preferred Units
that we hold which have the same distribution and liquidation preferences as our
preferred stock. "Total interest expense" means our consolidated interest paid
during the quarter plus any accrued or capitalized interest expense for that
period. This covenant is contained in our articles supplementary with respect to
the Series F Preferred Stock. Within 45 days after the end of each of our first
three quarters of the year, and within 90 days after the end of our fourth
quarter, we will file a report under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including information on the calculation of the
fixed charge coverage ratio. If we fail to maintain the ratio for six or more
consecutive fiscal quarters, the holders of the Series F Preferred Stock,
together with certain other holders of our preferred stock, will be entitled to
elect two additional directors to our Board of Directors until we again complete
a quarter in compliance with the ratio. See "- Voting Rights" above. For the
past four fiscal quarters, our fixed charge coverage ratio was 2.10:1 for the
first quarter of 2001, 2.45:1 for the second quarter of 2001, 2.52:1 for the
third quarter of 2001, and 2.52:1 for the fourth quarter of 2001.
We will remain subject to the fixed charge coverage ratio covenant
until the earliest of: (i) a class of our senior unsecured debt is rated BBB or
higher by Fitch, Inc., (ii) we are merged into a company which has senior
unsecured debt with such a rating, or (iii) if Fitch, Inc. is no longer
generally issuing ratings with respect to real estate investment trusts
comparable to us, a class of our senior unsecured debt is rated BBB or higher by
Standard & Poors Corporation or Baa2 or higher by Moody's Investors Service,
Inc. We do not have any current plans to issue rated unsecured debt.
CONVERSION
The Series F Preferred Stock is not convertible into or exchangeable
for any of our other property or securities, except that the shares of Series F
Preferred Stock may be exchanged for shares of our excess stock in order to
ensure that we remain qualified as a REIT for federal income tax purposes.
FORM
The Series F Preferred Stock will be issued and maintained in
book-entry form registered in the name of the nominee of The Depositary Trust
Company except under limited circumstances.
TRANSFER AGENT
The registrar and transfer agent for the Series F Preferred Stock will
be Mellon Investor Services.
The shares of Series F Preferred Stock are subject to certain
restrictions on ownership and transfer which are described under "Description of
Capital Stock - Restrictions on Transfer" in the accompanying prospectus.
S-25
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of certain federal income tax considerations
regarding an investment in Series F Preferred Stock is based on current law, is
for general information only and is not tax advice. This summary supersedes the
discussion set forth in the accompanying prospectus under the heading "Federal
Income Tax Considerations."
The information in this section is based on the Code as currently in
effect, current, temporary and proposed Treasury Regulations promulgated under
the Code, the legislative history of the 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
supplement are not binding on the IRS or a court of law. Thus, we can provide no
assurance that these statements will not be challenged by the IRS or sustained
by a court of law if challenged by the IRS. The tax treatment to holders of our
capital stock will vary depending on a holder's particular situation and this
discussion does not purport to deal with all aspects of address all tax
considerations applicable to prospective investors, nor does the discussion give
a detailed description of any state, local, or foreign tax considerations. This
discussion does not describe all of the aspects of federal income taxation that
may be relevant to a holder of common stock or prospective stockholder in light
of his or her personal investments or tax particular circumstances, or to
certain types of stockholders (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) 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
Series F Preferred Stock. If we meet the detailed requirements in the 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 shareholder level on funds distributed to a
corporation's shareholders. 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.
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 Series F Preferred Stock in an entity electing
to be taxed as a REIT. Each prospective purchaser should consult his or her own
tax advisor regarding the specific tax consequences of the purchase, ownership
and sale of common stock real estate investment trust, 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 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 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
S-26
stock ownership, the various qualification tests imposed under the 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 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 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 Code that govern the federal income tax
treatment of a REIT and its stockholders. This summary is qualified in its
entirety by the applicable Code provisions, relevant rules and regulations
promulgated under the Code, and administrative and judicial interpretations of
the 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.
