PROSPECTUS
4,061,975
Shares of Common Stock
Capital
Lease Funding, Inc.
This
prospectus covers resales of up to 4,061,975 shares of common stock by the
selling securityholders identified in this prospectus. We will not receive any
of the proceeds from the sale of the shares of common stock by the selling
securityholders but we will pay the expenses of this offering.
Our
common stock is listed on the New York Stock Exchange under the symbol “LSE.” On
April 15, 2005, the closing price of our common stock on the NYSE was $10.51.
Our corporate offices are located at 110 Maiden Lane, New York, New York 10005
and our telephone number is (212) 217-6300.
Investing
in our Company involves risks. You should carefully read and consider the “Risk
Factors” beginning on page 3 of
this prospectus before investing in our common stock.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date of this prospectus is May 10, 2005
TABLE
OF CONTENTS
| |
|
|
WHERE
YOU CAN FIND MORE INFORMATION |
1 |
|
THE
COMPANY |
2 |
|
RISK
FACTORS |
3 |
|
FORWARD-LOOKING
STATEMENTS AND PROJECTIONS |
18 |
|
USE
OF PROCEEDS |
18 |
|
DESCRIPTION
OF COMMON STOCK |
19 |
|
CERTAIN
PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS |
21 |
|
PARTNERSHIP
AGREEMENT |
26 |
|
RESTRICTIONS
ON OWNERSHIP |
30 |
|
SELLING
SECURITYHOLDERS |
33 |
|
FEDERAL
INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT |
35 |
|
OTHER
TAX CONSEQUENCES |
51 |
|
PLAN
OF DISTRIBUTION |
53 |
|
LEGAL
MATTERS |
55 |
|
EXPERTS |
55 |
We have
not authorized anyone to provide you with information or to represent anything
not contained in this prospectus. You must not rely on any unauthorized
information or representations. The selling securityholders are offering to
sell, and seeking offers to buy, only the common stock covered by this
prospectus, and only under circumstances and in jurisdictions where it is lawful
to do so. The information contained in this prospectus is current only as of its
date, regardless of the time and delivery of this prospectus or of any sale of
the shares.
You
should read carefully the entire prospectus, as well as the documents
incorporated by reference in the prospectus, before making an investment
decision.
When used
in this prospectus, except where the context otherwise requires, the terms “we,”
“our,” “us” and “the Company” refer to Capital Lease Funding, Inc. and its
predecessors and subsidiaries.
WHERE
YOU CAN FIND MORE INFORMATION
We file
annual, quarterly and current reports, proxy statements and other information
with the SEC under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). You may read and copy any reports, statements or other
information on file at the SEC’s public reference room located at 450 Fifth
Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. The SEC filings are also
available at the Internet website maintained by the SEC at http://www.sec.gov.
These filings are also available to the public from commercial document
retrieval services.
This
prospectus does not contain all of the information in our “shelf” registration
statement. We have omitted parts of the registration statement in accordance
with the rules and regulations of the SEC. For more detail about us and any
securities that may be offered by this prospectus, you may examine the
registration statement on Form S-3 and the exhibits filed with it at the
locations listed in the previous paragraph.
We
incorporate information into this prospectus by reference, which means that we
disclose important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this prospectus, except to the extent superseded by information
contained herein or by information contained in documents filed with or
furnished to the SEC after the date of this prospectus. This prospectus
incorporates by reference the documents set forth below, the file number for
each of which is 1-32039, that have been previously filed with the
SEC:
| · |
our
Annual Report on Form 10-K for the year ended December 31, 2004 filed with
the SEC on March 30, 2005; |
| · |
our
Current Reports on Form 8-K or Form 8-K/A, as the case may be, filed with
the SEC on January 7, 2005, January 11, 2005, February 4, 2005, February
17, 2005, March 3, 2005, March 7, 2005, March 16, 2005, March 25, 2005 and
April 21, 2005; and |
| · |
our
Registration Statement on Form 8-A, which incorporates by reference the
description of our common stock from our Registration Statement on Form
S-11 (Reg. No. 333-110644), and all reports filed for the purpose of
updating such description. |
We also
incorporate by reference into this prospectus additional documents that we may
file with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
from the date of this prospectus until we have sold all of the securities to
which this prospectus relates or the offering is otherwise terminated (other
than any portion of these documents that are furnished or otherwise deemed not
to be filed). These documents may include annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K, as well as proxy
statements.
You may
obtain copies of any of these filings through Capital Lease Funding, Inc. as
described below, through the SEC or through the SEC’s Internet website as
described above. Documents incorporated by reference are available without
charge by requesting them from us in writing or by telephone at:
Capital
Lease Funding, Inc.
110
Maiden Lane
New York,
New York 10005
(212)
217-6300
Attn:
Investor Relations
THE
COMPANY
Overview
We are a
net lease company focused on investing in commercial real estate assets that are
leased typically on a long-term basis primarily to high credit quality
corporate, government and not-for-profit tenants. These assets will include
mortgage loans and mortgage backed net lease securities (debt) and direct
investments in real estate (equity). We began our business in 1995 through
private equity capital. In March 2004, we completed an initial public offering
and our common stock began trading on the New York Stock Exchange under the
symbol “LSE.” We intend to elect to be taxed as a REIT for federal income tax
purposes.
Prior to
our initial public offering, we operated primarily as a first mortgage lender
using a gain on sale business model, where we sold the loans without retaining
any interest in them after origination, either through securitization or
whole-loan sales. Our mortgage loans have included traditional long-term credit
tenant first mortgage loans (typically 15 to 25 years), 10-year credit tenant
loans and a few development type loans and recapitalized loans.
Upon
completion of our initial public offering in March 2004, we changed our strategy
from that of a gain on sale originator of net lease loans, to a long-term holder
of debt, equity and mezzanine net lease assets for portfolio investment, though
we do still engage in some gain on sale activities. An important component of
our portfolio investment strategy is to borrow, or leverage, against our assets
in order to enable us to originate a larger portfolio of assets and to enhance
our returns on invested equity capital. This strategy entails financing our
mostly fixed rate net lease investments by using our existing warehouse
facilities on a reasonably short term basis and, as soon as practicable
thereafter, financing the majority of these assets on a secured long-term fixed
rate basis, both through collateralized debt obligations, or CDOs, and through
traditional first mortgage debt obtained from third party lenders, and other
mechanisms. We typically employ hedging strategies to mitigate interest rate
risk while our fixed rate assets are financed in our floating rate warehouse
facilities. We believe that the combination of assets backed by long-term leases
with high quality tenants coupled with long-term fixed rate financing will
produce stable risk-adjusted returns on our equity base.
In
connection with our initial public offering, we raised net proceeds after all
related expenses of approximately $221.8 million on top of an existing book
equity of approximately $34.0 million. As of December 31, 2004, we had invested
those proceeds into approximately $494.1 million of net lease assets and have
begun to leverage our existing portfolio utilizing our existing floating rate
warehouse credit facilities and fixed rate first mortgage debt. Subsequent to
December 31, 2004, we closed our first fixed rate long-term CDO offering with a
principal amount of approximately $300.0 million. We issued five classes of
notes with an aggregate face amount of $285.0 million and preferred stock with a
principal amount of $15.0 million. We retained $31.5 million in face amount of
the notes offered, comprised of the entire face amount of the three most junior
note classes and the preferred shares.
Our
executive offices are located at 110 Maiden Lane, New York, New York 10005. Our
telephone number is (212) 217-6300.
RISK
FACTORS
You
should carefully consider the risks and uncertainties described below, together
with the other information contained in this prospectus, the applicable
prospectus supplement and the documents we refer you to in the section “Where
You Can Find More Information,” before purchasing our
securities.
Risks
Related to Operations
We
may fail to continue to originate and/or acquire net lease
assets.
Origination
of additional net lease loans and acquisition of additional net lease real
properties is critical to the success of our business strategy. The net lease
market is highly competitive and we cannot assure you that we will be able to
identify net lease opportunities that meet our underwriting and return criteria.
If we are unable to continue to originate net lease loans and purchase net lease
real properties that are acceptable to us, we may be unable to execute our
business plan, which could have a material adverse affect on our operating
results and financial condition.
We
may fail to originate or acquire profitable assets.
Our
investment strategy is based on originating and purchasing profitable assets, as
determined by our returns on those assets less our related financing cost. We
originate or purchase long-term fixed rate assets and generally seek to finance
those assets with lower coupon long-term fixed rate debt, thus earning a profit
or spread.
We
generally obtain long-term financing for our assets after we acquire them.
Therefore, we price our assets at origination or acquisition based on our
assumption about our expected future financing cost.
If our
cost to finance our assets increases over our assumptions between the time we
commit to purchase the asset and when we obtain long-term financing, the profit
or spread we expected to earn on the asset and our overall portfolio will erode.
Various factors could cause our financing cost to increase,
including:
| · |
increases
in long-term interest rates; |
| · |
weakening
economic conditions; |
| · |
United
States military activity and terrorist
activities; |
| · |
ineffectiveness
of our hedging strategies; |
| · |
a
decline in the credit rating of the underlying tenant;
and |
| · |
market
dislocations caused by the failure or financial difficulties of a large
financial institution or institutions. |
Our
failure to originate and acquire profitable assets would have a material adverse
effect on our cash flows, results of operations and financial
condition.
We
conduct a significant part of our business with Wachovia Bank, N.A. and its
affiliates and their continued business with us is not
guaranteed.
We rely
on Wachovia Bank, N.A. and its affiliates in various aspects of our business.
For example:
| · |
Wachovia
Bank, N.A. provides us with short-term financing through a $250.0 million
repurchase facility. |
| · |
Through
December 31, 2004, we obtained $97.4 million of long-term mortgage
financings from Wachovia Bank. |
| · |
Affiliates
of Wachovia Bank, N.A. have performed investment banking services for us,
including in connection with our initial public offering and our initial
CDO transaction. |
| · |
Wachovia
Bank, N.A. acts as servicer of our net lease asset investments and as
transfer agent for our common stock. |
These
parties are not obligated to do business with us and any adverse developments in
their business or in our relationship with them could result in these parties
choosing not to do business with us or a significant reduction in our business
with them. Termination of our business with Wachovia Bank, N.A. or its
affiliates or a significant reduction in our business with these parties could
have a material adverse effect on our business, operating results and financial
condition.
We
may be unable to generate sufficient cash flow to make distributions to our
stockholders.
As a
REIT, we are required to distribute at least 90% of our taxable income each year
to our stockholders. If we are unable to execute our business plan successfully
or in the event of future downturns in our operating results and financial
performance, we may be unable to declare or pay distributions to our
stockholders. The timing and amount of distributions are in the sole discretion
of our board of directors, which will consider, among other factors, our
financial performance, debt service requirements, and capital expenditure
requirements. We cannot assure you that we will generate sufficient cash to fund
distributions required to maintain our REIT tax status or to fund any
distributions.
Our
management has limited experience operating a REIT or a public company or
executing our business plan.
Our
management has limited experience operating a REIT or a public company or in
executing our business plan. Therefore, you should be cautious in drawing
conclusions about the ability of our management team to do so.
Risks
Related to Net Lease Assets
An
adverse change in the financial condition of one or more tenants underlying our
net lease investments could have a material adverse impact on
us.
The
credit quality of the tenant underlying a net lease asset is at the core of our
underwriting process. An adverse change in the tenant’s financial condition,
including a bankruptcy of the tenant, could have a material adverse impact on
us. For example:
| · |
We
rely on rent payments from the tenants underlying our net lease
investments for our cash flows, and any bankruptcy, insolvency or failure
to make rental payments when due could result in a material reduction of
our cash flows and material losses to our
company. |
| · |
An
adverse change in the financial condition of one or more tenants
underlying our net lease investments or a decline in the credit rating of
one or more tenants underlying our net lease investments could result in a
margin call if the related asset is being financed on our short-term
repurchase facilities, and could make it more difficult for us to arrange
long-term financing for that asset. |
| · |
The
value of our net lease loan and real estate securities investments are
primarily driven by the credit quality of the underlying tenant or
tenants, and an adverse change in the subject tenant’s financial condition
or a decline in the credit rating of such tenant may result in a decline
in the value of our net lease investments and a charge to our statement of
operations. |
The
occurrence of material adverse events with respect to tenants to whom we have a
high degree of exposure or a downturn in their industries could have a material
adverse impact on us.
Of our
assets in portfolio as of December 31, 2004, approximately $85.8 million, or
17.4%, involve properties leased to, or leases guaranteed by, Aon Corporation.
In addition, two other corporations lease or guarantee leases underlying
investments we have made which represent over 5% (but are less than 10%) of our
assets in portfolio. Any financial difficulty or bankruptcy of one or more of
such tenants or guarantors resulting in nonpayment or delay in payment of rental
payments and other amounts due under the related leases could, as a result of
this concentration, have a greater adverse effect on us than a similar problem
with a less significant tenant.
In
addition, our assets in portfolio as of December 31, 2004 involve properties
leased to, or leases guaranteed by, CVS Corporation, Walgreen Co. and other
companies in the retail drug industry. Approximately $39.8 million, or 8.1%, of
our assets in portfolio as of December 31, 2004, involve properties leased to,
or leases guaranteed by, companies in the retail drug industry. Any downturn in
the retail drug industry or in any other industry in which we have a large
investment could have a material and adverse effect on our financial condition
and operating results. Among other risks, the retail drug industry is subject to
the risks of:
| · |
reductions
in third-party reimbursements of prescription drugs;
|
| · |
the
growth of mail-order prescription
providers; |
| · |
increases
in governmental regulation; |
| · |
introduction
of new brand and generic prescriptions
drugs; |
| · |
inability
to attract and retain qualified pharmacists and management personnel; and
|
We
may be subject to geographic concentrations that could make us more susceptible
to adverse events in these areas.
As of
December 31, 2004, an aggregate $169.4 million, or 34.3%, of our assets in
portfolio were investments in properties located in Chicago, Illinois and its
neighboring suburbs. An economic downturn or other adverse events or conditions
such as terrorist attacks or natural disasters in this area, or any other area
where we have significant credit concentration in the future, could have a
material adverse effect on our financial condition and operating
results.
We
may make errors in analyzing the data of certain of our net lease tenants and
intend to make loans on properties leased to non-investment grade
tenants.
Approximately
$52.5 million, or 10.6%, of our assets in portfolio as of December 31, 2004,
involve properties leased to, or leases guaranteed by, companies without a
publicly available credit rating. A portion of our assets is expected to
continue to involve tenants who do not have publicly available credit ratings.
We expect to obtain a private rating for these assets after origination or
acquisition and prior to obtaining long-term financing. When we make an
investment in an asset where the underlying tenant has no publicly available
credit rating, we prepare an internally generated credit analysis, after a
review of available financial data. We may misinterpret or incorrectly analyze
this data. These mistakes may cause us to make investments we would not have
otherwise made and may ultimately result in losses on one or more of our
investments.
In
addition, approximately $78.7 million, or 15.9%, of our assets in portfolio as
of December 31, 2004, involve properties leased to, or leases guaranteed by,
companies whose credit rating is below investment grade. These investments will
have a greater risk of default and bankruptcy than investments on properties net
leased exclusively to investment grade tenants.
Our
balance sheet, as of December 31, 2004, also includes a $1.1 million investment
in a structured interest that is unrated. The lack of such a rating generally
reflects the fact that the underlying collateral is weaker than what would be
found in a rated interest, and therefore, this investment has a greater risk of
default than an investment in a rated interest.
We
may be unable to obtain financing, and our existing secured warehouse facility
may be unavailable to us.
We expect
to borrow money under short-term secured warehouse credit facilities to fund our
acquisitions and originations of net lease assets. We currently have a secured
warehouse facility with Wachovia Bank, N.A. Our warehouse facility is
uncommitted as Wachovia Bank must agree to each asset contributed to the
facility. We cannot assure you that we may be able to draw funds under this
facility at any given time.
Under the
terms of this facility, we sell commercial mortgage assets to Wachovia Bank as
security in exchange for funds to finance our net lease investments. Wachovia
Bank owns the assets that we sell to it as security for our borrowings and holds
those assets subject to our right or obligation to repurchase later. In the
event that Wachovia Bank files for bankruptcy or becomes insolvent, our assets
subject to our repurchase rights or obligations may become subject to the
bankruptcy or insolvency proceedings, thus depriving us, at least temporarily,
of the benefit of these assets. In addition, in the event of our bankruptcy,
Wachovia Bank may qualify for special treatment under the bankruptcy code,
giving it the ability to avoid the automatic stay provisions of the Bankruptcy
Code. In that case, our bankruptcy estate might include our repurchase rights,
but would not include our assets held by Wachovia Bank subject to our repurchase
rights.
In
the event of a bankruptcy of one of our borrowers or an affiliate of one of our
borrowers, our financial condition and operating results may
suffer.
Although
we generally use bankruptcy-remote structures when we fund a loan, one of our
borrowers may become a debtor in a bankruptcy case as a result of liabilities
unrelated to ownership and operation of its net leased real property or, if an
affiliate of one of our borrowers becomes the debtor in a bankruptcy case, a
court may order that our borrower’s assets and liabilities be substantively
consolidated with those of its affiliate. Either of these events could delay or
reduce payments on our loan assets, delay our ability to foreclose on the net
leased property and may have an adverse affect on our financial condition and
operating results.
Risks
Related to Borrowings
We
expect to borrow a significant amount of debt to finance our portfolio, which
may subject us to increased risk of loss.
We expect
to incur significant indebtedness in our operations. We expect that
substantially all of our assets will be pledged as collateral for our borrowings
(on average 70% to 85% of our assets in portfolio). Required debt service will
reduce cash and net income available for operations or distribution to our
stockholders. If the income on assets financed with borrowed funds fails to
cover the cost of the borrowings, we may experience net losses on assets not yet
financed with long-term debt or lower net profits. If we default on our debt
service obligations, we would be at risk of losing some or all of our assets as
our lenders will have a first priority claim on the collateral we pledge and the
right to foreclose.
Our
ability to achieve our investment objectives depends to a significant extent on
our ability to borrow money in sufficient amounts and on sufficiently favorable
terms, thus earning incremental returns. We may not be able to achieve the
degree of leverage we believe to be optimal due to decreases in the proportion
of the value of our assets against which we can borrow, decreases in the market
value of our assets, increases in interest rates (to the extent we have assets
financed with variable rate debt, including our secured warehouse lines of
credit), changes in the availability of financing in the market, conditions in
the lending market and other factors. This may cause us to experience losses or
less profit than would otherwise be the case.
We intend
to continue to finance our net lease assets over the long-term through a variety
of means, including through the use of CDOs and mortgage financing. Our ability
to execute this strategy will depend on various conditions in the markets for
financing in this manner which are beyond our control, including the liquidity
of these markets and maintenance of attractive credit spreads. We cannot assure
you that these markets will remain an efficient source of long-term financing
for our net lease assets. If our strategy is not viable, we will have to find
alternative forms of long-term financing for our net lease assets, as our
secured warehouse lines will not accommodate long-term financing. This could
subject us to more recourse indebtedness and the risk that debt service on less
efficient forms of financing would require a larger portion of our cash flows,
thereby reducing cash available for distribution to our stockholders, funds
available for operations, as well as for future net lease investments, and could
result in net losses and the erosion of our equity.
Hedging
transactions may not effectively protect us against anticipated risks and may
subject us to certain other risks and costs.