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.
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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 temporary and proposed 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 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 Code;
(4) is not a financial institution referred to in Section 582(c) of the
Code or an insurance company to which subchapter L of the 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 Code to include the
entities set forth in Section 542(a)(2) of the Code; and
(7) meets other tests, described below, regarding the nature of its
income and assets and the amount of its distributions.
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 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 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" in the accompanying prospects. 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.
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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 Management
Companies for such entities to be treated as taxable REIT subsidiaries of ours
effective January 1, 2001.
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 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 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 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
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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 us 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:
o 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;
o rent any property to a related party tenant (except for leases to a
taxable REIT subsidiary);
o 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
o 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 Code. Generally, we may
avail ourselves of the relief provisions if:
o our failure to meet these tests was due to reasonable cause and not
due to willful neglect;
o we attach a schedule of the sources of our income to our federal
income tax return; and
o any incorrect information on the schedule was not due to fraud with
intent to evade tax.
S-30
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.
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.
S-31
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:
o the sum of:
o 90% of our "REIT taxable income," computed without regard to the
dividends paid deduction and our net capital gain, and
o 90% of the after tax net income, if any, from foreclosure
property;
o minus:
o 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 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 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:
o 85% of our REIT ordinary income for such year;
o 95% of our REIT capital gain income for the year; and
o any undistributed taxable income from prior periods;
S-32
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
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, 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. For purposes of determining whether
distributions to our stockholders are out of current or accumulated earnings and
profits, our earnings and profits will be first allocated to holders of
preferred stock, and second to holders of common stock. 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 30 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
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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:
o a 20% gain distribution, which would be taxable to non-corporate U.S.
stockholders at a maximum rate of 20%; or
o 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 Code as
if the REIT were an individual whose ordinary income were subject to a marginal
tax rate of at least 28%.
SERIES F PREFERRED STOCK
Redemption. Redemption of shares of Series F Preferred Stock will be
treated under Section 302 of the Code as a distribution taxable as a dividend
(to the extent of the company's current and accumulated earnings and profits) at
ordinary income rates unless the redemption satisfies one of the tests set forth
in Section 302(b) of the Code and is therefore treated as a sale or exchange of
the redeemed shares. None of these dividend distributions would be eligible for
the dividends received deduction for corporate stockholders. The redemption will
be treated as a sale or exchange if it (i) is "substantially disproportionate"
with respect to the holder, (ii) results in a "complete termination" of the
holder's stock interest in the company, or (iii) is "not essentially equivalent
to a dividend" with respect to the holder, all within the meaning of Section
302(b) of the Code. In determining whether any of these tests have been met,
shares of common stock considered to be owned by the holder by reason of certain
constructive ownership rules set forth in the Code, as well as shares of common
stock actually owned by the holder, must generally be taken into account. If a
particular holder of shares of Series F Preferred Stock owns (actually or
constructively) no shares of common stock of the company, or an insubstantial
percentage of the outstanding shares of common stock of the company, a
redemption of shares of Series F Preferred Stock of that holder is likely to
qualify for sale or exchange treatment because the redemption would not be
"essentially equivalent to a dividend." However, because the determination as to
whether any of the alternative tests of Section 302(b) of the Code will be
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satisfied with respect to any particular holder of shares of Series F Preferred
Stock depends upon the facts and circumstances at the time that the
determination must be made, prospective holders of shares of Series F Preferred
Stock are advised to consult their own tax advisors to determine such tax
treatment.
If a redemption of shares of Series F Preferred Stock is not treated as
a distribution taxable as a dividend to a particular holder, it will be treated
as to that holder as a taxable sale or exchange. As a result, such holder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received (less any portion thereof attributable to accumulated and
declared but unpaid dividends, which will be taxable as a dividend to the extent
of the company's current and accumulated earnings and profits), and (ii) the
holder's adjusted basis the shares of Series F Preferred Stock for tax purposes.