Our
current policy is to enter into hedging transactions primarily to protect us
from the effect of interest rate fluctuations on our portfolio of net lease
assets from the date on which we commit a rate or price to a borrower or seller
and until the date the asset is pledged to secure long-term financing or is
sold. Our hedging policy exposes us to certain risks, among them the
following:
| · |
Our
hedging strategy may not have the desired beneficial impact on our results
of operations or financial condition. |
| · |
No
hedging activity can completely insulate us from the risks associated with
changes in interest rates. |
| · |
There
will be many market risks against which we may not be able to hedge
effectively, including changes in the spreads of corporate bonds, CMBS or
CDOs over the underlying U.S. Treasury rates.
|
| · |
We
may or may not hedge any risks with respect to CMBS or CDOs that we may
purchase or hold for investment. |
| · |
Our
hedging strategy may serve to reduce the returns which we could possibly
achieve if we did not hedge certain risks. |
| · |
Because
we intend to structure our hedging transactions in a manner that does not
jeopardize our status as a REIT, we will be limited in the type of hedging
transactions that we may use. |
| · |
Hedging
costs increase as the period covered by the hedging increases and during
periods of rising and volatile interest rates. We may increase our hedging
activity and thus increase our hedging costs during periods when interest
rates are volatile or rising. |
| · |
The
enforceability of agreements underlying derivative transactions may depend
on compliance with applicable statutory and commodity and other regulatory
requirements and, depending on the identity of the counterparty,
applicable international requirements. |
| · |
A
default by a party with whom we enter into a hedging transaction may
result in the loss of unrealized profits and force us to cover our resale
commitments, if any, at the then current market price.
|
| · |
Although
generally we will seek to reserve the right to terminate our hedging
positions, it may not always be possible to dispose of or close out a
hedging position without the consent of the hedging counterparty, and we
may not be able to enter into an offsetting contract in order to cover our
risk. |
| · |
There
can be no assurance that a liquid secondary market will exist for hedging
instruments purchased or sold, and we may be required to maintain a
position until exercise or expiration, which could result in
losses. |
We
may fail to qualify for hedge accounting treatment.
We record
derivative and hedge transactions in accordance with United States generally
accepted accounting principles, specifically Statement of Financial Accounting
Standards No. 133, Accounting
for Derivative
Instruments and Hedging Activities (“SFAS
133”). Under these standards, we may fail to qualify for hedge accounting
treatment for a number of reasons, including, if we use instruments that do not
meet the SFAS 133 definition of a derivative (such as short sales), we fail to
satisfy SFAS 133 hedge documentation and hedge effectiveness assessment
requirements or our instruments are not highly effective. If we fail to qualify
for hedge accounting treatment, our operating results may suffer because losses
on the derivatives we enter into may not be offset by a change in the fair value
of the related hedged transaction.
If
we fail to secure long-term financing for a substantial portion of our net lease
assets, our financial condition and operating results may suffer.
We expect
to rely upon our ability to finance our net lease assets with long-term
indebtedness in order to generate cash proceeds for repayment of our secured
warehouse lines of credit and to originate and acquire additional and other net
lease assets. We cannot assure you, however, that we will continue to be
successful in securing long-term financing for a substantial portion of the net
lease assets that we originate or acquire. For example, a decline in the credit
quality of a tenant underlying a net lease asset investment could inhibit our
ability to secure long-term financing for that asset. In the event that it is
not possible or economical for us to secure long-term financing for a
substantial portion of our net lease assets, we may exceed our capacity under
our secured warehouse credit facilities and be unable or limited in our ability
to originate and acquire future net lease assets, which would have a material
adverse effect on our financial condition and operating results. If we determine
that we should sell our net lease assets rather than finance them, there could
be significant adverse effects on our operating results and stockholder
distributions as a result of the treatment of any gains from such sales under
the tax laws governing REITs.
Our
short-term financings may expose us to interest rate risks, margin calls and
term risks.
Our
borrowings under our repurchase facility are currently at variable rates and
will be adjusted monthly relative to market interest rates. If interest rates on
our borrowings rise at a faster pace than yields on our assets increase, our net
interest expense will likely increase, causing our net income to decrease.
The
amount available to us under our repurchase facility with Wachovia Bank depends
in large part on the lender’s valuation of the assets that secure our
financings. The facility provides Wachovia Bank the right, under certain
circumstances, to re-evaluate the collateral that secures our outstanding
borrowings at any time. In the event Wachovia Bank determines that the value of
the collateral has decreased (for example, in connection with a decline in the
credit rating of the underlying tenant), it has the right to initiate a margin
call. A margin call would require us to provide Wachovia Bank with additional
collateral or to repay a portion of the outstanding borrowings at a time when we
may not have a sufficient inventory of assets or cash to satisfy the margin
call. Any failure by us to meet a margin call could cause us to default on our
repurchase facility and otherwise have a material adverse effect on our
financial condition and operating results.
In
addition, Wachovia Bank has no obligation to renew our short-term borrowings. If
we are unable to obtain long-term financing or our shorter-term financings are
not renewed, our liquidity could be materially adversely affected.
The
use of CDO financings with coverage tests may have a negative impact on our
operating results and cash flows.
We expect
to purchase subordinate classes of bonds in our CDO financings. We also expect
that the terms of CDOs issued by us will include coverage tests that will be
used primarily to determine whether and to what extent principal and interest
proceeds on the underlying assets may be used to pay principal of and interest
on the subordinate classes of bonds in the CDO. In the event the coverage tests
are not satisfied, interest and principal that would otherwise be payable on the
subordinate classes may be re-directed to pay principal on the senior bond
classes. Therefore, failure to satisfy the coverage tests could adversely affect
our operating results and cash flows.
Risks
Related to Mortgage Assets
Our
investments in commercial mortgage-backed securities and collateralized debt
obligations are subject to losses.
When we
acquire structured interests in net lease assets, we generally invest in the
subordinate or interest-only classes of CMBS or CDOs or take a subordinate
interest in the net lease asset or assets. Losses on an asset securing a
mortgage loan included in a securitization or other structured interest are
generally borne first by the equity holder of the property, then by a cash
reserve fund or letter of credit, if any, and then by the “first loss”
subordinated security holder. In the event of default of an underlying asset or
assets and the exhaustion of any equity support, reserve fund, letter of credit
and any classes of securities or interests junior to those in which we invest,
if any, we may not be able to recover our investment in the securities or
structured interests we purchase. In addition, if the underlying asset portfolio
has been overvalued by the originator, or if the values subsequently decline
and, as a result, less collateral is available to satisfy interest and principal
payments due on the related structured interests, the structured interests in
which we invest may effectively become the “first loss” position behind the more
senior interests, which may result in significant losses to us.
The
prices of lower credit quality structured interests are generally less sensitive
to interest rate changes than more highly rated investments, but they are more
sensitive to adverse economic downturns or individual issuer developments. A
projection of an economic downturn, for example, could cause a decline in the
price of lower credit quality interests because the ability of tenants or the
obligors of mortgages underlying the structured interests to make required
payments may be impaired. In such event, existing credit support in the
structure may be insufficient to protect us against loss of our principal on
these interests.
Fluctuating
interest rates may adversely affect the quantity and value of our net lease
assets.
Because
we currently finance our net lease assets on a short-term basis with variable
rate financing, increases in short-term interest rates may increase our net
interest expense and decrease the net income generated by our net lease assets.
Fluctuations in interest rates may also affect us in other ways, including that:
| · |
higher
interest rates may reduce overall demand for net lease loans and
accordingly reduce our production of loan assets, which could have a
material adverse effect on our financial condition and operating results;
and |
| · |
increases
or decreases in short- or long-term interest rates may reduce the value of
assets on our balance sheet. |
We
may experience losses on our mortgage loans.
We
originate mortgage loans (in particular, net lease loans) as part of our
investment strategy. As a holder of mortgage loans, we are subject to risks of
borrower defaults, tenant defaults, bankruptcies, fraud, losses and special
hazard losses that may not be covered by standard hazard insurance. Also, the
costs of originating, financing and hedging the mortgage loans (including the
debt service on CDOs secured by the mortgage loans, and expenses related to the
CDO transaction, including third-party fees payable to trustees, servicers,
document custodians, and credit enhancement providers) could exceed the income
on the mortgage assets. In the event of any default under mortgage loans, we
will bear the risk of loss of principal to the extent of any deficiency between
the value of the mortgage collateral and the principal amount of the mortgage
loan plus all interest thereon and other costs payable before principal. To the
extent we acquire subordinate CMBS or CDO interests or other subordinate
structured interests in net lease assets, we will be subject to these risks in a
concentrated form with respect to the underlying net lease assets.
The
typical net lease requires casualty insurance (which may be provided through
self insurance) to be maintained on the underlying property (generally by the
borrower or the tenant), with such coverages and in such amounts as are
customarily insured against with respect to similar properties, for fire,
vandalism and malicious mischief, extended coverage perils, physical loss
perils, commercial general liability, flood (when the underlying property is
located in whole or in material part in a designated flood plain area) and
worker injury. There are, however, certain types of losses (such as from
earthquakes or wars) that may be either uninsurable or not economically
insurable. Should an uninsured loss occur, we could lose both our capital
invested in, and anticipated profits from, one or more net lease properties.
We
could be subject to the risks incident to ownership of real property if the
tenants underlying our net lease loans fail to make their lease payments.
Net lease
loans are generally non-recourse to the property owner and in the event of
default the lender thereunder is entirely dependent on the loan collateral. Rent
payment by the underlying tenant is the primary source of payment of these
loans. To the extent the tenant does not make its lease payments, repayment of
the net lease loan will depend upon the liquidation value of the underlying real
property. The liquidation value of a commercial property may be adversely
affected by risks generally incident to interests in real property, including
changes in general or local economic conditions and/or specific industry
segments, declines in real estate values, increases in interest rates, real
estate tax rates and other operating expenses including energy costs, changes in
governmental rules, regulations and fiscal policies, including environmental
legislation, acts of God, and other factors which are beyond our or our
borrower’s control. There can be no assurance that our remedies with respect to
the loan collateral will provide us with a recovery adequate to recover our
investment.
Development
loans involve greater risk of loss than loans secured by income producing
properties.
We expect
to expand our extension of development financing to real estate developers.
These types of loans involve a higher degree of risk than long-term senior
mortgage loans secured by income-producing real property, due to a variety of
factors, including dependence for repayment on successful completion and
operation of the project, difficulties in estimating construction or
rehabilitation costs, loan terms that often require little or no amortization,
and the possibility that a foreclosure by the holder of the senior loan could
result in a substantial decrease in the value of our collateral. Accordingly, in
the event of a borrower default, we may not recover some or all of our
investment in our development loans.
Unscheduled
principal payments on our loans could adversely affect our financial condition
and operating results.
The rate
and timing of unscheduled payments and collections of principal on our net lease
loans is impossible to predict accurately and will be affected by a variety of
factors, including the level of prevailing interest rates, restrictions on
voluntary prepayments contained in the loans, the availability of credit
generally and other economic, demographic, geographic, tax and legal factors. In
general, however, if prevailing interest rates fall significantly below the
interest rate on a loan, the borrower is more likely to prepay the then
higher-rate loan than if prevailing rates remain at or above the interest rate
on the loan.
Loans we
originate or acquire generally prohibit prepayment or only permit prepayment in
conjunction with payment of a prepayment premium to maintain the yield to
investors. Our mortgage loans are typically prepayable, however, without payment
of any prepayment premium, in the event of certain events of casualty or
condemnation with respect to the related mortgaged property. From time to time,
we may originate a loan that is prepayable under other circumstances without
payment of any prepayment premium. We cannot assure you that our prepayment
prohibitions will be enforceable in all jurisdictions in which we make loans.
Further, a mortgage loan may effectively prepay in the event of a default, in
which event a prepayment premium may not be recovered.
Unscheduled
principal prepayments could adversely affect our financial condition and
operating results to the extent we are unable to reinvest the funds we receive
at an equivalent or higher yield rate, if at all. In addition, a large amount of
prepayments, especially prepayments on loans with interest rates that are high
relative to the rest of our portfolio, will likely decrease the net income we
anticipate receiving from our assets.
We
may be required to repurchase assets that we have sold or to indemnify holders
of our CDOs.
If any of
the assets we originate or acquire and sell or pledge to obtain long-term
financing do not comply with representations and warranties that we make about
certain characteristics of the assets, the borrowers and the underlying
properties, we may be required to repurchase those assets or replace them with
substitute assets. In addition, in the case of assets that we have sold, we may
be required to indemnify persons for losses or expenses incurred as a result of
a breach of a representation or warranty. Repurchased assets typically require a
significant allocation of working capital to carry on our books, and our ability
to borrow against such assets is limited. Any significant repurchases or
indemnification payments could materially and adversely affect our financial
condition and operating results.
The
success of our net lease loan business will depend upon our ability to service
effectively, or to obtain effective third-party servicing for, the loans we
invest in.
We have
entered into a servicing arrangement with Wachovia Bank, N.A. for servicing of
our net lease loans. We may in the future undertake to retain the servicing of
our loan assets in a taxable subsidiary of ours. We have no experience servicing
a large portfolio of loans for an extended period of time. We cannot assure you
that our third-party contractor or we will be able to service the loans
according to industry standards. Failure to service the loans properly could
harm our financial condition and operating results.
The
success of our net lease equity business will depend on our ability to obtain
third-party management for the real properties we
purchase.
For our
equity investments in real property where the underlying lease is not a bondable
or triple net lease, we typically enter into management arrangements with third
parties to perform our property owner obligations. We rely on these managers to
perform our obligations under the net lease. A failure of these managers to
perform could trigger the tenant’s right to terminate the lease or abate rent.
In addition, if the managers fail to perform our obligations in a cost-effective
manner, our net cash flows from the property and hence our operating results and
cash flows could be adversely affected.
An
interruption in or breach of our information systems could impair our ability to
originate assets on a timely basis and may result in lost
business.
We rely
heavily upon communications and information systems to conduct our business. Any
failure or interruption or breach in security of our information systems or the
third-party information systems on which we rely could cause underwriting or
other delays and could result in reduced efficiency in asset servicing. We
cannot assure you that any failures or interruptions will not occur or, if they
do occur, that we or the third parties on whom we rely will adequately address
them. The occurrence of any failures or interruptions could significantly harm
our financial condition and operating results.
Our
network of independent mortgage brokers and investment sale brokers may sell our
investment opportunities to our competitors.
An
important source of our investments comes from independent mortgage brokers and
investment sale brokers. These brokers are not contractually obligated to do
business with us. Further, our competitors also have relationships with many of
these brokers and actively compete with us in our efforts to obtain investments
from these brokers. As a result, we may lose potential transactions to our
competitors, which could negatively affect the volume and pricing of our
investments, which would have a material adverse effect on our financial
condition and operating results.
We
may be unsuccessful in executing our 10-year credit tenant loan program.
Like our
other loan products, our 10-year credit tenant loans are secured by a first
mortgage on the underlying real estate and an absolute assignment of the
underlying lease and rents. However, we bifurcate our 10-year credit tenant
loans into two notes, a real estate note and a corporate credit note, and
allocate the security among the notes. The real estate note is entitled to a
first priority claim against the underlying real estate and the corporate credit
note is entitled to a first priority claim against the lease assignment. Any
excess recovery on one note is paid over to the other note. We typically sell
the real estate note, which represents 70% to 80% of the loan, to a CMBS conduit
promptly following origination and retain the corporate credit note in our
portfolio. If we are unable to continue to sell the first note, we will be
subject to all risks incident to holding the debt, including the risks of
borrower defaults, tenant defaults, bankruptcies, fraud, losses and special
hazard losses that may not be covered by standard hazard insurance. In addition,
if the tenant underlying the loan becomes insolvent or bankrupt, that tenant or
its bankruptcy trustee can reject the lease. In such an event, our claim, as
holder of the corporate credit note, against the real estate will be junior to
the real estate note holder’s claim. Further, while we will have a first
priority claim on the lease assignment, our claim for damages will be limited to
an amount defined under the Bankruptcy Code. Either of these contingencies could
result in a material adverse effect on our financial condition and operating
results.
Maintenance
of our Investment Company Act of 1940 exemption imposes limits on our
operations.
We intend
to continue to conduct our business in a manner that allows us to avoid
registration as an investment company under the Investment Company Act of 1940
(the “1940 Act”). Under Section 3(c)(5)(C) of the 1940 Act, entities that are
primarily engaged in the business of purchasing or otherwise acquiring
“mortgages and other liens on and interests in real estate” are not treated as
investment companies. The position of the SEC staff generally requires us to
maintain at least 55% of our assets directly in qualifying real estate interests
in order for us to rely on this exemption (the “55% Requirement”). To constitute
a qualifying real estate interest under this 55% Requirement, a real estate
interest must meet various criteria. Mortgage securities that do not represent
all of the certificates issued with respect to an underlying pool of mortgages
may be treated as securities separate from the underlying mortgage loans and,
thus, may not qualify for purposes of the 55% Requirement. Our ownership of
these mortgage securities, therefore, is limited by the provisions of the 1940
Act and SEC staff interpretations. We cannot assure you that efforts to pursue
our investment strategy will not be adversely affected by operation of these
provisions and interpretations.
Risks
Related to Ownership of Real Estate
Our
real estate investments are subject to risks particular to real property.
As an
owner of real property (including property securing our net lease loans that we
may acquire upon foreclosure), we are subject to the risks generally incident to
the ownership of the real estate. These risks may include those listed below:
| · |
civil
unrest, acts of God, including earthquakes, floods and other natural
disasters, which may result in uninsured losses, and acts of war or
terrorism, including the consequences of the terrorist attacks, such as
those that occurred on September 11, 2001; |
| · |
adverse
changes in national and local economic and market conditions;
|
| · |
changes
in interest rates and in the availability, cost and terms of debt
financing, including mortgage obligations and the possibility of
foreclosure; |
| · |
the
costs of complying or fines or damages as a result of non-compliance with
the Americans with Disabilities Act and with environmental laws;
|
| · |
changes
in governmental laws and regulations, fiscal policies and zoning
ordinances and the related costs of compliance with laws and regulations,
fiscal policies and ordinances; |
| · |
costs
of remediation and liabilities associated with environmental conditions
such as indoor mold; |
| · |
changes
in traffic patterns and neighborhood characteristics;
|
| · |
the
potential for uninsured or underinsured property losses;
|
| · |
the
ongoing need for capital improvements, particularly in older structures;
|
| · |
changes
in real property tax rates and other operating expenses;
|
| · |
the
relative illiquidity of real estate investments; and
|
| · |
other
circumstances beyond our control. |
Should
any of these events occur, our financial condition and operating results could
be adversely affected.
Single
tenant leases involve significant risks of tenant default.
We focus
our real estate acquisition activities on properties that are net leased to
single tenants. Therefore, a default by the sole tenant is likely to cause a
significant or complete reduction in the operating cash flow generated by the
property leased to that tenant and a reduction in the value of that property.
Tenant
defaults could adversely affect our financial condition and operating results.
The
tenants underlying our net lease investments may default on their lease
obligations. Our ability to manage our assets is also subject to federal
bankruptcy laws and state laws that limit creditors’ rights and remedies
available to real property owners to collect delinquent rents. If a tenant
becomes insolvent or bankrupt, we cannot be sure that we could recover the
premises from the tenant promptly or from a trustee or debtor-in-possession in
any bankruptcy proceeding relating to that tenant. We also cannot be sure that
we would receive rent in the proceeding sufficient to cover our expenses with
respect to the premises. If a tenant becomes bankrupt, the federal bankruptcy
code (and possibly state laws relating to debtor relief) will apply and, in some
instances, may restrict the amount and recoverability of our claims against the
tenant. A tenant’s default on its obligations to us could adversely affect our
financial condition and results of operations.
The
ability of tenants to reject leases in a bankruptcy could adversely affect the
value of our investments and our financial condition and operating results.
If the
tenant underlying our net lease investments becomes insolvent or bankrupt, that
tenant or its bankruptcy trustee could reject the lease. Lease enhancements do
not cover risks attendant to tenant bankruptcies. If a lease were rejected,
rental payments would terminate, leaving the owner without the rental payments
to support its debt service and other obligations under loans and with a claim
for damages under section 502(b)(6) of the Bankruptcy Code. A claim by the owner
for damages resulting from the rejection by a debtor of a lease of real property
is limited to an amount equal to the rent reserved under the lease, without
acceleration, for the greater of one year or 15 percent (but not more than three
years) of the remaining term of the lease, plus rent already due but unpaid.
There can be no assurance that any such claim for damages (or any recovery on
the underlying mortgaged real estate) would be sufficient to provide for the
repayment of amounts then due under the lease or any debt encumbering the
property.
We
may have obligations to comply with covenants under certain of our equity
investments in real property.
Under
certain of our equity investments in real property, we, as owner of the
property, retain obligations with respect to the property, including the
responsibility for real estate taxes, insurance, operating expenses, maintenance
and repair of the property, provision of adequate parking, maintenance of common
areas and compliance with other affirmative covenants in the lease. If we were
to fail to meet such obligations, the tenant may be permitted to abate rent or
terminate the lease, which may result in a loss of our capital invested in, and
anticipated profits from, such property.
Rising
operating expenses could reduce our cash flow and funds available for future
dividends.
Our
properties are subject to operating risks common to real estate in general, any
or all of which may negatively affect us. If any property is not fully occupied
or if rents are being paid in an amount that is insufficient to cover operating
expenses, we could be required to expend funds for that property’s operating
expenses. Our properties are also subject to increases in real estate and other
tax rates, utility costs, operating expenses, insurance costs, repairs and
maintenance and administrative expenses.
While
most of our properties are subject to a net lease, renewals of leases or future
leases may not be negotiated on that basis, in which event we will have to pay
the expenses associated with maintaining the property. In addition, real estate
taxes on our properties and any other properties that we acquire in the future
may increase as property tax rates change and as those properties are assessed
or reassessed by tax authorities. Many U.S. states and localities are
considering increases in their income and/or property tax rates (or increases in
the assessments of real estate) to cover revenue shortfalls. If we are unable to
lease properties on a net lease basis, or if tenants fail to pay required tax,
utility and other impositions, we could be required to pay those costs, which
could have a material adverse effect on our operating results and financial
condition, as well as our ability to pay dividends to stockholders at historical
levels or at all.
We
may not be able to renew our leases or re-lease our
properties.
Upon the
expiration of leases on our properties, we may not be able to re-let all or a
portion of that property, or the terms of re-letting (including the cost of
concessions to tenants) may be less favorable to us than current lease terms. If
we are unable to re-let promptly all or a substantial portion of our properties
or if the rental rates upon re-letting are significantly lower than the current
rates, our financial condition and operating results will be adversely affected.
There can be no assurance that we will be able to retain tenants upon the
expiration of their leases.
Illiquidity
of real estate may limit our ability to change our
portfolio.
Real
estate investments are relatively illiquid. Our ability to vary our portfolio by
selling and buying properties in response to changes in economic and other
conditions will be limited. In addition, the Internal Revenue Code of 1986, as
amended, or the Code, limits our ability to sell our properties by imposing a
penalty tax of 100% on the gain derived from prohibited transactions, which are
defined as sales of property held primarily for sale to customers in the
ordinary course of a trade or business. The frequency of sales and the holding
period of the property sold are two primary factors in determining whether a
property sold fits within this definition. These considerations may limit our
opportunities to sell our properties. If we must sell a property, we cannot
assure you that we will be able to dispose of the property in the time period we
desire or that the sales price of the property will recoup or exceed our cost
for the property.
Noncompliance
with environmental laws could adversely affect our financial condition and
operating results.
The real
properties we own, including those that we may acquire by foreclosure in
connection with our net lease loans, are subject to various federal, state and
local environmental laws. Under these laws, courts and government agencies have
the authority to require the current owner of a contaminated property to clean
up the property, even if the owner did not know of and was not responsible for
the contamination. For
example, liability can be imposed upon a property owner based on activities of a
tenant. In addition to the costs of cleanup, environmental contamination can
affect the value of a property and, therefore, an owner’s ability to borrow
funds using the property as collateral or to rent or sell the property. Under
the environmental laws, courts and governmental agencies also have the authority
to require that a person who sent waste to a waste disposal facility, such as a
landfill or an incinerator, to pay for the clean-up of that facility if it
becomes contaminated and threatens human health or the environment. A person
that arranges for the disposal of, or transports for disposal or treatment of, a
hazardous substance to a property owned by another may be liable for the costs
of removal or remediation of the hazardous substances released into the
environment at that property.
Furthermore,
various court decisions have established that third parties may recover damages
for injury caused by property contamination. Also, some of these environmental
laws restrict the use of a property or place conditions on various activities.
An example would be laws that require a business using chemicals to manage them
carefully and to notify local officials that the chemicals are being used. We
may be responsible for environmental liabilities created by our tenants
irrespective of the terms of any lease.
We could
be responsible for the costs discussed above. The costs incurred to clean up a
contaminated property, to defend against a claim, or to comply with
environmental laws could be material and could adversely affect our financial
condition and operating results.
Prior to
acquisition of or foreclosure on a property, we obtain Phase I environmental
reports and, in some cases, a Phase II environmental report. However, these
reports may not reveal all environmental conditions at a property and we may
incur material environmental liabilities of which we are unaware. Future laws or
regulations may impose material environmental liabilities on us or our tenants
and the current environmental condition of our properties may be affected by the
condition of the properties in the vicinity of our properties (such as the
presence of leaking underground storage tanks) or by third parties unrelated to
us.
Risks
Related to Lease Enhancements
Our
lease enhancement mechanisms may fail.
We have
developed certain lease enhancement mechanisms designed to reduce the risks
inherent in our net lease investments. These lease enhancement mechanisms
include:
| · |
casualty
and condemnation insurance policies that protect us from any right the
tenant may have to terminate the underlying net lease or abate rent as a
result of a casualty or condemnation; |
| · |
with
respect to a double net lease, borrower reserve funds that protect us from
any rights the tenant may have to terminate the underlying net lease or
abate rent as a result of the failure of the property owner to maintain
and repair the property or related common areas;
and |
| · |
residual
value insurance policies on net lease loans which have an amortization
period that extends beyond the initial term of the underlying net lease,
that insure against the risk that the borrower defaults and the property
is worth less than the balloon balance at
maturity. |
These
lease enhancement mechanisms may not protect us against all losses. For example,
our casualty and condemnation policies typically contain exclusions relating to
war, insurrection, rebellion, revolution or civil riot and radioactive matter,
earthquakes (in earthquake zones) and takings (other than by condemnation) by
reason of danger to public health, public safety or the environment. In
addition, amounts in the borrower reserve fund may be insufficient to cover the
cost of maintenance or repairs, and the borrower may fail to perform such
maintenance or repairs at its own expense. The failure of our lease enhancement
mechanisms may result in the loss of our capital invested in, and profits
anticipated from, our investment, and could adversely affect our financial
condition and operating results.
We
depend on our insurance carriers to provide and honor lease enhancements.
We
presently obtain specialized lease enhancement insurance policies from two
carriers. The limited number of insurance carriers available to provide lease
enhancements restricts our ability to replace such insurers. Any of the
following developments with respect to our carriers may have a material adverse
effect on our financial condition and operating results:
| · |
a
deterioration in our relationship with one or both of our carriers;
|
| · |
a
bankruptcy or other material adverse financial development with respect to
one or both of our carriers; and |
| · |
a
dispute as to policy coverage with one or both of our
carriers. |
We
may fail to analyze leases adequately or apply appropriate lease enhancement
mechanisms.
Our net
lease assets are generally secured by rent payments on the underlying net lease.
Therefore, continued rent payments are critical to the value of our assets. In
determining whether a lease enhancement mechanism is appropriate, we examine the
costs and benefits of the lease enhancement mechanism in light of our analysis
of the risks associated with the underlying net lease. As a result of this
analysis, we may decline to apply a lease enhancement mechanism that would
otherwise protect us. Our failure to analyze leases adequately or apply
appropriate lease enhancement mechanisms could cause a decline in the value of
our net lease asset and adversely affect our financial condition and operating
results.
Risks
Related to Business Strategy and Policies
We
face significant competition that could harm our business.
We are
subject to significant competition in seeking asset investments. We compete with
other specialty finance companies, insurance companies, investment banks,
savings and loan associations, banks, mortgage bankers, mutual funds,
institutional investors, pension funds, other lenders, governmental bodies and
individuals and other entities, including REITs. We may face new competitors
and, due to our focus on net lease properties located throughout the United
States, and because many of our competitors are locally and/or regionally
focused, we may not encounter the same competitors in each region of the United
States. Many of our competitors will have greater financial and other resources
and may have other advantages over our company. Our competitors may be willing
to accept lower returns on their investments, may have access to lower cost
capital and may succeed in buying the assets that we target for acquisition. We
may incur costs on unsuccessful acquisitions that we will not be able to
recover. Our failure to compete successfully could have a material adverse
effect on our financial condition and operating results.
Our
ability to grow our business will be limited by our ability to attract debt or
equity financing, and we may have difficulty accessing capital on attractive
terms.
We expect
to fund future investments primarily from debt or equity capital. Therefore, we
are dependent upon our ability to attract debt or equity financing from public
or institutional lenders. The capital markets have been, and in the future may
be, adversely affected by various events beyond our control, such as the United
States’ military involvement in the Middle East and elsewhere, the terrorist
attacks on September 11, 2001, the ongoing War on Terrorism by the United States
and the bankruptcy of major companies, such as Enron Corp. Events such as an
escalation in the War on Terrorism, new terrorist attacks, or additional
bankruptcies in the future, as well as other events beyond our control, could
adversely affect the availability and cost of capital for our business. As a
REIT, we will also be dependent upon the availability and cost of capital in the
REIT markets specifically, which can be impacted by various factors such as
interest rate levels, the strength of real estate markets and investors’
appetite for REIT investments. We cannot assure you that we will be successful
in attracting sufficient debt or equity financing to fund future investments, or
at an acceptable cost.
Future
offerings of debt and equity may adversely affect the market price of our common
stock.
We expect
in the future to increase our capital resources by making additional offerings
of equity and debt securities, which would include classes of preferred stock,
common stock and senior or subordinated notes. All debt securities and other
borrowings, as well as all classes of preferred stock, will be senior to our
common stock in a liquidation of our company. Additional equity offerings could
dilute our stockholders’ equity, reduce the market price of shares of our common
stock, or be of preferred stock having a distribution preference that may limit
our ability to make distributions on our common stock. We are unable to estimate
the amount, timing or nature of additional offerings as they will depend upon
market conditions and other factors.
We
may fail to manage our anticipated growth.
As of
December 31, 2004, our company had 23 employees. If we grow rapidly, we may
experience a significant strain on our management, operational, financial and
other resources. Our ability to manage growth effectively will require us to
continue to improve our operational and financial systems, to expand our
employee base and train and manage our employees and to develop additional
management expertise. Management of growth is especially challenging for us due
to our limited financial resources. Failure to increase our business and manage
growth effectively could have a material adverse effect on our financial
condition and operating results.
Temporary
investment in short-term investments may adversely affect our results.
Our
results of operations may be adversely affected during the period in which we
are implementing our investment, leveraging and hedging strategies or during any
period after which we have received the proceeds of a financing or asset sale
but have not invested the proceeds. During this time, we may be invested in
short-term investments, including CMBS or CDO bonds, corporate bonds, commercial
paper, money market funds and U.S. agency debt.
The
concentration of our company’s ownership may adversely affect the ability of new
investors to influence our company’s policies.
As of
December 31, 2004, our directors and executive officers owned approximately
12.2% in the aggregate of the outstanding shares of our common stock.
Accordingly, these owners collectively have significant influence over our
company and may determine to vote their shares together. This influence may
result in company decisions that may not serve the best interest of all
stockholders.
Our
board of directors may change our investment and operational policies without
stockholder consent.
Our board
of directors determines our investment and operational policies and may amend or
revise our policies, including our policies with respect to our REIT status,
investment objectives, acquisitions, growth, operations, indebtedness,
capitalization and distributions, or approve transactions that deviate from
these policies without a vote of or notice to our stockholders. Investment and
operational policy changes could adversely affect the market price of our common
stock and our ability to make distributions to our stockholders.
The
federal income tax laws governing REITs are complex, and our failure to qualify
as a REIT under the federal tax laws will result in adverse tax consequences.
We intend
to operate in a manner that will allow us to qualify as a REIT under the federal
income tax laws. The REIT qualification requirements are extremely complex,
however, and interpretations of the federal income tax laws governing
qualification as a REIT are limited. Accordingly, we cannot be certain that we
will be successful in qualifying as a REIT. At any time, new laws,
interpretations, or court decisions may change the federal tax laws or the
federal income tax consequences of our qualification as a REIT.
If we
fail to qualify as a REIT in any taxable year, we will be subject to federal
income tax on our taxable income. Our taxable income would be determined without
deducting any distributions to our stockholders. We might need to borrow money
or sell assets in order to pay any such tax. If we cease to qualify as a REIT,
we no longer would be required to distribute most of our taxable income to our
stockholders. Unless the federal income tax laws excused our failure to qualify
as a REIT, we could not re-elect REIT status until the fifth calendar year after
the year in which we failed to qualify as a REIT.
Even
if we qualify as a REIT, we may face other tax liabilities that reduce our cash
flow or limit our ability to sell or securitize our assets.
Failure
to make required distributions would subject us to tax.
In order
to qualify as a REIT, each year we must distribute to our stockholders at least
90% of our taxable income, other than any net capital gain. To the extent that
we satisfy this distribution requirement, but distribute less than 100% of our
taxable income, we will be subject to federal corporate income tax on our
undistributed taxable income. In addition, we will be subject to a 4%
nondeductible excise tax if the actual amount that we pay out to our
stockholders in a calendar year is less than a minimum amount specified under
federal tax laws. Under some circumstances, we may need to borrow money or sell
assets to distribute enough of our taxable income to satisfy the distribution
requirement and to avoid corporate income tax and the 4% nondeductible excise
tax in a particular year.
The
formation of taxable REIT subsidiaries increases our overall tax
liability.
Our
taxable REIT subsidiaries will be subject to federal and state income tax on
their taxable income, which will consist of gains from any loan sales and
financial advisory services fees, net of the general and administrative expenses
associated with these businesses. Accordingly, although our ownership of the
taxable REIT subsidiaries allows us to participate in additional operating
income, that operating income is fully subject to corporate income tax. The
after-tax net income of our taxable REIT subsidiaries is available for
distribution to us as dividends, but we may choose to retain earnings in the
taxable REIT subsidiary and not pay dividends.
We will
incur a 100% tax on transactions with our taxable REIT subsidiaries that are not
conducted on an arm’s-length basis.
The
tax on prohibited transactions will limit our ability to engage in transactions,
including certain methods of securitizing our loans, that would be treated as
sales for federal income tax purposes.
A REIT’s
net income from prohibited transactions is subject to a 100% tax. In general,
prohibited transactions are sales or other dispositions of property, other than
foreclosure property, but including mortgage loans, held primarily for sale to
customers in the ordinary course of business. We might be subject to this tax if
we were to sell a loan or securitize loans in a manner that was treated as a
sale for federal income tax purposes. Therefore, in order to avoid the
prohibited transactions tax, we may choose not to engage in certain sales of
loans other than through our taxable REIT subsidiaries and may limit the
structures that we utilize for our securitization transactions even though such
sales or structures might otherwise be beneficial for us.
Complying
with REIT requirements may cause us to forego otherwise attractive
opportunities.
To
qualify as a REIT for federal income tax purposes we must continually satisfy
tests concerning, among other things, the sources of our income, the nature and
diversification of our assets, the amounts we distribute to our stockholders and
the ownership of our stock. We may be required to make distributions to
stockholders at disadvantageous times or when we do not have funds readily
available for distribution. Thus, compliance with the REIT requirements may
hinder our ability to operate solely on the basis of maximizing profits.
Complying
with REIT requirements may limit our ability to hedge effectively.
The REIT
provisions of the Code may limit our ability to hedge our operations by
requiring us to limit our income in each year from qualified hedges, together
with any other income not generated from qualified real estate assets, to no
more than 25% of our gross income. In addition, we must limit our aggregate
income from non-qualified hedging transactions, from our provision of services
and from other non-qualifying sources to no more than 5% of our annual gross
income. As a result, we may have to limit our use of advantageous hedging
techniques. This could result in greater risks associated with changes in
interest rates than we would otherwise want to incur. If we were to violate one
or both of the REIT gross income tests, we would be subject to a penalty tax
generally equal to the greater of the amounts by which we failed the two gross
income tests, multiplied by a fraction intended to reflect our profitability. If
we fail to satisfy the REIT gross income tests, unless our failure was due to
reasonable cause and not due to willful neglect, we could lose our REIT status
for federal income tax purposes.
Our
ownership limitations may restrict or prevent you from engaging in certain
transfers of our common stock.
In order
to maintain our REIT qualification, no more than 50% in value of our outstanding
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the federal income tax laws to include various kinds of entities)
during the last half of any taxable year. To preserve our REIT qualification,
our charter provides that, unless exempted by our board of directors, no person
may directly or indirectly own more than 9.9% of the number or value (whichever
is more restrictive) of our outstanding shares of stock. We refer to this
limitation as the “Aggregate Stock Ownership Limit.” In addition, our charter
provides that, unless exempted by our board of directors, no person may directly
or indirectly own more than 9.9% of the aggregate number or value (whichever is
more restrictive) of the outstanding shares of our common stock. We refer to
this limitation as the “Common Stock Ownership Limit.” Generally, any shares of
our stock owned by affiliated owners will be combined for purposes of the
Aggregate Stock Ownership Limit, and any shares of common stock owned by
affiliated owners will be combined for purposes of the Common Stock Ownership
Limit.
If anyone
transfers shares in a way that would violate our ownership limits, or prevent us
from continuing to qualify as a REIT under the federal income tax laws, we will
consider the transfer to be null and void from the outset and the intended
transferee of those shares will be deemed never to have owned the shares or
those shares instead will be transferred to a trust for the benefit of a
charitable beneficiary and will be either redeemed by us or sold to a person
whose ownership of the shares will not violate our ownership limits. Anyone who
acquires shares in violation of our ownership limits or the other restrictions
on transfer in our charter bears the risk of suffering a financial loss when the
shares are redeemed or sold if the market price of our stock falls between the
date of purchase and the date of redemption or sale.
Provisions
of our charter and Maryland law may limit the ability of a third-party to
acquire control of our company.
Our
charter contains restrictions on stock ownership and transfer.
Our
charter contains the Aggregate Stock Ownership Limit and the Common Stock
Ownership Limit, and these restrictions on transferability and ownership may
delay, defer or prevent a transaction or a change of control of our company that
might involve a premium price for our common stock or otherwise be in the best
interest of our stockholders.
Our
board of directors may issue additional stock without stockholder
approval.
Our
charter authorizes our board of directors to amend the charter to increase or
decrease the aggregate number of shares of stock we have authority to issue,
without any action by the stockholders. Issuances of additional shares of stock
may delay, defer or prevent a transaction or a change of control of our company
that might involve a premium price for our common stock or otherwise be in the
best interest of our stockholders.
Other
provisions of our charter and bylaws may delay or prevent a transaction or
change of control.
Our
charter and bylaws also contain other provisions that may delay, defer or
prevent a transaction or a change of control of our company that might involve a
premium price for our common stock or otherwise be in the best interest of our
stockholders. For example, our charter and bylaws provide that: a two-thirds
vote of stockholders is required to remove a director, vacancies on our board
may only be filled by the remaining directors, the number of directors may be
fixed only by the directors, our bylaws may only be amended by our directors and
a majority of shares is required to call a special stockholders
meeting.
The
market price of our common stock may vary substantially.
The
trading prices of equity securities issued by REITs historically have been
affected by changes in market interest rates. One of the factors that may
influence the price of our common stock in public trading markets is the annual
yield from distributions on our common stock as compared to yields on other
financial instruments. An increase in market interest rates, or a decrease in
our distributions to stockholders, may lead prospective purchasers of our common
stock to demand a higher annual yield, which could reduce the market price of
our common stock.
The
resale of the shares registered hereunder into the public market, or the
perception that such resale may occur, could adversely affect the market price
of our common stock.
Other
factors that could affect the market price of our common stock include the
following:
| · |
actual
or anticipated variations in our quarterly results of
operations; |
| · |
changes
in market valuations of companies in the real estate or mortgage loan
industries; |
| · |
changes
in expectations of future financial performance or changes in estimates of
securities analysts; |
| · |
fluctuations
in stock market prices and volumes; |
| · |
the
addition or departure of key personnel; and |
| · |
announcements
by us or our competitors of acquisitions, investments or strategic
alliances. |
We
depend on our key personnel.
We depend
on the efforts and expertise of our senior management to manage our day-to-day
operations and strategic business direction. Our senior management is comprised
of Paul H. McDowell, William R. Pollert, Shawn P. Seale, Robert C. Blanz and
Michael J. Heneghan. We also depend on the business relationships that our staff
has with borrowers, tenants, mortgage brokers, investment sale brokers, lenders,
institutional investors and other net lease market participants. Although we
have entered into employment agreements with each member of our senior
management, there is no guarantee that any of them will remain employed with our
company for the term of their respective agreements. We do not maintain key
person life insurance on any of our management team members. If any member of
our senior management team were to die, become disabled or otherwise leave our
employ, we may not be able to replace him with a person of equal skill, ability
and industry expertise.