Such gain or loss will be capital gain or loss if the shares of Series F
Preferred Stock have been held as a capital asset, and will be long-term gain or
loss if such shares of Series F Preferred Stock have been held for more than one
year. If a redemption of shares of Series F Preferred Stock is treated as a
distribution taxable as a dividend, the amount of the distribution will be
measured by the amount of cash and the fair market value of any property
received by the holder. The holder's adjusted basis in the redeemed shares of
Series F Preferred Stock for tax purposes will be transferred to the holder's
remaining shares of the company. If the holder owns no other shares of the
company, such basis may, under certain circumstances, be transferred to a
related person or it may be lost entirely.
DISPOSITIONS OF SERIES F PREFERRED STOCK
If you are a U.S. stockholder and you sell or dispose of your shares of
Series F Preferred 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 capital stock that you have held for six months
or less, after applying holding period rules set forth in the 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 Code and the shares are not
otherwise used in a trade or business, dividend income from
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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 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 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 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 Code; is tax-exempt under Section
501(a) of the 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 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 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 supplement 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.
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Certification and disclosure requirements must be satisfied to be exempt from
withholding under the effectively connected income and permanent establishment
exemptions discussed above. We expect 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:
o a lower treaty rate applies and the non-U.S. stockholder files an IRS
Form W-8BEN evidencing eligibility for that reduced rate with us; or
o the non-U.S. stockholder files an IRS Form W-8ECI with us 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. We 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
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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 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 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 Code.
"Qualifying income" under Section 7704 of the Code includes interest, dividends,
real property rents, gains from the disposition of real property, and certain
income or gains from
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the exploitation of natural resources. Therefore, qualifying income under
Section 7704 of the Code generally includes any income that is qualifying income
for purposes of the 95% gross income test applicable to REITs. We anticipate
that the operating partnership will satisfy the 90% qualifying income test under
Section 7704 of the 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 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 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 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
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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 us or of our 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 us or
our stockholders. Consequently, the tax treatment described herein may be
modified prospectively or retroactively by legislative, judicial or
administrative action.
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UNDERWRITING
We and the underwriters for this offering named below have entered into
an underwriting agreement concerning the shares of the Series F Preferred Stock
being offered. The underwriters' obligations are several and not joint, which
means that each underwriter is required to purchase a specified number of
shares, but is not responsible for the commitment of any other underwriter to
purchase shares. Subject to the terms and conditions of the underwriting
agreement, each underwriter has severally agreed to purchase the number of
shares of Series F Preferred Stock set forth opposite its name below.
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
Bear, Stearns & Co. Inc. ........................................... 298,143
A.G. Edwards & Sons, Inc. .......................................... 298,143
BB&T Capital Markets, a division of Scott & Stringfellow, Inc. ..... 298,143
First Union Securities, Inc.*....................................... 298,142
McDonald Investments Inc. .......................................... 298,143
Stifel, Nicolaus & Company, Incorporated............................ 298,143
U.S. Bancorp Piper Jaffray Inc. .................................... 298,143
-------
Total...................................................... 2,087,000
=========
------------------
*First Union Securities, Inc. is acting under the trade name Wachovia
Securities.
The underwriting agreement provides that the obligations of the
underwriters are conditional and may be terminated at their discretion based on
their assessment of the state of the financial markets. The obligations of the
underwriters may also be terminated upon the occurrence of the events specified
in the underwriting agreement. The underwriters are severally committed to
purchase all of the Series F Preferred Stock being offered if any shares are
purchased, other than those shares covered by the over-allotment option
described below.
We have granted the underwriters an option to purchase up to 313,050
additional shares of Series F Preferred Stock to be sold in this offering at the
public offering price, less the underwriting discounts and commissions set forth
on the cover page of this prospectus supplement. The underwriters may exercise
this option solely to cover over-allotments, if any. This option may be
exercised, in whole or in part, at any time within 30 days after the date of
this prospectus supplement. To the extent the option is exercised, the
underwriters will be severally committed, subject to certain conditions, to
purchase the additional shares of Series F Preferred Stock in proportion to
their respective commitments as indicated in the table above.