FORWARD-LOOKING
STATEMENTS AND PROJECTIONS
Cautionary
Statement Regarding Forward-Looking Statements
We may
from time to time make written or oral forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
including statements contained in our filings with the Securities and Exchange
Commission and in our press releases and webcasts. Forward-looking statements
relate to expectations, beliefs, projections, future plans and strategies,
anticipated events or trends and similar expressions concerning matters that are
not historical facts. In some cases, you can identify forward-looking statements
by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” “potential,” “should,” “strategy,” “will” and other
words of similar meaning. The forward-looking statements are based on our
beliefs, assumptions and expectations of future performance, taking into account
all information currently available to us. These beliefs, assumptions and
expectations can change as a result of many possible events or factors, not all
of which are known to us or are within our control. If a change occurs, our
business, financial condition, liquidity and results of operations may vary
materially from those expressed in our forward-looking statements. In connection
with the “safe harbor” provisions of the Private Securities Litigation Reform
Act of 1995, we are hereby identifying important factors that could cause actual
results and outcomes to differ materially from those contained in any
forward-looking statement made by or on our behalf. Such factors include, but
are not limited to:
| · |
our
ability to invest in additional net lease assets in a timely manner or on
acceptable terms; |
| · |
adverse
changes in the financial condition of the tenants underlying our net lease
investments; |
| · |
changes
in our industry, the industries of our tenants, interest rates or the
general economy; |
| · |
the
success of our hedging strategy; |
| · |
the
availability, terms and deployment of capital, including our ability to
raise additional capital to invest in net lease assets and to obtain
long-term financing for our assets; |
| · |
the
completion of pending net lease loans and/or other net lease
investments; |
| · |
demand
for our products; |
| · |
impairments
in the value of the collateral underlying our
investments; |
| · |
the
degree and nature of our competition; and |
| · |
legislative
or regulatory changes, including changes to laws governing the taxation of
REITs. |
These
risks and uncertainties should be considered in evaluating any forward-looking
statement we may make from time to time. Any forward-looking statement speaks
only as of its date. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are qualified by the
cautionary statements in this section. We undertake no obligation to update or
publicly release any revisions to forward-looking statements to reflect events,
circumstances or changes in expectations after the date made.
USE
OF PROCEEDS
We will
not receive any proceeds from the resale of the common stock by any selling
securityholders. All the proceeds from the sale of the shares of common stock
will be for the account of the selling securityholders. See the “Selling
Securityholders” and “Plan of Distribution” sections of this
prospectus.
DESCRIPTION
OF COMMON STOCK
The
following summary of the terms of our common stock does not purport to be
complete and is subject to and qualified in its entirety by reference to our
charter and bylaws. See “Where You Can Find More Information.”
Authorized
Stock
Our
charter provides that we may issue up to 500,000,000 shares of common stock,
$.01 par value per share, and 100,000,000 shares of preferred stock, $.01 par
value per share. At April 1, 2005, 27,875,200 shares of common stock were issued
and outstanding and no preferred stock was issued and outstanding. In addition,
305,734 shares of common stock have been reserved for issuance under our stock
plan. As permitted by the Maryland General Corporation Law, or MGCL, our charter
contains a provision permitting our board of directors, without any action by
our stockholders, to amend the charter to increase or decrease the aggregate
number of shares of stock or the number of shares of stock of any class or
series that we have authority to issue.
Voting
Rights of Common Stock
Subject
to the provisions of our charter restricting the transfer and ownership of our
capital stock, each outstanding share of common stock entitles the holder to one
vote on all matters submitted to a vote of stockholders, including the election
of directors, and, except as provided with respect to any other class or series
of capital stock that we may issue in the future, the holders of our common
stock possess the exclusive voting power. There is no cumulative voting in the
election of directors. The holders of a plurality of the outstanding common
stock, voting as a single class, can elect all of the directors.
Distributions,
Liquidation and Other Rights of Common Stock
All
common stock offered by this prospectus will be duly authorized, fully paid and
nonassessable. Holders of our common stock are entitled to receive distributions
when, as and if authorized by our board of directors and declared by us out of
assets legally available for the payment of distributions. They also are
entitled to share ratably in our assets legally available for distribution to
our stockholders in the event of our liquidation, dissolution or winding up,
after payment of or adequate provision for all of our known debts and
liabilities. These rights are subject to the preferential rights of any other
class or series of our stock and to the provisions of our charter restricting
transfer of our stock.
Holders
of our common stock have no preference, conversion, exchange, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any of our securities. Subject to the restrictions on transfer of stock
contained in our charter, all shares of common stock have equal distribution,
liquidation and other rights.
Power
to Reclassify Stock
Our
charter authorizes our board of directors to classify any unissued preferred
stock and to reclassify any previously classified but unissued common stock and
preferred stock of any series, from time to time, in one or more classes or
series, as authorized by the board of directors. Prior to issuance of stock of
each class or series, the board of directors is required by the MGCL and our
charter to set for each such class or series, the terms, preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends or
other distributions, qualifications and terms or conditions of redemption for
each such class or series. Thus, our board of directors could authorize the
issuance of preferred stock with priority over the common stock with respect to
distributions and rights upon liquidation and with other terms and conditions
which may delay, defer or prevent a transaction or a change of control of our
company that might involve a premium price for our common stock or otherwise be
in the best interest of our common stock holders.
Power
to Issue Additional Common Stock and Preferred Stock
We
believe that the power to issue additional common stock or preferred stock and
to classify or reclassify unissued common stock or preferred stock and
thereafter to issue the classified or reclassified stock provides us with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other needs which might arise. These actions can be taken without
stockholder approval, unless stockholder approval is required by applicable law
or the rules of the NYSE. The listing requirements of the NYSE require
stockholder approval of certain issuances of 20% or more of the then outstanding
voting power or the outstanding number of shares of common stock. Although we
have no current intention of doing so, we could issue a class or series of stock
that could delay, defer or prevent a transaction or a change of control of our
company that might involve a premium price for our common stock or otherwise be
in the best interest of our common stock holders.
Restrictions
on Ownership and Transfer
Our
charter provides that no person may beneficially own, actually or
constructively, more than 9.9% of the value of our outstanding capital stock or
9.9% of the number of our outstanding shares of common stock. See “Restrictions
on Ownership.”
Other
Matters
The
transfer agent and registrar for our common stock is Wachovia Bank,
NA.
CERTAIN
PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER
AND
BYLAWS
The
following description of certain provisions of Maryland law and of our charter
and bylaws does not purport to be complete and is qualified in its entirety by
reference to Maryland law, our charter and our bylaws. See “Where You Can Find
More Information.”
Our
Board of Directors
Our
bylaws provide that the number of our directors may be established only by our
board of directors. We have seven directors. The board of directors may increase
or decrease the number of directors by a vote of a majority of the members of
our board of directors, provided that the number of directors may not be less
than the number required by Maryland law and that the tenure of office of a
director may not be affected by any decrease in the number of directors. Except
as may be provided by the board of directors in setting the terms of any class
or series of preferred stock, any vacancy on our board of directors may be
filled only by a majority of the remaining directors, even if the remaining
directors do not constitute a quorum, or, if no directors remain, by our
stockholders. Any director elected to fill a vacancy serves for the remainder of
the full term of the directorship in which the vacancy occurred and until a
successor is elected and qualifies.
At each
annual meeting of stockholders, the holders of the common stock may vote to
elect all of the directors on the board of directors, each of which is elected
to a one-year term. Holders of common stock have no right to cumulative voting
in the election of directors. At each annual meeting of stockholders, the
holders of a plurality of the common stock are able to elect all of the
directors.
Removal
of Directors
Under
Maryland law and our charter, a director may be removed, with or without cause,
upon the affirmative vote of at least two-thirds of the votes entitled to be
cast in the election of directors. Absent removal of all of our directors, this
provision, when coupled with the exclusive power of our board of directors to
fill vacant directorships (described below under “—Other Anti-Takeover
Provisions”), precludes stockholders from removing incumbent directors, except
upon a substantial affirmative vote, and filling the vacancies created by such
removal with their own nominees.
Business
Combinations
Maryland
law prohibits “business combinations” between us and an interested stockholder
or an affiliate of an interested stockholder for five years after the most
recent date on which the interested stockholder becomes an interested
stockholder. These business combinations include a merger, consolidation, share
exchange or, in certain circumstances specified in the statute, an asset
transfer, issuance or transfer by us of equity securities, liquidation plan or
reclassification of equity securities. Maryland law defines an interested
stockholder as:
| · |
any
person who beneficially owns 10% or more of the voting power of our stock;
or |
| · |
an
affiliate or associate of ours who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10% or more of
the voting power of our then-outstanding voting
stock. |
A person
is not an interested stockholder if our board of directors approved in advance
the transaction by which the person otherwise would have become an interested
stockholder. However, in approving a transaction, our board of directors may
provide that its approval is subject to compliance, at or after the time of
approval, with any terms and conditions determined by our board of
directors.
After the
five-year prohibition, any business combination between us and an interested
stockholder or an affiliate of an interested stockholder generally must be
recommended by our board of directors and approved by the affirmative vote of at
least:
| · |
80%
of the votes entitled to be cast by holders of our then-outstanding shares
of voting stock; and |
| · |
two-thirds
of the votes entitled to be cast by holders of our voting stock other than
stock held by the interested stockholder with whom or with whose affiliate
the business combination is to be effected or stock held by an affiliate
or associate of the interested stockholder. |
These
super-majority vote requirements do not apply if our common stockholders receive
a minimum price, as defined under Maryland law, for their stock in the form of
cash or other consideration in the same form as previously paid by the
interested stockholder for its stock.
The
statute permits various exemptions from its provisions, including business
combinations that are approved or exempted by the board of directors before the
time that the interested stockholder becomes an interested stockholder. We have
opted out of the business combination provisions of the MGCL by resolution of
our board of directors. However, our board of directors may, by resolution, opt
into the business combination statute in the future.
Should
our board opt into the business combination statute, the business combination
statute may discourage others from trying to acquire control of us and increase
the difficulty of consummating any offer.
Control
Share Acquisitions
Maryland
law provides that “control shares” of a Maryland corporation acquired in a
“control share acquisition” have no voting rights unless approved by a vote of
two-thirds of the votes entitled to be cast on the matter. Shares owned by the
acquiring person, or by officers or by directors who are our employees, are
excluded from shares entitled to vote on the matter. “Control shares” are voting
shares which, if aggregated with all other shares previously acquired by the
acquiring person, or in respect of which the acquiring person is able to
exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiring person to exercise voting power in
electing directors within one of the following ranges of voting
power:
| · |
one-tenth
or more but less than one-third; |
| · |
one-third
or more but less than a majority; or |
Control
shares do not include shares the acquiring person is then entitled to vote as a
result of having previously obtained stockholder approval. A “control share
acquisition” means the acquisition of control shares, subject to certain
exceptions.
A person
who has made or proposes to make a control share acquisition may compel our
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 shares. The right to
compel the calling of a special meeting is subject to the satisfaction of
certain conditions, including an undertaking to pay the expenses of the meeting
and delivery of an acquiring person statement. If no request for a meeting is
made, we may present the question at any stockholders’ meeting.
If voting
rights are not approved at the stockholders’ meeting or if the acquiring person
does not deliver the acquiring person statement required by Maryland law, then,
subject to certain conditions and limitations, we may redeem any or all of the
control shares, except those for which voting rights have previously been
approved, for fair value. Fair value is determined without regard to the absence
of voting rights for the control shares and as of the date of the last control
share acquisition by the acquiring person or of any meeting of stockholders at
which the voting rights of the shares were considered and not approved. If
voting rights for control shares are approved at a stockholders’ meeting and the
acquiring person becomes entitled to vote a majority of the shares entitled to
vote, then all other stockholders may exercise appraisal rights. The fair value
of the shares for purposes of these appraisal rights may not be less than the
highest price per share paid by the acquiring person in the control share
acquisition. The control share acquisition statute does not apply to shares
acquired in a merger, consolidation or share exchange if we are a party to the
transaction, nor does it apply to acquisitions approved or exempted by our
charter or bylaws.
Our
bylaws contain a provision exempting from the control share acquisition statute
any and all acquisitions by any person of our shares of stock. There can be no
assurance that this provision will not be amended or eliminated at any time in
the future.
Other
Anti-Takeover Provisions
Subtitle
8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity
securities registered under the Securities Exchange Act of 1934, as amended, and
at least three independent directors to elect to be subject, by provision in its
charter or bylaws or a resolution of its board of directors and notwithstanding
any contrary provision in the charter or bylaws, to any or all of five
provisions:
| · |
a
two-thirds vote requirement for removing a
director; |
| · |
a
requirement that the number of directors be fixed only by vote of the
directors; |
| · |
a
requirement that a vacancy on the board be filled only by the remaining
directors and for the remainder of the full term of the directorship in
which the vacancy occurred; and |
| · |
a
majority requirement for the calling of a special meeting of
stockholders. |
Pursuant
to Subtitle 8, we have elected to provide that vacancies on the board be filled
only by the remaining directors and for the remainder of the full term of the
directorship in which the vacancy occurred. Through provisions in our charter
and bylaws unrelated to Subtitle 8, we already (a) require a two-thirds vote for
the removal of any director from the board, (b) vest in our board the exclusive
power to fix the number of directorships and (c) require, unless called by the
chairman of our board of directors, our chief executive officer, our president
or our board of directors, the request of the holders of a majority of
outstanding shares to call for a special stockholders meeting.
Our
bylaws also provide that only our board of directors may amend or repeal any of
our bylaws or adopt new bylaws.
Merger;
Amendment of Charter
Under the
MGCL, a Maryland corporation generally cannot dissolve, amend its charter or
merge with another entity unless approved by the affirmative vote of
stockholders holding at least two-thirds of the shares entitled to vote on the
matter, unless a lesser percentage (but not less than a majority of all the
votes entitled to be cast on the matter) is set forth in the corporation’s
charter. Our charter provides for approval by the holders of a majority of all
the votes entitled to be cast on the matter for the matters described in this
paragraph, except for amendments to various provisions of the charter, including
the provisions relating to removal of directors, that require the affirmative
vote of the holders of two-thirds of the votes entitled to be cast on the
matter. As permitted by the MGCL, our charter contains a provision permitting
our directors, without any action by our stockholders, to amend the charter to
increase or decrease the aggregate number of shares of stock or the number of
shares of stock of any class or series that we have authority to
issue.
Limitation
of Liability and Indemnification
Our
charter limits the liability of our directors and officers for money damages to
the maximum extent permitted by Maryland law. Maryland law permits us to include
in our charter a provision limiting the liability of our directors and officers
to us and our stockholders for money damages, except for liability resulting
from:
| · |
actual
receipt of an improper benefit or profit in money, property or services;
or |
| · |
active
and deliberate dishonesty established by a final judgment and which is
material to the cause of action. |
Our
charter authorizes us to obligate ourselves and our bylaws require us, to the
maximum extent permitted by Maryland law, to indemnify, and to pay or reimburse
reasonable expenses to, any of our present or former directors or officers or
any individual who, while a director and at our request, serves or has served
another entity, employee benefit plan or any other enterprise as a director,
trustee, officer, partner or otherwise. The indemnification covers any claim or
liability against the person by reason of his or her status as a present or
former director or officer.
Maryland
law requires us (unless our charter provides otherwise, which our charter does
not) to indemnify a director or officer who has been successful, on the merits
or otherwise, in the defense of any proceeding to which he or she is made a
party by reason of his or her service in that capacity. Maryland law permits us
to indemnify our present and former directors and officers against liabilities
and reasonable expenses actually incurred by them in any proceeding to which
they are made a party by reason of their service in these or other capacities
unless it is established that:
| · |
the
act or omission of the director or officer was material to the matter
giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; |
| · |
the
director or officer actually received an improper personal benefit in
money, property or services; or |
| · |
in
a criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was
unlawful. |
However,
Maryland law prohibits us from indemnifying our present and former directors and
officers for an adverse judgment in a derivative action or for a judgment of
liability on the basis that personal benefit was improperly received, unless in
either case a court orders indemnification, and then only for
expenses.
Maryland
law requires us, as a condition to advancing expenses in certain circumstances,
to obtain:
| · |
a
written affirmation by the director or officer of his or her good faith
belief that he or she has met the standard of conduct necessary for
indemnification; and |
| · |
a
written undertaking to repay the amount advanced if the standard of
conduct is not met. |
Insofar
as the above provisions permit indemnification of directors, officers, or
persons controlling us for liability arising under the Securities Act of 1933,
as amended, we have been informed that in the opinion of the SEC, this
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is therefore unenforceable.
REIT
Status
Our
charter provides that our board of directors may revoke or otherwise terminate
our REIT election if it determines that it is no longer in our best interest to
continue to qualify as a REIT.
Dissolution
Pursuant
to our charter, and subject to the provisions of any of our classes or series of
shares of stock then outstanding and the prior approval by a majority of the
entire board of directors, our stockholders, at any meeting thereof, by the
affirmative vote of a majority of all of the votes entitled to be cast on the
matter, may approve a plan of liquidation and dissolution.
Advance
Notice of Director Nominations and New Business
Our
bylaws provide that, with respect to an annual meeting of stockholders,
nominations of individuals for election to our board of directors and the
proposal of business to be considered by stockholders at the annual meeting may
be made only:
| · |
pursuant
to our notice of the meeting; |
| · |
by
or at the direction of our board of directors;
or |
| · |
by
a stockholder who is a stockholder of record both at the time of the
provision of notice and at the time of the meeting, who is entitled to
vote at the meeting and who complied with the advance notice procedures
set forth in our bylaws. |
Generally,
under our bylaws, a stockholder seeking to nominate a director or bring other
business before our annual meeting of stockholders must deliver a notice to our
secretary not later than the close of business on the 90th day nor
earlier than the close of business on the 120th day
prior to the first anniversary of the date of mailing of the notice to
stockholders for the prior year’s annual meeting. For a stockholder seeking to
nominate a candidate for our board of directors, the notice must describe
various matters regarding the nominee, including name, address, occupation and
number of shares held, and other specified matters. For a stockholder seeking to
propose other business, the notice must include a description of the proposed
business, the reasons for the proposal and other specified matters.
With
respect to special meetings of stockholders, only the business specified in our
notice of meeting may be brought before the meeting of stockholders and
nominations of individuals for election to our board of directors may be made
only:
| · |
pursuant
to our notice of the meeting; |
| · |
by
or at the direction of our board of directors;
or |
| · |
provided
that our board of directors has determined that directors shall be elected
at such meeting, by a stockholder who is a stockholder of record both at
the time of the provision of notice and at the time of the meeting, who is
entitled to vote at the meeting and who complied with the advance notice
provisions set forth in our bylaws. |
Possible
Anti-Takeover Effect of Certain Provisions of Maryland Law and of our Charter
and Bylaws
Our board
of directors may rescind the resolution opting out of the business combination
statute or repeal the bylaw opting out of the control share acquisition statute.
If the business combination provisions or control share provisions become
applicable to our company, those provisions, in addition to the provisions in
our charter regarding removal of directors and the restrictions on the transfer
of shares of capital stock and the advance notice provisions of our bylaws, may
delay, defer or prevent a transaction or a change of control of our company that
might involve a premium price for our common stock or otherwise be in the best
interest of our common stock holders.
PARTNERSHIP
AGREEMENT
We
conduct substantially all of our business through our operating partnership,
Caplease, LP, or its subsidiaries. We are the sole limited partner and our
wholly-owned subsidiary is the sole general partner of our operating
partnership.
We may
admit additional limited partners to the partnership in the future, particularly
in connection with the acquisition of real estate. We may issue units of
partnership interest in the partnership to the sellers of real estate. The
issuance of these partnership units can help sellers defer recognition of
taxable gain which would otherwise be payable upon the sale of a property to us.
We believe that offering sellers the ability to acquire these partnership units
will enhance our ability to acquire properties because of the tax advantages to
sellers.
For so
long as we own all of the interests in the operating partnership and until such
time as we admit outside limited partners to our operating partnership, the
partnership agreement for our operating partnership is a short-form agreement
that does not contain all the terms described below, particularly those relating
to rights of limited partners. There can be no assurance that we will issue any
units of partnership interest in the future and admit outside partners as
limited partners of our operating partnership. If we do, we expect that the
agreement of limited partnership for our operating partnership will be amended
and restated so as to contain the following general terms which we believe are
customarily found in the operating partnership agreements of many other publicly
traded real estate investment trusts which have outside limited
partners.
Management
As the
sole general partner of the operating partnership, we will have, subject to
certain protective rights of limited partners described below, full, exclusive
and complete responsibility and discretion in the management and control of the
operating partnership, including the ability to cause the operating partnership
to enter into certain major transactions including acquisitions, dispositions
and refinancings and to cause changes in the operating partnership’s line of
business and distribution policies.
Transferability
of Interests
We may
not voluntarily withdraw from the operating partnership or transfer or assign
our interest in the operating partnership or engage in any merger, consolidation
or other combination, or sale of substantially all of our assets, in a
transaction which results in a change of control of our company
unless:
| · |
we
receive the consent of limited partners holding more than 50% of the
partnership interests of the limited
partners; |
| · |
as
a result of such transaction all limited partners will receive for each
partnership unit an amount of cash, securities or other property equal in
value to the greatest amount of cash, securities or other property paid in
the transaction to a holder of one share of our common stock, provided
that if, in connection with the transaction, a purchase, tender or
exchange offer shall have been made to and accepted by the holders of more
than 50% of the outstanding shares of our common stock, each holder of
partnership units will be given the option to exchange its partnership
units for the greatest amount of cash, securities or other property that a
limited partner would have received had it (i) exercised its redemption
right (described below) and (ii) sold, tendered or exchanged pursuant to
the offer shares of our common stock received upon exercise of the
redemption right immediately prior to the expiration of the offer;
or |
| · |
we
are the surviving entity in the transaction and either (i) our
stockholders do not receive cash, securities or other property in the
transaction or (ii) all limited partners (other than our company or its
subsidiaries) receive for each partnership unit an amount of cash,
securities or other property having a value that is no less than the
greatest amount of cash, securities or other property received in the
transaction by our stockholders for a share of our common
stock. |
We also
may merge with or into or consolidate with another entity if immediately after
such merger or consolidation (i) substantially all of the assets of the
successor or surviving entity, other than partnership units held by us, are
contributed, directly or indirectly, to the partnership as a capital
contribution in exchange for partnership units with a fair market value equal to
the value of the assets so contributed as determined by the survivor in good
faith and (ii) the survivor expressly agrees to assume all of our obligations
under the partnership agreement and the partnership agreement is amended after
any such merger or consolidation so as to arrive at a new method of calculating
the amounts payable upon exercise of the redemption right that approximates the
existing method for such calculation as closely as reasonably
possible.
We also
may (i) transfer all or any portion of our general partnership interest to (1) a
wholly-owned subsidiary or (2) a parent company, and following such transfer may
withdraw as the general partner and (ii) engage in a transaction required by law
or by the rules of any national securities exchange on which our common stock is
listed.
Capital
Contribution
We
contributed to our operating partnership substantially all the net proceeds of
our initial public offering. Other parties in the future that contribute assets
to our operating partnership will become limited partners and will receive
partnership units based on the fair market value of the assets at the time of
such contributions. The partnership agreement will provide that if the operating
partnership requires additional funds at any time in excess of funds available
to the operating partnership from borrowing or capital contributions, we may
borrow such funds from a financial institution or other lender and lend such
funds to the operating partnership on the same terms and conditions as are
applicable to our borrowing of such funds. Under the partnership agreement, we
will be obligated to contribute the proceeds of any offering of shares of stock
as additional capital to the operating partnership. We will be authorized to
cause the operating partnership to issue partnership interests for less than
fair market value if we have concluded in good faith that such issuance is in
both the operating partnership’s and our best interests. If we contribute
additional capital to the operating partnership, we will receive additional
partnership units and our percentage interest will be increased on a
proportionate basis based upon the amount of such additional capital
contributions and the value of the operating partnership at the time of such
contributions. Conversely, the percentage interests of the limited partners will
be decreased on a proportionate basis in the event of additional capital
contributions by us. In addition, if we contribute additional capital to the
operating partnership, we will revalue the property of the operating partnership
to its fair market value (as determined by us) and the capital accounts of the
partners will be adjusted to reflect the manner in which the unrealized gain or
loss inherent in such property (that has not been reflected in the capital
accounts previously) would be allocated among the partners under the terms of
the partnership agreement if there were a taxable disposition of such property
for its fair market value (as determined by us) on the date of the revaluation.
The operating partnership may issue preferred partnership interests, in
connection with acquisitions of property or otherwise, which could have priority
over common partnership interests with respect to distributions from the
operating partnership, including the partnership interests we own as the general
partner.
Redemption
Rights
Pursuant
to the partnership agreement, the limited partners will receive redemption
rights, which will enable them to cause the operating partnership to redeem
their units of partnership interests in exchange for cash or, at our option,
shares of common stock on a one-for-one basis. The number of shares of common
stock issuable upon redemption of units of partnership interest held by limited
partners may be adjusted upon the occurrence of certain events such as stock
dividends, stock subdivisions or combinations. Notwithstanding the foregoing, a
limited partner will not be entitled to exercise its redemption rights if the
delivery of common stock to the redeeming limited partner would:
| · |
result
in any person owning, directly or indirectly, shares of common stock in
excess of the stock ownership limits in our
charter; |
| · |
result
in our shares of our common stock being owned by fewer than 100 persons
(determined without reference to any rules of
attribution); |
| · |
result
in our being “closely held” within the meaning of section 856(h) of the
Code; |
| · |
cause
us to own, actually or constructively, 10% or more of the ownership
interests in a tenant of our or a subsidiary’s real property, within the
meaning of section 856(d)(2)(B) of the Code;
or |
| · |
cause
the acquisition of common stock by such redeeming limited partner to be
“integrated” with any other distribution of common stock for purposes of
complying with the registration provisions of the Securities Act of 1933,
as amended. |
We may,
in our sole and absolute discretion, waive any of these
restrictions.
The
redemption rights may be exercised by the limited partners at any time after an
initial holding period; provided, however, unless we otherwise
agree:
| · |
a
limited partner may not exercise the redemption right for fewer than 1,000
partnership units or, if such limited partner holds fewer than 1,000
partnership units, the limited partner must redeem all of the partnership
units held by such limited partner; |
| · |
a
limited partner may not exercise the redemption right for more than the
number of partnership units that would, upon redemption, result in such
limited partner or any other person owning, directly or indirectly, common
stock in excess of the ownership limitation in our charter;
and |
| · |
a
limited partner may not exercise the redemption right more than two times
annually. |
The
partnership agreement will require that the operating partnership be operated in
a manner that enables us to satisfy the requirements for being classified as a
REIT, to avoid any federal income or excise tax liability imposed by the Code
(other than any federal income tax liability associated with our retained
capital gains) and to ensure that the partnership will not be classified as a
“publicly traded partnership” taxable as a corporation under section 7704 of the
Code.
In
addition to the administrative and operating costs and expenses incurred by the
operating partnership, the operating partnership generally will pay all of our
administrative costs and expenses, including:
| · |
all
expenses relating to our continuity of existence and our subsidiaries’
operations; |
| · |
all
expenses relating to offerings and registration of
securities; |
| · |
all
expenses associated with the preparation and filing of any of our periodic
or other reports and communications under federal, state or local laws or
regulations; |
| · |
all
expenses associated with our compliance with laws, rules and regulations
promulgated by any regulatory body; and |
| · |
all
of our other operating or administrative costs incurred in the ordinary
course of business on behalf of the operating
partnership. |
These
expenses, however, do not include any of our administrative and operating costs
and expenses incurred that are attributable to assets that are owned by us
directly rather than by the operating partnership or its
subsidiaries.
Distributions
The
partnership agreement will provide that the operating partnership will
distribute cash from operations (including net sale or refinancing proceeds, but
excluding net proceeds from the sale of the operating partnership’s property in
connection with the liquidation of the operating partnership) at such time and
in such amounts as determined by us in our sole discretion, to us and the
limited partners in accordance with their respective percentage interests in the
operating partnership.
Upon
liquidation of the operating partnership, after payment of, or adequate
provision for, debts and obligations of the partnership, including any partner
loans, any remaining assets of the partnership will be distributed to us and the
limited partners with positive capital accounts in accordance with their
respective positive capital account balances.
Allocations
Profits
and losses of the operating partnership (including depreciation and amortization
deductions) for each fiscal year generally will be allocated to us and the
limited partners in accordance with the respective percentage interests in the
operating partnership. All of the foregoing allocations are subject to
compliance with the provisions of sections 704(b) and 704(c) of the Code and
Treasury regulations promulgated thereunder. We expect the operating partnership
to use the “traditional method” under section 704(c) of the Code for allocating
items with respect to contributed property for which the fair market value
differs from the adjusted tax basis at the time of contribution.
Term
The
operating partnership will continue for a term of 50 years or more, or until
sooner dissolved upon:
| · |
our
bankruptcy, dissolution, removal or withdrawal (unless the limited
partners elect to continue the
partnership); |
| · |
the
passage of 90 days after the sale or other disposition of all or
substantially all the assets of the
partnership; |
| · |
the
redemption of all partnership units (other than those held by us, if any);
or |
| · |
an
election by us in our capacity as the general
partner. |
Tax
Matters
Pursuant
to the partnership agreement, we will be the tax matters partner of the
operating partnership and will have authority to handle tax audits and to make
tax elections under the Code on behalf of the operating
partnership.
RESTRICTIONS ON
OWNERSHIP
For us to
qualify as a REIT under the Code, our shares of stock must be beneficially owned
by 100 or more persons during at least 335 days of a taxable year of 12 months
(other than the first year for which an election to be a REIT has been made) or
during a proportionate part of a shorter taxable year. Also, not more than 50%
of the value of the outstanding shares of 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 (other than the first
year for which an election to be a REIT has been made).
In order
to help us to satisfy the requirements set forth in the preceding paragraph, our
charter, subject to certain exceptions, contains restrictions on the number of
shares of our stock that a person may own. Our charter provides that no person
may own, or be deemed to own by virtue of the attribution provisions of the
Code, more than 9.9% (the “Aggregate Stock Ownership Limit”) in value or in
number, whichever is more restrictive, of our outstanding shares of stock. In
addition, our charter prohibits any person or persons acting as a group from
acquiring or holding, directly or indirectly, shares of common stock in excess
of 9.9% in value or in number, whichever is more restrictive, of our outstanding
shares of common stock (the “Common Stock Ownership Limit”).
In
addition to these ownership limits, our charter prohibits:
| · |
any
person from beneficially or constructively owning shares of our stock that
would result in us being “closely held” under Section 856(h) of the
Code; |
| · |
any
transfer of shares of our stock if that would result in our stock being
beneficially owned by fewer than 100 persons;
and |
| · |
any
transfer of shares of our stock that would cause us to own, directly or
indirectly, 10% or more of the ownership interests in a tenant of our
company (or a tenant of any entity owned or controlled by
us). |
Any
person who acquires or attempts or intends to acquire beneficial or constructive
ownership of our shares of stock that will or may violate any of the foregoing
restrictions on transferability and ownership, or any person who would have
owned shares of our stock that resulted in a transfer of shares to a charitable
trust, as described below, is required to give written notice immediately to us,
or in the case of a proposed or attempted transaction, to give at least 15 days’
prior written notice, and provide us with such other information as we may
request in order to determine the effect of such transfer on our status as a
REIT. The foregoing restrictions on transferability and ownership will not apply
if our board of directors determines that it is no longer in our best interest
to attempt to qualify, or to continue to qualify, as a REIT.
Furthermore,
our board of directors, in its sole discretion, may exempt a person from the
above ownership limits and any of the restrictions described in the first
sentence of the paragraph directly above. However, the board of directors may
not grant an exemption to any person unless the board of directors obtains such
representations, covenants and undertakings as the board of directors may deem
appropriate in order to determine that granting the exemption would not result
in our failing to qualify as a REIT. As a condition of exemption, our board of
directors may require a ruling from the Internal Revenue Service or an opinion
of counsel, in either case in form and substance satisfactory to the board of
directors, in its sole discretion, in order to determine or ensure our status as
a REIT.
In April
2005, our board of directors granted an exemption to Hotchkis & Wiley
Capital Management permitting them to own up to 12.5% of our outstanding common
stock.
If any
transfer of our shares of stock occurs which, if effective, would result in our
shares of stock being owned by fewer than 100 persons, would cause us to be
“closely held” under the Code, would cause us to own, directly or indirectly,
10% or more of the ownership interests in a tenant of our company (or a tenant
of any entity owned or controlled by us) or would result in any person
beneficially or constructively owning shares of stock in excess or in violation
of the above transfer or ownership limitations (a “Prohibited Owner”), then that
number of shares of stock the transfer of which otherwise would cause such
person to violate the charter limitations (rounded up to the nearest whole
share) will be automatically transferred to a charitable trust for the exclusive
benefit of a charitable beneficiary, and the Prohibited Owner will not acquire
any rights in such shares. This automatic transfer will be considered effective
as of the close of business on the business day before the violative transfer.
If the transfer to the charitable trust would not be effective for any reason to
prevent the violation of the above transferor ownership limitations, then the
transfer of that number of shares of stock that otherwise would cause any person
to violate the above limitations will be void. Shares of stock held in the
charitable trust will constitute issued and outstanding shares of our stock. The
Prohibited Owner will not benefit economically from ownership of any shares of
stock held in the charitable trust, will have no rights to dividends or other
distributions and will not possess any rights to vote or other rights
attributable to the shares of stock held in the charitable trust. The trustee of
the charitable trust will be designated by us and must be unaffiliated with us
or any Prohibited Owner and will have all voting rights and rights to dividends
or other distributions with respect to shares of stock held in the charitable
trust, and these rights will be exercised for the exclusive benefit of the
trust’s beneficiary. Any dividend or other distribution paid before our
discovery that shares of stock have been transferred to the trustee will be paid
by the recipient of such dividend or distribution to the trustee upon demand,
and any dividend or other distribution authorized but unpaid will be paid when
due to the trustee. Any dividend or distribution so paid to the trustee will be
held in trust for the trust’s charitable beneficiary. The Prohibited Owner will
have no voting rights with respect to shares of stock held in the charitable
trust and, subject to Maryland law, effective as of the date that such shares of
stock have been transferred to the trustee, the trustee, in its discretion, will
have the authority to:
| · |
rescind
as void any vote cast by a Prohibited Owner prior to our discovery that
such shares have been transferred to the trustee;
and |
| · |
recast
such vote in accordance with the desires of the trustee acting for the
benefit of the trust’s beneficiary. |
However,
if we have already taken irreversible corporate action, then the trustee will
not have the authority to rescind and recast such vote.
Within 20
days of receiving notice from us that shares of stock have been transferred to
the charitable trust, and unless we buy the shares as described below, the
trustee will sell the shares of stock held in the charitable trust to a person,
designated by the trustee, whose ownership of the shares will not violate the
ownership limitations in our charter. Upon the sale, the interest of the
charitable beneficiary in the shares sold will terminate and the trustee will
distribute the net proceeds of the sale to the Prohibited Owner and to the
charitable beneficiary. The Prohibited Owner will receive the lesser
of:
| · |
the
price paid by the Prohibited Owner for the shares or, if the Prohibited
Owner did not give value for the shares in connection with the event
causing the shares to be held in the charitable trust (for example. in the
case of a gift or devise) the market price of the shares on the day of the
event causing the shares to be held in the charitable trust;
and |
| · |
the
price per share received by the trustee from the sale or other disposition
of the shares held in the charitable trust. |
Any net
sale proceeds in excess of the amount payable to the Prohibited Owner will be
paid immediately to the charitable beneficiary. If, before our discovery that
shares of stock have been transferred to the charitable trust, such shares are
sold by a Prohibited Owner, then:
| · |
such
shares will be deemed to have been sold on behalf of the charitable trust;
and |
| · |
to
the extent that the Prohibited Owner received an amount for such shares
that exceeds the amount that the Prohibited Owner was entitled to receive
as described above, the excess must be paid to the trustee upon
demand. |
In
addition, shares of stock held in the charitable trust will be deemed to have
been offered for sale to us, or our designee, at a price per share equal to the
lesser of:
| · |
the
price per share in the transaction that resulted in such transfer to the
charitable trust (or, in the case of a gift or devise, the market price at
the time of the gift or devise); and |
| · |
the
market price on the date we, or our designee, accept such
offer. |
We will
have the right to accept the offer until the trustee has sold the shares of
stock held in the charitable trust. Upon such a sale to us, the interest of the
charitable beneficiary in the shares sold will terminate and the trustee will
distribute the net proceeds of the sale to the Prohibited Owner and any
dividends or other distributions held by the trustee will be paid to the
charitable beneficiary.
All
certificates representing our shares of stock will bear a legend referring to
the restrictions described above.
Every
owner of more than 5% (or such lower percentages as required by the Code or the
Treasury Regulations promulgated thereunder) of all classes or series of our
shares of capital stock must give written notice to us, within 30 days after the
end of each taxable year, of the name and address of such owner, the number of
shares of each class and series of shares of stock which the owner beneficially
owns and a description of the manner in which the shares are held. Each such
owner must also provide us with additional information as we may request to
determine the effect of the owner’s beneficial ownership on our REIT status and
to ensure compliance with the Aggregate Stock Ownership Limit and the Common
Stock Ownership Limit. In addition, each of our stockholders, whether or not an
owner of 5% or more of our capital stock, must provide us with information as we
may request to determine our REIT status and to comply with the requirements of
any taxing authority or governmental authority or to determine such compliance
and to ensure compliance with the Aggregate Stock Ownership Limit and the Common
Stock Ownership Limit.
These
ownership and transfer limitations in our charter could delay, defer or prevent
a transaction or a change of control of our company that might involve a premium
price for our common stock or otherwise be in the best interest of our
stockholders.
SELLING
SECURITYHOLDERS
In
connection with our initial public offering, we agreed to register, pursuant to
a registration rights agreement, the shares of common stock owned by the
following securityholders.
The
following table sets forth information as of March 31, 2005 about the shares of
common stock beneficially owned by each selling securityholder and the number of
shares that may be offered by this prospectus.
| |
|
Number
of Shares of Common Stock Beneficially Owned Before
Offering |
|
Number
of Shares of Common Stock That May Be Sold |
|
Number
of Shares of Common Stock Beneficially Owned After
Offering(1) |
|
Percentage
of Common Stock Beneficially Owned After
Offering(1) |
|
|
Hyperion
CLF LLC (2) |
|
|
2,295,566 |
|
|
2,295,566 |
|
|
0 |
|
|
0 |
% |
|
Wachovia
Investors, Inc. (3) |
|
|
1,020,251 |
|
|
1,020,251 |
|
|
0 |
|
|
0 |
% |
|
LSR
Capital CLF LLC (4) |
|
|
510,126 |
|
|
510,126 |
|
|
0 |
|
|
0 |
% |
|
Paul
H. McDowell (5) |
|
|
194,827 |
|
|
55,051 |
|
|
139,776 |
|
|
* |
|
|
William
R. Pollert (6) |
|
|
190,946 |
|
|
53,692 |
|
|
137,254 |
|
|
* |
|
|
Shawn
P. Seale (7) |
|
|
234,141 |
|
|
58,783 |
|
|
175,358 |
|
|
* |
|
|
Robert
C. Blanz (8) |
|
|
128,262 |
|
|
30,490 |
|
|
97,772 |
|
|
* |
|
|
Michael
J. Heneghan (9) |
|
|
66,399 |
|
|
16,170 |
|
|
50,229 |
|
|
* |
|
|
Gary
E. Landriau (10) |
|
|
67,239 |
|
|
21,846 |
|
|
45,393 |
|
|
* |
|
| |
|
|
4,707,757 |
|
|
4,061,975 |
|
|
645,782 |
|
|
|
|
| * Represents
less than 1.0%. |
|
(1)
|
Assumes
all shares of common stock offered by the selling securityholders by this
prospectus are sold.
|
|
(2)
|
Our
chairman, Lewis S. Ranieri, is the chairman and president, a director and
the majority stockholder of Hyperion Funding II Corp., which is the sole
general partner of Hyperion Ventures II L.P., which is the sole general
partner of Hyperion Partners II L.P., which is the sole member of Hyperion
CLF LLC.
|
| |
On
November 1, 2004, our wholly-owned subsidiary, Caplease, LP, entered into
two contracts of sale with Hyperion Partners II L.P. Under the terms of
the two contracts, we acquired Hyperion’s beneficial interest in two
trusts. Each trust’s sole asset is a free-standing Walgreen’s retail
store, one located in Portsmouth, Virginia and the second located in
Pennsauken, New Jersey. Caplease, LP paid the seller an aggregate purchase
price of approximately $7.2 million under the contracts, inclusive of debt
assumed of approximately $5.6 million. As required by our conflict of
interest policy, our disinterested directors approved this
transaction.
|
|
(3)
|
Wachovia
Investors,
Inc. is an affiliate of Wachovia Bank, N.A. We have entered into a master
repurchase agreement with Wachovia Bank to finance our asset investments
on a short-term basis. We have also obtained long-term mortgage financing
for certain of our assets from Wachovia Bank, and expect to continue to do
so in the future. From time to time, we have sold and may continue to sell
net lease assets to Wachovia Bank or its affiliates. Affiliates of
Wachovia Bank have performed investment banking services for us, including
in connection with our initial public offering and initial collateralized
debt obligation transaction, and we may engage these affiliates to perform
these services for us in the future. In addition, Wachovia Bank acts as
servicer of our net lease loan assets and the transfer agent of our common
stock.
|
|
(4)
|
Mr.