The following table provides information regarding the per share and
total underwriting discounts and commissions that we will pay to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up to
an additional 313,050 shares of the Series F Preferred Stock.
PER SHARE TOTAL
--------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- --------------- -------------- --------------
Underwriting discounts and
commissions payable by us............. $0.7875 $0.7875 $1,643,513 $1,890,039
We estimate that the total expenses of this offering payable by us,
excluding underwriting discounts and commissions, will be approximately
$120,000.
The underwriters propose to offer the Series F Preferred Stock directly
to the public initially at the public offering price set forth on the cover page
of this prospectus supplement and to selected dealers at such price less a
concession not to exceed $0.50 per share. The underwriters may allow, and such
selected dealers may reallow, a
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concession not to exceed $0.45 per share. The shares of Series F Preferred Stock
will be available for delivery, when, as and if accepted by the underwriters and
subject to prior sale and to withdrawal, cancellation or modification of the
offering without notice. The underwriters reserve the right to reject any order
for purchase of the shares in whole or in part. After the commencement of this
offering, the underwriters may charge the public offering price and other
selling terms.
We have agreed in the underwriting agreement to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, and, where such indemnification is
unavailable, to contribute to payments that the underwriters may be required to
make in respect of such liabilities.
The Series F Preferred Stock is a new issue of securities and, prior to
the Series F Preferred Stock being accepted for listing on the NYSE, there will
be no established trading market for the Series F Preferred Stock. The NYSE has
authorized, upon official notice of issuance, the listing of the shares of the
Series F Preferred Stock under the symbol "HME PrF." We expect that trading on
the NYSE will commence within 30 days after the initial delivery of the Series F
Preferred Stock. In order to meet the requirements for listing the Series F
Preferred Stock on the NYSE, the underwriters have undertaken to sell (i) Series
F Preferred Stock to ensure a minimum of 100 beneficial holders with a minimum
of 100,000 shares of Series F Preferred Stock outstanding and (ii) sufficient
shares of Series F Preferred Stock so that following this offering, the Series F
Preferred Stock has a minimum aggregate market value of $2 million. The
underwriters have advised us that prior to the commencement of listing on the
NYSE they intend to make a market in the Series F Preferred Stock, but are not
obligated to do so and may discontinue market making at any time without notice.
No assurance can be given as to the liquidity of the trading market for the
Series F Preferred Stock.
In order to facilitate this offering of the Series F Preferred Stock,
the underwriters may engage in transactions that stabilize, maintain or
otherwise affect the market price of the Series F Preferred Stock in accordance
with Regulation M under the Exchange Act.
The underwriters may over-allot shares of the Series F Preferred Stock
in connection with this offering, thus creating a short position for their own
account. Short sales involve the sale by the underwriters of a greater number of
shares than they are committed to purchase in this offering. A short position
may involve either "covered" short sales or "naked" short sales. Covered short
sales are sales made in an amount not greater than the underwriters'
over-allotment option to purchase additional shares of the Series F Preferred
Stock as described above. The underwriters may close out any covered short
position by either exercising their over-allotment option or purchasing shares
in the open market. In determining the source of shares to close the covered
short position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares from us through the over-allotment option. Naked
short sales are sales in excess of the over-allotment option. The underwriters
must close out any naked short position by purchasing shares in the open market.
A naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the Series F
Preferred Stock in the open market after pricing that could adversely affect
investors who purchase in this offering.
Accordingly, to cover these short sales positions or to stabilize the
market price of the Series F Preferred Stock, the underwriters may bid for, and
purchase, shares of the Series F Preferred Stock in the open market. These
transactions may be effected on the NYSE or otherwise. Additionally, the
representatives, on behalf of the underwriters, may also reclaim selling
concessions allowed to an underwriter or dealer. Similar to other purchase
transactions, the underwriters' purchases to cover the syndicate short sales or
to stabilize the market price of our Series F Preferred Stock may have the
effect of raising or maintaining the market price of our Series F Preferred
Stock or preventing or mitigating a decline in the market price of our Series F
Preferred Stock. As a result, the price of the Series F Preferred Stock may be
higher than the price that might otherwise exist in the open market. No
representation is made as to the magnitude or effect of any such stabilization
or other activities. The underwriters are not required to engage in these
activities and, if commenced, may discontinue any of these activities at any
time.
From time to time, the underwriters and/or their affiliates have
provided, and may continue to provide in the future, investment banking, general
financing and banking services to us and our affiliates for which they have
received, and expect to receive, customary compensation.
S-42
First Union Securities, Inc. is an indirect, wholly-owned subsidiary of
Wachovia Corporation, which conducts its investment banking, institutional and
capital markets businesses through its various bank, broker-dealer and nonbank
subsidiaries (including First Union Securities, Inc.) under the trade name of
Wachovia Securities. Any reference to Wachovia Securities in this prospectus
supplement, however, does not include Wachovia Securities, Inc., a NASD/SIPC
member and a separate broker-dealer subsidiary of Wachovia Corporation and an
affiliate of First Union Securities, Inc., which may or may not be participating
as a selling dealer in the distribution of the Series F Preferred Stock.
S-43
LEGAL MATTERS
The legality of the shares of the Series F Preferred Stock offered
hereby will be passed upon for us by Nixon Peabody LLP, Rochester, New York.
Certain legal matters relating to this offering will be passed upon for the
underwriters by Clifford Chance Rogers & Wells LLP, New York, New York. As to
matters of Maryland law contained in its opinion, Clifford Chance Rogers & Wells
LLP will rely on the opinion of Nixon Peabody LLP. Mr. Alan L. Gosule, a partner
at Clifford Chance Rogers & Wells LLP, is a member of our Board of Directors and
owns 774 shares of our common stock, options to acquire 21,240 shares of our
common stock, and 2,704 shares of our common stock accrued under our directors'
deferred compensation plan.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any document we file at the SEC's public reference rooms at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on their public reference rooms. Our SEC
filings are also available to the public at the SEC's web site at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus supplement and the accompanying
prospectus and later information filed with the SEC will update and supersede
this information. We incorporate by reference the documents listed below, any of
such documents filed since the date the registration statement relating to this
offering was filed and any future filings with the SEC under Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, until this offering is completed:
o our Annual Report on Form 10-K for the year ended December 31, 2001;
o our Current Report on Form 8-K, dated February 25, 2002 (filed as of
February 28, 2002); and
o all other reports we filed or file pursuant to Section 13(a) of the
Exchange Act since December 31, 2001, provided, however, that the
content of our Current Report on Form 8-K, filed on 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
calling us at the following address and telephone number:
Charis W. Copin
Vice President, Investor Relations
Home Properties of New York, Inc.
850 Clinton Square
Rochester, New York 14604
(585) 546-4900
You should rely only on the information incorporated by reference into,
or provided in, this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
S-44
PROSPECTUS
$400,000,000
HOME PROPERTIES OF NEW YORK, INC.
COMMON STOCK PREFERRED STOCK COMMON STOCK PURCHASE
RIGHTS OR WARRANTS AND 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 $400,000,000. 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 ("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
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT
CONTAINED OR INCORPORATED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, BY ANY PERSON
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS AT ANY TIME NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-----------------------------------
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to by be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy not shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
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 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
-2-
affect operating expenses, the timely completion of repositioning activities,
the actual pace of acquisitions, and the continued access to capital to fund
growth.
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 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 and the Company's
registration statement with respect to its Common Stock on Form 8-A effective
July 27, 1994.
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 55.9% 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.