Ranieri is the managing member and sole equity owner of LSR Capital CLF
LLC.
|
|
(5)
|
Mr.
McDowell is a founder of our company. He has been continuously employed by
us or our predecessor companies since 1994, including as chief executive
officer since March 2001, and as senior vice president, general counsel
and secretary from 1994 until February 2001. He has served on our Board
since November 2003, and served on the board of directors of our
predecessor, Capital Lease Funding, LLC (“CLF, LLC”), from November 2001
until March 2004.
|
|
(6)
|
Mr.
Pollert is a founder of our company. He has been continuously employed by
us or our predecessor companies since 1994, including as president since
1994, and chief executive officer from 1994 to March 2001. He has served
on our Board since November 2003, and served on the board of directors of
CLF, LLC from November 2001 until March 2004.
|
| |
Shares
owned by Mr. Pollert include 5,000 shares owned by his spouse, 1,000
shares owned by his stepdaughter and 3,000 shares owned by a family trust.
Mr. Pollert disclaims beneficial ownership of these shares except, with
respect to the shares owned by the trust, to the extent of his pecuniary
interest therein.
|
|
(7)
|
Mr.
Seale is a founder of our company. He has been continuously employed by us
or our predecessor companies since 1994, including as senior vice
president, chief financial officer and treasurer since 1994. He served on
our Board from November 2003 until March 2004 and the board of directors
of CLF, LLC from November 2001 until March 2004.
|
| |
Shares
owned by Mr. Seale include 10,551 shares owned by his spouse and 35,000
shares owned by his mother-in-law and father-in-law. Mr. Seale disclaims
beneficial ownership of these shares.
|
|
(8)
|
Mr.
Blanz has been continuously employed by us or our predecessor companies
since October 1999, including as our senior vice president since October
1999 and our chief investment officer since October 2003.
|
|
(9)
|
Mr.
Heneghan has been continuously employed by us or our predecessor companies
since 1997, including as our senior vice president, investments since
January 2005 and our senior vice president and general counsel from
October 2001 until January 2005.
|
|
(10)
|
Mr.
Landriau has been continuously employed by us or our predecessors since
1997, including as our senior vice president, acquisitions, since March
2004, and as our vice president since 1997.
|
Mr.
McDowell, Mr. Pollert, Mr. Seale, and Mr. Blanz collectively own a 50% interest
in a computer data center in the Sacramento, California area that is net leased
to Qwest Communications. The group owns the data center through a limited
partnership. In February 2001, we originated a net lease loan to the limited
partnership in the amount of approximately $42 million. At that time,
management’s ownership interest in the limited partnership was 25%. In February
2001, we sold the loan to Wachovia Bank, and the limited partnership agreed to
pay us an advisory fee from the rent payable by Qwest in the amount of
approximately $66,000 a month until November 2010. An affiliate of the limited
partnership is also a party to a management agreement with Qwest for the
operation of the data center, and another affiliate of the limited partnership
subleases a portion of the leased building from Qwest at a nominal amount. No
failure to perform under the management agreement or sublease entitles Qwest to
any rent abatement or termination under the lease.
FEDERAL
INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT
This
section summarizes the federal income tax issues that you, as a holder of our
common stock, may consider relevant. Because this section is a summary, it does
not address all aspects of taxation that may be relevant to particular
stockholders in light of their personal investment or tax circumstances, or to
certain types of stockholders that are subject to special treatment under the
federal income tax laws, such as insurance companies, tax-exempt organizations
(except to the extent discussed in “Taxation of Tax-Exempt Stockholders” below),
financial institutions or broker-dealers, and non-U.S. individuals and foreign
corporations (except to the extent discussed in “Taxation of Non-U.S.
Stockholders” below).
The
statements in this section and the opinion of Hunton & Williams LLP are
based on the current federal income tax laws governing qualification as a REIT.
We cannot assure you that new laws, interpretations of law, or court decisions,
any of which may take effect retroactively, will not cause any statement in this
section to be inaccurate.
We
urge you to consult your own tax advisor regarding the specific tax consequences
to you of ownership of our common stock and of our election to be taxed as a
REIT. Specifically, you should consult your own tax advisor regarding the
federal, state, local, foreign, and other tax consequences of such ownership and
election, and regarding potential changes in applicable tax
laws.
Taxation
of our Company
We plan
to make an election to be taxed as a REIT under the federal income tax laws
effective for our short taxable year beginning on March 23, 2004 and ending on
December 31, 2004. We believe that, commencing with such short taxable year, we
will be organized and will operate in such a manner as to qualify for taxation
as a REIT under the federal income tax laws, and we intend to continue to
operate in such a manner, but no assurance can be given that we will operate in
a manner so as to qualify or remain qualified as a REIT. This section discusses
the laws governing the federal income tax treatment of a REIT and its
stockholders. These laws are highly technical and complex.
If we
qualify as a REIT, we generally will not be subject to federal income tax on the
taxable income that we distribute to our stockholders. The benefit of that tax
treatment is that it avoids the “double taxation,” or taxation at both the
corporate and stockholder levels, that generally results from owning stock in a
corporation. However, we will be subject to federal tax in the following
circumstances:
| · |
We
will pay federal income tax on taxable income, including net capital gain,
that we do not distribute to stockholders during, or within a specified
time period after, the calendar year in which the income is
earned. |
| · |
We
may be subject to the “alternative minimum tax” on items of tax
preference. |
| · |
We
will pay income tax at the highest corporate rate
on: |
| · |
net
income from the sale or other disposition of property acquired through
foreclosure (“foreclosure property”) that we hold primarily for sale to
customers in the ordinary course of business,
and |
| · |
other
non-qualifying income from foreclosure
property. |
| · |
We
will pay a 100% tax on net income from sales or other dispositions of
property, other than foreclosure property, that we hold primarily for sale
to customers in the ordinary course of
business. |
| · |
If
we fail to satisfy one or both of the 75% gross income test or the 95%
gross income test, as described below under “Requirements for
Qualification—Income Tests,” and nonetheless continue to qualify as a REIT
because we meet other requirements, we will pay a 100% tax
on: |
| · |
the
greater of (i) the amount by which we fail the 75% gross income test or
(ii) the amount by which 95% (90% for taxable years prior to 2005) of our
gross income exceeds the amount of our income qualifying under the 95%
gross income test, multiplied by |
| · |
a
fraction intended to reflect our
profitability. |
| · |
In
the event of a more than de minimis failure of any of the asset tests
occurring after January 1, 2005, as described below under “—Requirements
for Qualification—Asset Tests,” as long as the failure was due to
reasonable cause and not to willful neglect and we dispose of the assets
or otherwise comply with the asset tests within six months after the last
day of the applicable quarter, we will pay a tax equal to the greater of
$50,000 or 35% of the net income from the nonqualifying assets during the
period in which we failed to satisfy the asset test or
tests. |
| · |
If
we fail to satisfy one or more requirements for REIT qualification during
a taxable year beginning on or after January 1, 2005, other than a gross
income test or an asset test, we will be required to pay a penalty of
$50,000 for each such failure. |
| · |
If
we fail to distribute during a calendar year at least the sum
of: |
| · |
85%
of our REIT ordinary income for the calendar
year, |
| · |
95%
of our REIT capital gain net income for the calendar year,
and |
| · |
any
undistributed income required to be distributed from earlier
periods, |
we will
pay a 4% nondeductible excise tax on the excess of the required distribution
over the amount we actually distributed.
| · |
We
may elect to retain and pay income tax on our net long-term capital gain.
In that case, a U.S. stockholder would be taxed on its proportionate share
of our undistributed long-term capital gain (to the extent that we make a
timely designation of such gain to the stockholder) and would receive a
credit or refund for its proportionate share of the tax we
paid. |
| · |
We
will be subject to a 100% tax on transactions with a taxable REIT
subsidiary that are not conducted on an arm’s-length
basis. |
| · |
If
we acquire any asset from a C corporation, or a corporation that generally
is subject to full corporate-level tax, in a merger or other transaction
in which we acquire a basis in the asset that is determined by reference
either to the C corporation’s basis in the asset or to another asset, we
will pay tax at the highest regular corporate rate applicable if we
recognize gain on the sale or disposition of the asset during the 10-year
period after we acquire the asset. The amount of gain on which we will pay
tax is the lesser of: |
| · |
the
amount of gain that we recognize at the time of the sale or disposition,
and |
| · |
the
amount of gain that we would have recognized if we had sold the asset at
the time we acquired it. |
Requirements
for Qualification
A REIT is
a corporation, trust, or association that meets each of the following
requirements:
| 1. |
It
is managed by one or more trustees or
directors. |
| 2. |
Its
beneficial ownership is evidenced by transferable shares or by
transferable certificates of beneficial
interest. |
| 3. |
It
would be taxable as a domestic corporation but for the REIT provisions of
the federal income tax laws. |
| 4. |
It
is neither a financial institution nor an insurance company subject to
special provisions of the federal income tax
laws. |
| 5. |
At
least 100 persons are beneficial owners of its shares or ownership
certificates. |
| 6. |
Not
more than 50% in value of its outstanding shares or ownership certificates
is owned, directly or indirectly, by five or fewer individuals, which the
federal income tax laws define to include certain entities, during the
last half of any taxable year. |
| 7. |
It
elects 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 IRS that must be met to elect and maintain
REIT status. |
| 8. |
It
meets certain other qualification tests, described below, regarding the
nature of its income and assets and the distribution of its
income. |
We must
meet requirements 1 through 4 during our entire taxable year and must meet
requirement 5 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. Requirements 5
and 6 will apply to us beginning with our 2005 taxable year. If we comply with
all the requirements for ascertaining the ownership of our outstanding stock in
a taxable year and have no reason to know that we violated requirement 6, we
will be deemed to have satisfied requirement 6 for that taxable year. For
purposes of determining share ownership under requirement 6, an “individual”
generally includes a supplemental unemployment compensation benefits plan, a
private foundation, or a portion of a trust permanently set aside or used
exclusively for charitable purposes. An “individual,” however, generally does
not include a trust that is a qualified employee pension or profit sharing trust
under the federal income tax laws, and beneficiaries of such a trust will be
treated as holding our stock in proportion to their actuarial interests in the
trust for purposes of requirement 6.
We have
issued common stock with sufficient diversity of ownership to satisfy
requirements 5 and 6. In addition, our charter restricts the ownership and
transfer of our stock so that we should continue to satisfy these requirements.
The provisions of our charter restricting the ownership and transfer of the
common stock are described in “Restrictions on Ownership.”
Qualified
REIT Subsidiaries. A
corporation that is a “qualified REIT subsidiary” is not treated as a
corporation separate from its parent REIT. All assets, liabilities, and items of
income, deduction, and credit of a “qualified REIT subsidiary” are treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
“qualified REIT subsidiary” is a corporation, all of the capital stock of which
is owned by the REIT and that has not elected to be a taxable REIT subsidiary.
Thus, in applying the requirements described herein, any “qualified REIT
subsidiary” that we own will be ignored, and all assets, liabilities, and items
of income, deduction, and credit of such subsidiary will be treated as our
assets, liabilities, and items of income, deduction, and credit.
Other
Disregarded Entities and Partnerships. An
unincorporated domestic entity, such as a partnership or limited liability
company, that has a single owner, generally is not treated as an entity separate
from its parent for federal income tax purposes. Prior to the admittance of
third-party limited partners, our operating partnership will be treated as a
disregarded entity. An unincorporated domestic entity with two or more owners
generally is treated as a partnership for federal income tax purposes. In the
case of a REIT that is a partner in a partnership that has other partners, the
REIT is treated as owning its proportionate share of the assets of the
partnership and as earning its proportionate share of the gross income of the
partnership for purposes of the applicable REIT qualification tests. Thus, our
proportionate share, based on percentage capital interests, of the assets,
liabilities, and items of income of any partnership, joint venture, or limited
liability company that is treated as a partnership for federal income tax
purposes in which we acquire an interest, directly or indirectly, will be
treated as our assets and gross income for purposes of applying the various REIT
qualification requirements.
Taxable
REIT Subsidiaries. A REIT
is permitted to own up to 100% of the stock of one or more “taxable REIT
subsidiaries” or TRSs. A TRS is a fully taxable corporation that may earn income
that would not be qualifying income if earned directly by the parent REIT. The
subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A
corporation of which a TRS directly or indirectly owns more than 35% of the
voting power or value of the stock will automatically be treated as a TRS.
Overall, no more than 20% of the value of a REIT’s assets may consist of stock
or securities of one or more TRSs.
A TRS
will pay income tax at regular corporate rates on any income that it earns. In
addition, the TRS rules limit the deductibility of interest paid or accrued by a
TRS to its parent REIT to assure that the TRS is subject to an appropriate level
of corporate taxation. Further, the rules impose a 100% tax on transactions
between a TRS and its parent REIT or the REIT’s tenants that are not conducted
on an arm’s-length basis. We have formed a TRS which will engage in activity
that could jeopardize our REIT status if engaged in by us and will earn income
that would not be qualifying income if earned directly by us.
Taxable
Mortgage Pools. An
entity, or a portion of an entity, may be classified as a taxable mortgage pool
under the federal income tax laws if:
| · |
substantially
all of its assets consist of debt obligations or interests in debt
obligations; |
| · |
more
than 50% of those debt obligations are real estate mortgages or interests
in real estate mortgages as of specified testing
dates; |
| · |
the
entity has issued debt obligations that have two or more maturities;
and |
| · |
the
payments required to be made by the entity on its debt obligations “bear a
relationship” to the payments to be received by the entity on the debt
obligations that it holds as assets. |
Under the
Treasury regulations, if less than 80% of the assets of an entity, or portion of
an entity, consists of debt obligations, these debt obligations are considered
not to comprise “substantially all” of its assets, and therefore the entity
would not be treated as a taxable mortgage pool.
We may
make investments or enter into financing and securitization transactions that
give rise to us being considered to be, or owning an interest in, one or more
taxable mortgage pools. Where an entity, or a portion of an entity, is
classified as a taxable mortgage pool, it is generally treated as a taxable
corporation for federal income tax purposes. However, special rules apply to a
REIT, a portion of a REIT, or a qualified REIT subsidiary that is a taxable
mortgage pool. The portion of the REIT’s assets, held directly or through a
qualified REIT subsidiary, that is treated as a taxable mortgage pool is treated
as a qualified REIT subsidiary that is not subject to corporate income tax, and
the taxable mortgage pool classification does not affect the tax status of the
REIT. Rather, the consequences of the taxable mortgage pool classification
generally would, except as described below, be limited to the REIT’s
stockholders. The Treasury Department has yet to issue regulations governing the
tax treatment of the stockholders of a REIT that owns an interest in a taxable
mortgage pool.
A portion
of our income from a taxable mortgage pool arrangement, which might be non-cash
accrued income, or “phantom” taxable income, could be treated as “excess
inclusion income.” Excess inclusion income is an amount, with respect to any
calendar quarter, equal to the excess, if any, of (i) income allocable to the
holder of a residual interest in a REMIC or taxable mortgage pool interest over
(ii) the sum of an amount for each day in the calendar quarter equal to the
product of (a) the adjusted issue price at the beginning of the quarter
multiplied by (b) 120% of the long-term federal rate (determined on the basis of
compounding at the close of each calendar quarter and properly adjusted for the
length of such quarter). This non-cash or “phantom” income would nonetheless be
subject to the distribution requirements that apply to us and could therefore
adversely affect our liquidity. See “—Requirements for
Qualification—Distribution Requirements.”
Our
excess inclusion income would be allocated among our stockholders. A
stockholder’s share of excess inclusion income (i) would not be allowed to be
offset by any net operating losses otherwise available to the stockholder, (ii)
would be subject to tax as unrelated business taxable income in the hands of
most tax-exempt stockholders, and (iii) would result in the application of U.S.
federal income tax withholding at the maximum rate of 30%, without reduction for
any otherwise applicable income tax treaty, to the extent allocable to most
types of foreign stockholders. See“—Taxation of Tax-Exempt Stockholders” and
“—Taxation of Non-U.S. Stockholders.” The manner in which excess inclusion
income would be allocated among shares of different classes of our stock or how
such income is to be reported to stockholders is not clear under current law.
Tax-exempt investors, foreign investors, and taxpayers with net operating losses
should carefully consider the tax consequences described above and are urged to
consult their tax advisors in connection with their decision to invest in our
common stock.
If we
were to own less than all of the equity interests in an entity that is
classified as a taxable mortgage pool, the foregoing rules would not apply.
Rather, the entity would be treated as an ordinary corporation for federal
income tax purposes, and its taxable income would be subject to corporate income
tax. In addition, this characterization could adversely affect our compliance
with the REIT gross income and asset tests. We currently do not own, and do not
intend to own, some, but less than all, of the equity interests in an entity
that is or will become a taxable mortgage pool, and we intend to monitor the
structure of any taxable mortgage pools in which we have an interest to ensure
that they will not adversely affect our status as a REIT.
Income
Tests
We must
satisfy two gross income tests annually to maintain our qualification as a REIT.
First, at least 75% of our gross income for each taxable year must consist of
defined types of income that we derive, directly or indirectly, from investments
relating to real property or mortgages on real property or qualified temporary
investment income. Qualifying income for purposes of that 75% gross income test
generally includes:
| · |
rents
from real property; |
| · |
interest
on debt secured by mortgages on real property or on interests in real
property; |
| · |
dividends
or other distributions on. and gain from the sale of, shares in other
REITs; |
| · |
gain
from the sale of real estate assets; |
| · |
amounts,
such as commitment fees, received in consideration for entering into an
agreement to make a loan secured by real property, unless such amounts are
determined by income and profits; and |
| · |
income
derived from the temporary investment of new capital that is attributable
to the issuance of our stock or a public offering of our debt with a
maturity date of at least five years and that we receive during the
one-year period beginning on the date on which we received such new
capital. |
Second,
in general, at least 95% of our gross income for each taxable year must consist
of income that is qualifying income for purposes of the 75% gross income test,
other types of interest and dividends, gain from the sale or disposition of
stock or securities, or any combination of these. Gross income from servicing
fees, loan origination fees, financial advisory fees and structuring fees
receivable are not qualifying income for purposes of either gross income test.
In addition, gross income from our sale of property that we hold primarily for
sale to customers in the ordinary course of business is excluded from both the
numerator and the denominator in both income tests. For taxable years beginning
on and after January 1, 2005, income and gain from “hedging transactions” that
we enter into to hedge indebtedness incurred, or to be incurred, to acquire or
carry real estate assets and that are clearly and timely identified as such will
be excluded from both the numerator and the denominator for purposes of the 95%
gross income test (but not the 75% gross income test). We will monitor the
amount of our nonqualifying income and we will manage our portfolio to comply at
all times with the gross income tests. The following paragraphs discuss the
specific application of the gross income tests to us.
Rents
from Real Property. Rent
that we receive from real property that we own and lease to tenants will qualify
as “rents from real property,” which is qualifying income for purposes of the
75% and 95% gross income tests, only if the following 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. Any participating or percentage rent, however, will
qualify as “rents from real property” if it is based on percentages of receipts
or sales and the percentages:
| · |
are
fixed at the time the leases are entered
into; |
| · |
are
not renegotiated during the term of the leases in a manner that has the
effect of basing percentage rent on income or profits;
and |
| · |
conform
with normal business practice. |
More
generally, any participating or percentage rent will not qualify as “rents from
real property” if, considering the leases and all the surrounding circumstances,
the arrangement does not conform with normal business practice, but is in
reality used as a means of basing the rent on income or profits. Since the rent
that we expect to receive will not be based on the lessees’ income or sales, our
rent should not be considered based in whole or in part on the income or profits
of any person. Furthermore, we have represented that, with respect to other
properties that we acquire in the future, we will not 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 fixed percentage of gross revenues,
as described above.
Second,
we must not own, actually or constructively, 10% or more of the stock or the
assets or net profits of any lessee (a “related party tenant”) other than a TRS.
The constructive ownership rules generally provide that, if 10% or more in value
of our stock is owned, directly or indirectly, by or for any person, we are
considered as owning the stock owned, directly or indirectly, by or for such
person. We do not own any stock or any assets or net profits of any lessee
directly. In addition, our charter prohibits transfers of our common stock that
would cause us to own actually or constructively, 10% or more of the ownership
interests in a lessee. Based on the foregoing, we should never own, actually or
constructively, 10% or more of any lessee other than a TRS. Furthermore, we have
represented that, with respect to other properties that we acquire in the
future, we will not rent any property to a related party tenant. However,
because the constructive ownership rules are broad and it is not possible to
monitor continually direct and indirect transfers of our common stock, no
absolute assurance can be given that such transfers or other events of which we
have no knowledge will not cause us to own constructively 10% or more of a
lessee other than a TRS at some future date.
As
described above, we may own up to 100% of the stock of one or more TRSs. As an
exception to the related party tenant rule described in the preceding paragraph,
rent that we receive from a TRS will qualify as “rents from real property” as
long as (i) the TRS is a qualifying TRS (among other things, it does not
directly or indirectly operate or manage any hotels or health care facilities or
provide rights to any brand name under which any hotel or health care facility
is operated), (ii) at least 90% of the leased space in the property is leased to
persons other than TRSs and related party tenants, and (iii) the amount paid by
the TRS to rent space at the property is substantially comparable to rents paid
by other tenants of the property for comparable space. The “substantially
comparable” requirement must be satisfied when the lease is entered into, when
it is extended, and when the lease is modified, if the modification increases
the rent paid by the TRS. If the requirement that at least 90% of the leased
space in the related property is rented to unrelated tenants is met when a lease
is entered into, extended, or modified, such requirement will continue to be met
as long as there is no increase in the space leased to any TRS or related party
tenant. Any increased rent attributable to a modification of a lease with a TRS
in which we own directly or indirectly more than 50% of the voting power or
value of the stock (a “controlled TRS”) will not be treated as “rents from real
property.”
Third,
the rent attributable to the personal property leased in connection with the
lease of a property must not be greater than 15% of the total rent received
under the lease. The rent attributable to the personal property contained in a
property is the amount that bears the same ratio to total rent for the taxable
year as the average of the fair market values of the personal property at the
beginning and at the end of the taxable year bears to the average of the
aggregate fair market values of both the real and personal property contained in
the property at the beginning and at the end of such taxable year (the “personal
property ratio”). With respect to each property, we believe either that the
personal property ratio is less than 15% or that any income attributable to
excess personal property will not jeopardize our ability to qualify as a REIT.
There can be no assurance, however, that the IRS would not challenge our
calculation of a personal property ratio, or that a court would not uphold such
assertion. If such a challenge were successfully asserted, we could fail to
satisfy the 75% or 95% gross income test and thus lose our REIT
status.
Fourth,
we generally cannot furnish or render noncustomary services to the tenants of
our properties, or manage or operate our properties, other than through an
independent contractor who is adequately compensated and from whom we do not
derive or receive any income. However, we need not provide services through an
“independent contractor,” but instead may provide services directly to our
tenants, if the services are “usually or customarily rendered” in connection
with the rental of space for occupancy only and are not considered to be
provided for the tenants’ convenience. In addition, we may provide a minimal
amount of “noncustomary” services to the tenants of a property, other than
through an independent contractor, as long as our income from the services does
not exceed 1% of our gross income from the related property. Finally, we may own
up to 100% of the stock of one or more TRSs, which may provide noncustomary
services to our tenants without tainting our rents from the related properties.
We do not perform any services other than customary ones for our lessees.
Furthermore, we have represented that, with respect to other properties that we
acquire in the future, we will not perform noncustomary services for the lessees
of the property to the extent that the provision of such services would
jeopardize our REIT status.
If a
portion of the rent that we receive from a property does not qualify as “rents
from real property” because the rent attributable to personal property exceeds
l5% of the total rent for a taxable year, the portion of the rent that is
attributable to personal property will not be qualifying income for purposes of
either the 75% or 95% gross income test. Thus, if such rent attributable to
personal property, plus any other income that is nonqualifying income for
purposes of the 95% gross income test, during a taxable year exceeds 5% of our
gross income during the year, we would lose our REIT status. If, however, the
rent from a particular property does not qualify as “rents from real property”
because either (i) the rent is considered based on the income or profits of the
related lessee, (ii) the lessee either is a related party tenant or fails to
qualify for the exception to the related party tenant rule for qualifying TRSs,
or (iii) we furnish noncustomary services to the tenants of the property, or
manage or operate the property, other than through a qualifying independent
contractor or a TRS, none of the rent from that property would qualify as “rents
from real property.” In that case, we might lose our REIT status because we
would be unable to satisfy either the 75% or 95% gross income test.
In
addition to rent, our lessees are required to pay certain additional charges. To
the extent that such additional charges represent either (i) reimbursements of
amounts that we are obligated to pay to third parties, such as a lessee’s
proportionate share of a property’s operational or capital expenses or (ii)
penalties for nonpayment or late payment of such amounts, such charges should
qualify as “rents from real property.” However, to the extent that charges
described in clause (ii) do not qualify as “rents from real property,” they
instead may be treated as interest that qualifies for the 95% gross income
test.
Interest. The term
“interest,” as defined for purposes of both gross income tests, generally
excludes any amount that is based in whole or in part on the income or profits
of any person. However, interest generally includes the following:
| · |
an
amount that is based on a fixed percentage or percentages of receipts or
sales; and |
| · |
an
amount that is based on the income or profits of a debtor, as long as the
debtor derives substantially all of its income from the real property
securing the debt from leasing substantially all of its interest in the
property, and only to the extent that the amounts received by the debtor
would be qualifying “rents from real property” if received directly by a
REIT. |
If a loan
contains a provision that entitles a REIT to a percentage of the borrower’s gain
upon the sale of the real property securing the loan or a percentage of the
appreciation in the property’s value as of a specific date, income attributable
to that loan provision generally will be treated as gain from the sale of the
property securing the loan, which generally is qualifying income for purposes of
both gross income tests.
Interest
on debt secured by mortgages on real property or on interests in real property,
including, for this purpose, prepayment penalties, loan assumption fees, and
late payment charges that are not compensation for services, generally is
qualifying income for purposes of the 75% gross income test. However, if the
highest principal amount of a loan outstanding during a taxable year exceeds the
fair market value of the real property securing the loan as of the date the REIT
agreed to originate or acquire the loan, a portion of the interest income from
such loan will not be qualifying income for purposes of the 75% gross income
test, but will be qualifying income for purposes of the 95% gross income test.
The portion of the interest income that will not be qualifying income for
purposes of the 75% gross income test will be equal to the portion of the
principal amount of the loan that is not secured by real property—that is, the
amount by which the principal amount of the loan exceeds the value of the real
estate that is security for the loan.
Mezzanine
loans that we originate generally will not be secured by a direct interest in
real property. Instead, our mezzanine loans generally will be secured by
ownership interests in an entity owning real property. In Revenue Procedure
2003-65, the Internal Revenue Service established a safe harbor under which
interest from loans secured by a first priority security interest in ownership
interests in a partnership or limited liability company owning real property
will be treated as qualifying income for both the 75% and 95% gross income
tests, provided several requirements are satisfied. Although we anticipate that
any mezzanine loans that we extend will qualify for the safe harbor in Revenue
Procedure 2003-65, it is possible that we may make some mezzanine loans that do
not qualify for that safe harbor. In those cases, the interest income from the
loan will be qualifying income for purposes of the 95% gross income test, but
potentially will not be qualifying income for purposes of the 75% gross income
test. We will make mezzanine loans that do not qualify for the safe harbor in
Revenue Procedure 2003-65 only to the extent that the interest from those loans,
combined with our other nonqualifying income, will not cause us to fail to
satisfy the 75% gross income test.
We also
may originate construction or development loans. As stated above, in order to
determine whether the interest income from a loan is qualifying income for
purposes of the gross income tests, we generally compare the loan amount, or the
highest principal amount of a loan outstanding during a taxable year, to the
loan value, or the fair market value of the real property securing the loan as
of the date we agree to originate or acquire the loan. However, in the case of a
construction or development loan, the loan value is equal to the fair market
value of the land plus the reasonably estimated cost of the improvements or
developments (other than personal property) which will secure the loan and which
are to be constructed from the proceeds of the loan, determined as of the date
we agree to originate the loan. If we do not make the construction loan but
commit to provide long-term financing following completion of construction, the
loan value is determined by using the principles for determining the loan value
for a construction loan. In addition, if the mortgage on the real property is
given as additional security (or as a substitute for other security) for the
loan after our commitment to extend the loan is binding, the loan value is equal
to the fair market value of the real property when it becomes security for the
loan (or, if earlier, when the borrower makes a binding commitment to add or
substitute the property as security).
The
interest, original issue discount, and market discount income that we receive
from our mortgage loans and mortgage-backed securities generally are qualifying
income for purposes of both gross income tests. However, as discussed above, if
the fair market value of the real estate securing any of our loans is less than
the principal amount of the loan, a portion of the income from that loan will be
qualifying income for purposes of the 95% gross income test but not the 75%
gross income test. In addition, to the extent that any mezzanine loans that we
extend do not qualify for the safe harbor described above, the interest income
from the loans will be qualifying income for purposes of the 95% gross income
test, but potentially will not be qualifying income for purposes of the 75%
gross income test.
Fee
Income. We may
receive various fees in connection with our mortgage loans. The fees will be
qualifying income for purposes of both the 75% and 95% income tests if they are
received in consideration for entering into an agreement to make a loan secured
by real property, and the fees are not determined by income and profits.
Therefore, commitment fees generally will be qualifying income for purposes of
the income tests. Other fees, such as fees received for servicing loans for
third parties, origination fees, and financial advisory fees, are not qualifying
income for purposes of either income test. To the extent necessary, one of our
TRSs will conduct loan servicing and financial advisory functions that generate
fee income that is not qualifying income. In this case, the income earned by our
TRS from these services will not be included for purposes of the REIT gross
income tests.
Dividends. Our
share of any dividends received from any corporation (including a TRS but not
another REIT) in which we own an equity interest will be qualifying income for
purposes of the 95% gross income test but not for purposes of the 75% gross
income test. Our share of any dividends received from any other REIT in which we
own an equity interest will be qualifying income for purposes of both gross
income tests.
Hedging
Transactions. From
time to time, we enter into hedging transactions with respect to one or more of
our assets or liabilities. Our hedging activities may include entering into
interest rate swaps, caps, and floors, options to purchase these items, and
futures and forward contracts. For taxable years prior to 2005, to the extent
that we entered into an interest rate swap or cap contract, option, futures
contract, forward rate agreement, or any similar financial instrument to hedge
our indebtedness incurred to acquire or carry “real estate assets,” any periodic
income or gain from the disposition of such contract should have been qualifying
income for purposes of the 95% gross income test, but not the 75% gross income
test. For taxable years beginning on and after January 1, 2005, income and gain
from “hedging transactions” will be excluded from gross income for purposes of
the 95% gross income test (but not the 75% gross income test). For those taxable
years, a “hedging transaction” means any transaction entered into in the normal
course of our trade or business primarily to manage the risk of interest rate or
price changes, or currency fluctuations with respect to borrowings made or to be
made, or ordinary obligations incurred or to be incurred, to acquire or carry
real estate assets. We are required to clearly identify any such hedging
transaction before the close of the day on which it was acquired, originated, or
entered into. We intend to structure any hedging transactions in a manner that
does not jeopardize our status as a REIT.
Prohibited
Transactions. A REIT
will incur a 100% tax on the net income derived from any sale or other
disposition of property, other than foreclosure property, that the REIT holds
primarily for sale to customers in the ordinary course of a trade or business.
We believe that none of our assets will be held primarily for sale to customers
and that a sale of any of our assets will not be in the ordinary course of our
business. Whether a REIT holds an asset “primarily for sale to customers in the
ordinary course of a trade or business” depends, however, on the facts and
circumstances in effect, from time to time, including those related to a
particular asset. Nevertheless, we will attempt to comply with the terms of
safe-harbor provisions in the federal income tax laws prescribing when an asset
sale will not be characterized as a prohibited transaction. We cannot assure
you, however, that we can comply with the safe-harbor provisions or that we will
avoid owning property that may be characterized as property that we hold
“primarily for sale to customers in the ordinary course of a trade or business.”
To the extent necessary to avoid the prohibited transactions tax, we will
conduct sales of our loans through one of our taxable REIT
subsidiaries.
It is our
current intention that any securitizations that we undertake with regard to our
mortgage loans will not be treated as sales for tax purposes. If we were to
transfer a mortgage loan to a REMIC, this transfer would be treated as a sale
for tax purposes and the sale may be subject to the prohibited transactions tax.
As a result, we intend to securitize our mortgage loans only in non-REMIC
transactions.
Foreclosure
Property. We will
be subject to tax at the maximum corporate rate on any income from foreclosure
property, other than income that otherwise would be qualifying income for
purposes of the 75% gross income test, less expenses directly connected with the
production of that income. However, gross income from foreclosure property will
qualify under the 75% and 95% gross income tests. Foreclosure property is any
real property, including interests in real property, and any personal property
incident to such real property:
| · |
that
is acquired by a REIT as the result of the REIT having bid on 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
indebtedness that such property secured; |
| · |
for
which the related loan or leased property was acquired by the REIT at a
time when the default was not imminent or anticipated;
and |
| · |
for
which the REIT makes a proper election to treat the property as
foreclosure property. |
However,
a REIT will not be considered to have foreclosed on a property where the REIT
takes control of the property as a mortgagee-in-possession and cannot receive
any profit or sustain any loss except as a creditor of the mortgagor. Property
generally ceases to be foreclosure property at the end of the third taxable year
following the taxable year in which the REIT acquired the property, or longer if
an extension is granted by the Secretary of the Treasury. This grace period
terminates and foreclosure property ceases to be foreclosure property on the
first day:
| · |
on
which a lease is entered into for the property that, by its terms, will
give rise to income that does not qualify for purposes of the 75% gross
income test, or any amount is received or accrued, directly or indirectly,
pursuant to a lease entered into on or after such day that will give rise
to income that does not qualify for purposes of the 75% gross income
test; |
| · |
on
which any construction takes place on the property, other than completion
of a building or any other improvement, where more than 10% of the
construction was completed before default became imminent;
or |
| · |
which
is more than 90 days after the day on which the REIT acquired the property
and the property is used in a trade or business which is conducted by the
REIT, other than through an independent contractor from whom the REIT
itself does not derive or receive any
income. |
Failure
to Satisfy Gross Income Tests. If we
fail to satisfy one or both of the gross income tests for any taxable year, we
nevertheless may qualify as a REIT for that year if we qualify for relief under
certain provisions of the federal income tax laws. Those relief provisions
generally will be available if:
| · |
our
failure to meet such tests is due to reasonable cause and not due to
willful neglect; and |
| · |
following
such failure for any taxable year, a schedule of the sources of our income
is filed in accordance with regulations prescribed by the Secretary of the
Treasury. |
For
taxable years prior to 2005, any incorrect information on the schedule of the
sources of our income must not have been due to fraud with intent to evade
tax.
We cannot
predict, however, whether in all circumstances we would qualify for the relief
provisions. In addition, as discussed above in “Taxation of Our Company,” even
if the relief provisions apply, we would incur a 100% tax on the gross income
attributable to the greater of (i) the amount by which we fail the 75% gross
income test or (ii) the amount by which 95% (90% for taxable years prior to
2005) of our gross income exceeds the amount of our income qualifying under the
95% gross income test, in each case multiplied by a fraction intended to reflect
our profitability.
Asset
Tests
To
qualify as a REIT, we also must satisfy the following asset tests at the end of
each quarter of each taxable year. At least 75% of the value of our total assets
must consist of:
| · |
cash
or cash items, including certain
receivables; |
| · |
interests
in real property, including leaseholds and options to acquire real
property and leaseholds; |
| · |
interests
in mortgages on real property; |
| · |
stock
in other REITs; and |
| · |
investments
in stock or debt instruments during the one-year period following our
receipt of new capital that we raise through equity offerings or offerings
of debt with at least a five-year term. |
Of our
investments not included in the 75% asset class:
First,
the value of our interest in any one issuer’s securities may not exceed 5% of
the value of our total assets.
Second,
we may not own more than 10% of the voting power or value of any one issuer’s
outstanding securities.
Third, no
more than 20% of the value of our total assets may consist of the securities of
one or more TRSs.
Fourth,
no more than 25% of the value of our total assets may consist of the securities
of TRSs and other non-TRS taxable subsidiaries and other assets that are not
qualifying assets for purposes of the 75% asset test.
For
purposes of the 5% and 10% asset tests, the term “securities” does not include
stock in another REIT, equity or debt securities of a qualified REIT subsidiary
or TRS, mortgage loans that constitute real estate assets, or equity interests
in a partnership. The term “securities,” however, generally includes debt
securities issued by a partnership or another REIT, except that for purposes of
the 10% value test, the term “securities” does not include:
| · |
“Straight
debt,” defined as a written unconditional promise to pay on demand or on a
specified date a sum certain in money if (i) the debt is not convertible,
directly or indirectly, into stock, and (ii) the interest rate and
interest payment dates are not contingent on profits, the borrower’s
discretion, or similar factors. “Straight debt” securities do not include
any securities issued by a partnership or a corporation in which we or any
controlled TRS (i.e., a TRS in which we own directly or indirectly more
than 50% of the voting power or value of the stock) holds non-”straight
debt” securities that have an aggregate value of more than 1% of the
issuer’s outstanding securities. However, “straight debt” securities
include debt subject to the following
contingencies: |
| · |
a
contingency relating to the time of payment of interest or principal, as
long as either (i) there is no change to the effective yield of the debt
obligation, other than a change to the annual yield that does not exceed
the greater of 0.25% or 5% of the annual yield, or (ii) neither the
aggregate issue price nor the aggregate face amount of the issuer’s debt
obligations held by us exceeds $1 million and no more than 12 months of
unaccrued interest on the debt obligations can be required to be prepaid;
and |
| · |
a
contingency relating to the time or amount of payment upon a default or
prepayment of a debt obligation, as long as the contingency is consistent
with customary commercial practice; |
| · |
Any
loan to an individual or an estate; |
| · |
Any
“section 467 rental agreement,” other than an agreement with a related
party tenant; |
| · |
Any
obligation to pay “rents from real
property”; |
| · |
Any
security issued by a state or any political subdivision thereof, the
District of Columbia, a foreign government of any political subdivision
thereof, or the Commonwealth of Puerto Rico, but only if the determination
of any payment thereunder does not depend in whole or in part on the
profits of any entity not described in this paragraph or payments on any
obligation issued by an entity not described in this
paragraph; |
| · |
Any
security issued by a REIT; |
| · |
Any
debt instrument of an entity treated as a partnership for federal income
tax purposes to the extent of our interest as a partner in the
partnership; or |
| · |
Any
debt instrument of an entity treated as a partnership for federal income
tax purposes not described in the preceding bullet points if at least 75%
of the partnership’s gross income, excluding income from prohibited
transactions, is qualifying income for purposes of the 75% gross income
test described above in “—Requirements for Qualification-Income
Tests.” |
For
purposes of the 10% value test, our proportionate share of the assets of a
partnership is our proportionate interest in any securities issued by the
partnership, without regard to securities described in the last two bullet
points above.