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.
-4-
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.
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 current taxable income to the
former owners.
COMPLIANCE WITH LAWS AND REGULATIONS. Many laws an governmental
regulations are applicable to the Properties and changes in these laws and
regulations, or their interpretation by agencies and the
-5-
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, 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).
-6-
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 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 consequence
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.
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
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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, December 31,
------------ ------------ ------------ ------------ -------------
August 3
---------
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 the Company's initial public offering.
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
-8-
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, payment of development costs for new multifamily
residential properties, the repayment of certain indebtedness outstanding at
such time and 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 of 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
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 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.
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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 of the affairs of the Company; and (xiv) any limitations
on direct or beneficial ownership and restriction 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.
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
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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 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
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(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 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.
-12-
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 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 of 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
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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.
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
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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 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
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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 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 be consolidated
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
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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 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.
-17-
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.
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.
-18-
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."
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
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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, and (iii) for which such REIT makes a
proper election to treat such property as foreclosure property. The Company oes
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.
-20-
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 and 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, these 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 ould be entitled to the benefit of these relief provisions. As discussed
above in "GENERALLY," even if these relief provisions apply, a 100% tax 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
tock offering or long-term (at least five- year) debt offering of the Company.
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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 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
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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 apital 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.
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
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taxable years following the year during which qualification was lost. If 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.
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,
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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.
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."
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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 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
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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 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
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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.
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
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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 the 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.
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
-29-
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 to
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.
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 subsidiairy." 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.
-30-
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 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
-31-
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.
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.
-32-
========================= =========================
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. NEITHER WE 2,087,000 SHARES
NOR THE UNDERWRITERS HAVE AUTHORIZED ANYONE TO PROVIDE
YOU WITH INFORMATION THAT IS DIFFERENT FROM THAT HOME PROPERTIES OF NEW YORK, INC.
CONTAINED OR INCORPORATED BY REFERENCE INTO THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. 9.00% SERIES F
NEITHER WE NOR THE UNDERWRITERS ARE OFFERING TO SELL CUMULATIVE REDEEMABLE
THE THESE SECURITIES, OR SEEKING OFFERS TO BUY THESE PREFERRED STOCK
SECURITIES, IN ANY JURISDICTION WHERE OFFERS AND SALES
ARE NOT PERMITTED. YOU SHOULD ASSUME THAT THE ------------------------------------
INFORMATION APPEARING IN THIS PROSPECTUS SUPPLEMENT, PROSPECTUS SUPPLEMENT
THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS ------------------------------------
INCORPORATED THEREIN BY REFERENCE IS ACCURATE ONLY AS
OF ITS DATE OR THE DATE SPECIFIED IN SUCH DOCUMENTS.
OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE ANY
SUCH DATES.
-------------------------------------------------------- BEAR, STEARNS & CO. INC.
TABLE OF CONTENTS
-------------------------------------------------------- A.G. EDWARDS & SONS, INC.
PAGE BB&T CAPITAL MARKETS
PROSPECTUS SUPPLEMENT MCDONALD INVESTMENTS INC.
Summary............................................ S-1 STIFEL, NICOLAUS & COMPANY
Risk Factors....................................... S-6 INCORPORATED
Use of Proceeds.................................... S-11
Capitalization..................................... S-12 U.S. BANCORP PIPER JAFFRAY
The Company........................................ S-14
Selected Financial Data............................ S-18 WACHOVIA SECURITIES
Description of Series F Cumulative
Redeemable Preferred Stock................... S-20
Certain Federal Income Tax
Consequences................................. S-26
Underwriting....................................... S-41 MARCH 18, 2002
Legal Matters...................................... S-44
Incorporation of Certain Documents by
Reference..................................... S-44
=========================
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..................... 14
Federal Income Tax Considerations.................. 18
ERISA Considerations............................... 30
Plan of Distribution............................... 31
Legal Matters...................................... 32
Experts............................................ 32
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