We
believe that all or substantially all of the real property, mortgage loans, and
mortgage-backed securities that we own are qualifying assets for purposes of the
75% asset test. For purposes of these rules, however, if the outstanding
principal balance of a mortgage loan exceeds the fair market value of the real
property securing the loan (determined as described under “Income
Tests—Interest” above), a portion of such loan likely will not be a qualifying
real estate asset under the federal income tax laws. Although the law on the
matter is not entirely clear, it appears that the non-qualifying portion of that
mortgage loan will be equal to the portion of the loan amount that exceeds the
value of the associated real property that is security for that loan. In
addition, any mezzanine loan that we extend generally will be secured by
ownership interests in an entity owning real property. We anticipate that most
or all of such mezzanine loans will qualify for the safe harbor in Revenue
Procedure 2003-65 pursuant to which certain loans secured by a first priority
security interest in ownership interests in a partnership or limited liability
company will be treated as qualifying assets for purposes of the 75% asset test.
See “—Income Tests.” However, it is possible that we may make some mezzanine
loans that do not qualify for that safe harbor and that do not qualify as
“straight debt” securities for purposes of the 10% value test. We will make
mezzanine loans that do not qualify for the safe harbor in Revenue Procedure
2003-65 or as “straight debt” securities only to the extent that such loans will
not cause us to fail the asset tests described above. Furthermore, to the extent
that we own debt securities issued by other REITs or C corporations that are not
secured by mortgages on real property, those debt securities will not be
qualifying assets for purposes of the 75% asset test. Instead, we would be
subject to the 5% and 10% asset tests with respect to those debt
securities.
We will
monitor the status of our assets for purposes of the various asset tests and
will seek to manage our portfolio to comply at all times with such tests. There
can be no assurance, however, that we will be successful in this effort. In this
regard, to determine our compliance with these requirements, we will need to
estimate the value of the real estate securing our mortgage loans at various
times. Although we will seek to be prudent in making these estimates, there can
be no assurances that the IRS will not disagree with these determinations and
assert that a lower value is applicable. If we fail to satisfy the asset tests
at the end of a calendar quarter, we will not lose our REIT status
if:
| · |
we
satisfied the asset tests at the end of the immediately preceding calendar
quarter; and |
| · |
the
discrepancy between the value of our assets and the asset test
requirements arose from changes in the market values of our assets and was
not wholly or partly caused by the acquisition of one or more
non-qualifying assets. |
If we did
not satisfy the condition described in the second item, above, we still could
avoid disqualification by eliminating any discrepancy within 30 days after the
close of the calendar quarter in which it arose.
In the
event that, at the end of any calendar quarter in a taxable year beginning on or
after January 1, 2005, we violate the 5% or 10% asset test described above, we
will not lose our REIT status if (1) the failure is de minimis (up to the lesser
of 1% of our assets or $10 million) and (2) we dispose of assets or otherwise
comply with the asset tests within six months after the last day of the quarter
in which we discovered the failure of the asset test. In the event of a more
than de minimis failure of any of the asset tests at the end of any calendar
quarter in a taxable year beginning on or after January 1, 2005, as long as the
failure was due to reasonable cause and not to willful neglect, we will not lose
our REIT status if we (1) dispose of assets or otherwise comply with the asset
tests within six months after the last day of the quarter in which we discovered
the failure of the asset test and (2) pay a tax equal to the greater of $50,000
or 35% of the net income from the nonqualifying assets during the period in
which we failed to satisfy the asset tests.
Distribution
Requirements
Each
taxable year, we must distribute dividends, other than capital gain dividends
and deemed distributions of retained capital gain, to our stockholders in an
aggregate amount at least equal to:
| · |
90%
of our “REIT taxable income,” computed without regard to the dividends
paid deduction and our net capital gain or loss,
and |
| · |
90%
of our after-tax net income, if any, from foreclosure property,
minus |
| · |
the
sum of certain items of non-cash income. |
Generally,
we must pay such distributions in the taxable year to which they relate, or in
the following taxable year if we declare the distribution before we timely file
our federal income tax return for the year and pay the distribution on or before
the first regular dividend payment date after such declaration.
We will
pay federal income tax on taxable income, including net capital gain, that we do
not distribute to stockholders. Furthermore, if we fail to distribute during a
calendar year, or by the end of January following the calendar year in the case
of distributions with declaration and record dates falling in the last three
months of the calendar year, at least the sum of:
| · |
85%
of our REIT ordinary income for such calendar
year, |
| · |
95%
of our REIT capital gain income for such calendar year,
and |
| · |
the
excess, if any, of the “grossed up required distribution” for the
preceding calendar year over the distributed amount for that preceding
calendar year. The “grossed up required distribution” for any calendar
year is the sum of the taxable income of the REIT for the calendar year
(without regard to the deduction for dividends paid) and all amounts from
earlier years that are not treated as having been distributed under the
provision, |
we will
incur a 4% nondeductible excise tax on the excess of such required distribution
over the distributed amount. The distributed amount is the sum of (i) the
deduction for dividends paid during that calendar year, (ii) amounts on which
the REIT is required to pay corporate tax, and (iii) the excess, if any, of the
distributed amount for the preceding taxable year over the grossed up required
distribution for that preceding taxable year. We may elect to retain and pay
income tax on the net long-term capital gain we receive in a taxable year. See
“Taxation of Taxable U.S. Stockholders.” If we so elect, we will be treated as
having distributed any such retained amount for purposes of the 4% nondeductible
excise tax described above. We intend to make timely distributions sufficient to
satisfy the annual distribution requirements and to avoid corporate income tax
and the 4% nondeductible excise tax.
It is
possible that, from time to time, we may experience timing differences between
the actual receipt of income and actual payment of deductible expenses and the
inclusion of that income and deduction of such expenses in arriving at our REIT
taxable income. Possible examples of those timing differences include the
following:
| · |
Because
we may deduct capital losses only to the extent of our capital gains, we
may have taxable income that exceeds our economic
income. |
| · |
We
will recognize taxable income in advance of the related cash flow if any
of our mortgage loans or subordinated structured interests in net lease
assets are deemed to have original issue discount. We generally must
accrue original issue discount based on a constant yield method that takes
into account projected prepayments but that defers taking into account
credit losses until they are actually
incurred. |
| · |
We
may be required to recognize the amount of any payment projected to be
made pursuant to a provision in a mortgage loan that entitles us to share
in the gain from the sale of, or the appreciation in, the mortgaged
property over the term of the related loan using the constant yield
method, even though we may not receive the related cash until the maturity
of the loan. |
| · |
We
may recognize taxable market discount income when we receive the proceeds
from the disposition of, or principal payments on, loans that have a
stated redemption price at maturity that is greater than our tax basis in
those loans, although such proceeds often will be used to make
non-deductible principal payments on related
borrowings. |
| · |
We
may recognize taxable income without receiving a corresponding cash
distribution if we foreclose on or make a significant modification to a
loan, to the extent that the fair market value of the underlying property
or the principal amount of the modified loan, as applicable, exceeds our
basis in the original loan. |
| · |
We
may recognize phantom taxable income from any retained ownership interests
in mortgage loans subject to collateralized mortgage obligation debt that
we own. |
Although
several types of non-cash income are excluded in determining the annual
distribution requirement, we may incur corporate income tax and the 4% excise
tax with respect to those non-cash income items if we do not distribute those
items on a current basis. As a result of the foregoing, we may have less cash
than is necessary to distribute all of our taxable income and thereby avoid
corporate income tax and the excise tax imposed on certain undistributed income.
In such a situation, we may need to borrow funds or issue additional common or
preferred stock.
Under
certain circumstances, we may be able to correct a failure to meet the
distribution requirement for a year by paying “deficiency dividends” to our
stockholders in a later year. We may include such deficiency dividends in our
deduction for dividends paid for the earlier year. Although we may be able to
avoid income tax on amounts distributed as deficiency dividends, we will be
required to pay interest to the IRS based upon the amount of any deduction we
take for deficiency dividends.
Recordkeeping
Requirements
We must
maintain certain records in order to qualify as a REIT. In addition, to avoid a
monetary penalty, we must request on an annual basis information from our
stockholders designed to disclose the actual ownership of our outstanding stock.
We intend to comply with these requirements.
Failure
to Qualify
If we
fail to qualify as a REIT in any taxable year, and no relief provision applies,
we would be subject to federal income tax and any applicable alternative minimum
tax on our taxable income at regular corporate rates. In calculating our taxable
income in a year in which we fail to qualify as a REIT, we would not be able to
deduct amounts paid out to stockholders. In fact, we would not be required to
distribute any amounts to stockholders in that year. In such event, to the
extent of our current and accumulated earnings and profits, all distributions to
stockholders would be taxable as ordinary income. Subject to certain limitations
of the federal income tax laws, corporate stockholders might be eligible for the
dividends received deduction. Unless we qualified for relief under specific
statutory provisions, we also would be disqualified from taxation as a REIT for
the four taxable years following the year during which we ceased to qualify as a
REIT. We cannot predict whether in all circumstances we would qualify for such
statutory relief.
For
taxable years beginning on and after January 1, 2005, if we fail to satisfy one
or more requirements for REIT qualification, other than the gross income tests
and the asset tests, we could avoid disqualification if our failure is due to
reasonable cause and not to willful neglect and we pay a penalty of $50,000 for
each such failure. In addition, there are relief provisions for a failure of the
gross income tests and asset tests, as described above in “—Income Tests” and
“—Asset Tests.”
Taxation
of Taxable U.S. Stockholders
The term
“U.S. stockholder” means a holder of our common stock that, for United States
federal income tax purposes, is:
| · |
a
citizen or resident of the United States; |
| · |
a
corporation or partnership (including an entity treated as a corporation
or partnership for U.S. federal income tax purposes) created or organized
under the laws of the United States or of a political subdivision of the
United States; |
| · |
an
estate whose income is subject to U.S. federal income taxation regardless
of its source; or |
| · |
any
trust if (i) a U.S. court is able to exercise primary supervision over the
administration of such trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust or (ii) it has
a valid election in place to be treated as a U.S.
person. |
As long
as we qualify as a REIT, a taxable “U.S. stockholder” must take into account as
ordinary income distributions made out of our current or accumulated earnings
and profits that we do not designate as capital gain dividends or retained
long-term capital gain. A U.S. stockholder will not qualify for the dividends
received deduction generally available to corporations. In addition, dividends
paid to a U.S. stockholder generally will not qualify for the 15% tax rate for
“qualified dividend income.” Qualified dividend income generally includes
dividends paid by domestic C corporations and certain qualified foreign
corporations to most U.S. noncorporate stockholders. Because we are not
generally subject to federal income tax on the portion of our REIT taxable
income distributed to our stockholders, our dividends generally will not be
eligible for the new 15% rate on qualified dividend income. As a result, our
ordinary REIT dividends will continue to be taxed at the higher tax rate
applicable to ordinary income. Currently, the highest marginal individual income
tax rate on ordinary income is 35%. However, the 15% tax rate for qualified
dividend income will apply to our ordinary REIT dividends, if any, that are (i)
attributable to dividends received by us from non-REIT corporations, such as our
TRSs, and (ii) attributable to income upon which we have paid corporate income
tax (e.g., to the extent that we distribute less than 100% of our taxable
income). In general, to qualify for the reduced tax rate on qualified dividend
income, a stockholder must hold our common stock for more than 60 days during
the 120-day period beginning on the date that is 60 days before the date on
which our common stock becomes ex-dividend.
If we
declare a distribution in October, November, or December of any year that is
payable to a U.S. stockholder of record on a specified date in any such month,
such distribution shall be treated as both paid by us and received by the U.S.
stockholder on December 31 of such year, provided that we actually pay the
distribution during January of the following calendar year.
A U.S.
stockholder generally will recognize distributions that we designate as capital
gain dividends as long-term capital gain without regard to the period for which
the U.S. stockholder has held its common stock. We generally will designate our
capital gain dividends as either 15% or 25% rate distributions. See “—Capital
Gains and Losses.” A corporate U.S. stockholder, however, may be required to
treat up to 20% of certain capital gain dividends as a preference
item.
We may
elect to retain and pay income tax on the net long-term capital gain that we
recognize in a taxable year. In that case, a U.S. stockholder would be taxed on
its proportionate share of our undistributed long-term capital gain. The U.S.
stockholder would receive a credit or refund for its proportionate share of the
tax we paid. The U.S. stockholder would increase the basis in its common stock
by the amount of its proportionate share of our undistributed long-term capital
gain, minus its share of the tax we paid.
A U.S.
stockholder will not incur tax on a distribution in excess of our current and
accumulated earnings and profits if the distribution does not exceed the
adjusted basis of the U.S. stockholder’s common stock. Instead, the distribution
will reduce the adjusted basis of such common stock. A U.S. stockholder will
recognize a distribution in excess of both our current and accumulated earnings
and profits and the U.S. stockholder’s adjusted basis in his or her common stock
as long-term capital gain, or short-term capital gain if the common stock has
been held for one year or less, assuming the common stock is a capital asset in
the hands of the U.S. stockholder.
Stockholders
may not include in their individual income tax returns any of our net operating
losses or capital losses. Instead, these losses are generally carried over by us
for potential offset against our future income. Taxable distributions from us
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 the stockholder is a limited partner, against such income.
In addition, taxable distributions from us and gain from the disposition of our
common stock generally will be treated as investment income for purposes of the
investment interest limitations. We will notify stockholders after the close of
our taxable year as to the portions of the distributions attributable to that
year that constitute ordinary income, return of capital, and capital
gain.
Our
excess inclusion income generally will be allocated among our stockholders to
the extent that it exceeds our REIT taxable income in a particular year. A
stockholder’s share of excess inclusion income would not be allowed to be offset
by any net operating losses otherwise available to the stockholder.
Taxation
of U.S. Stockholders on the Disposition of Common Stock
In
general, a U.S. stockholder who is not a dealer in securities must treat any
gain or loss realized upon a taxable disposition of our common stock as
long-term capital gain or loss if the U.S. stockholder has held the common stock
for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. stockholder must treat any loss upon a sale or exchange of
common stock held by such stockholder for six-months or less as a long-term
capital loss to the extent of capital gain dividends and any other actual or
deemed distributions from us that such U.S. stockholder treats as long-term
capital gain. All or a portion of any loss that a U.S. stockholder realizes upon
a taxable disposition of the common stock may be disallowed if the U.S.
stockholder purchases substantially identical common stock within 30 days before
or after the disposition.
Capital
Gains and Losses
A
taxpayer generally must hold a capital asset for more than one year 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 currently is 35% (which
rate will apply for the period from January 1, 2003 to December 31, 2010). The
maximum tax rate on long-term capital gain applicable to non-corporate taxpayers
is 15% through December 31, 2008. The maximum tax rate on long-term capital gain
from the sale or exchange of “section 1250 property,” or depreciable real
property, is 25% to the extent that such gain would have been treated as
ordinary income if the property were “section 1245 property.” With respect to
distributions that we designate as capital gain dividends and any retained
capital gain that we are deemed to distribute, we generally may designate
whether such a distribution is taxable to our non-corporate stockholders at a
15% or 25% rate. 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. A non-corporate taxpayer may deduct capital
losses not offset by capital gains against its ordinary income only up to a
maximum annual amount of $3,000 ($1,500 for married individuals filing separate
returns). A non-corporate taxpayer may carry forward unused capital losses
indefinitely. A corporate taxpayer must pay tax on its net capital gain at
ordinary corporate rates. A corporate taxpayer may deduct capital losses only to
the extent of capital gains, with unused losses being carried back three years
and forward five years.
Information
Reporting Requirements and Backup Withholding
We will
report to our stockholders and to the IRS the amount of dividends we pay during
each calendar year, and the amount of tax we withhold, if any. Under the backup
withholding rules, a stockholder may be subject to backup withholding at a rate
of 28% with respect to distributions unless the holder:
| · |
is
a corporation or comes within certain 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 the applicable
requirements of the backup withholding
rules. |
A
stockholder who does not provide us with its correct taxpayer identification
number also may 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
to us. For a discussion of the backup withholding rules as applied to non-U.S.
stockholders, see “—Taxation of Non-U.S. Stockholders.”
Taxation
of Tax-Exempt Stockholders
Tax-exempt
entities, including qualified employee pension and profit sharing trusts and
individual retirement accounts, generally are exempt from federal income
taxation. However, they are subject to taxation on their unrelated business
taxable income, or UBTI. While many investments in real estate generate UBTI,
the IRS has issued a ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute UBTI so long as the exempt employee
pension trust does not otherwise use the shares of the REIT in an unrelated
trade or business of the pension trust. Based on that ruling, amounts that we
distribute to tax-exempt stockholders generally should not constitute UBTI.
However, if a tax-exempt stockholder were to finance its acquisition of common
stock with debt, a portion of the income that it receives from us would
constitute UBTI pursuant to the “debt-financed property” rules. Moreover, social
clubs, voluntary employee benefit associations, supplemental unemployment
benefit trusts and qualified group legal services plans that are exempt from
taxation under special provisions of the federal income tax laws are subject to
different UBTI rules, which may require them to characterize distributions that
they receive from us as UBTI. Furthermore, a tax-exempt stockholder’s share of
our excess inclusion income would be subject to tax as UBTI. Finally, in certain
circumstances, a qualified employee pension or profit sharing trust that owns
more than 10% of our stock must treat a percentage of the dividends that it
receives from us as UBTI. Such percentage is equal to the gross income we derive
from an unrelated trade or business, determined as if we were a pension trust,
divided by our total gross income for the year in which we pay or are treated as
having paid the dividends. That rule applies to a pension trust holding more
than 10% of our stock only if:
| · |
the
percentage of our dividends that the tax-exempt trust must treat as UBTI
is at least 5%; |
| · |
we
qualify as a REIT by reason of the modification of the rule requiring that
no more than 50% of our stock be owned by five or fewer individuals that
requires the beneficiaries of the pension trust to be treated as holding
our stock in proportion to their actuarial interests in the pension trust;
and |
| · |
at
least one pension trust owns more than 25% of the value of our stock;
or |
| · |
a
group of pension trusts individually holding more than 10% of the value of
our stock collectively owns more than 50% of the value of our
stock. |
Taxation
of Non-U.S. Stockholders
The rules
governing U.S. federal income taxation of nonresident alien individuals, foreign
corporations, foreign partnerships, and other foreign stockholders are complex.
This section is only a summary of such rules. We
urge non-U.S. stockholders to consult their own tax advisors to determine the
impact of federal, foreign, state, and local income tax laws on ownership of the
common stock, including any reporting requirements.
A
non-U.S. stockholder that receives a distribution that is not attributable to
gain from our sale or exchange of U.S. real property interests, as defined
below, and that we do not designate as a capital gain dividend or retained
capital gain will recognize ordinary income to the extent that we pay the
distribution out of our current or accumulated earnings and profits. A
withholding tax equal to 30% of the gross amount of the distribution ordinarily
will apply unless an applicable tax treaty reduces or eliminates the tax.
However, if a distribution is treated as effectively connected with the non-U.S.
stockholder’s conduct of a U.S. trade or business, the non-U.S. stockholder
generally will be subject to federal income tax on the distribution at graduated
rates, in the same manner as U.S. stockholders are taxed on distributions and
also may be subject to the 30% branch profits tax in the case of a corporate
non-U.S. stockholder. We plan to withhold U.S. income tax at the rate of 30% on
the gross amount of any ordinary dividend paid to a non-U.S. stockholder unless
either:
| · |
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 |
| · |
the
non-U.S. stockholder files an IRS Form W-8ECI with us claiming that the
distribution is effectively connected
income. |
However,
reduced treaty rates are not available to the extent that the income allocated
to the foreign stockholder is excess inclusion income. Our excess inclusion
income generally will be allocated among our stockholders to the extent that it
exceeds our REIT taxable income in a particular year.
A
non-U.S. stockholder will not incur U.S. tax on a distribution in excess of our
current and accumulated earnings and profits if the excess portion of the
distribution does not exceed the adjusted basis of its common stock. Instead,
the excess portion of the distribution will reduce the adjusted basis of that
common stock. A non-U.S. stockholder will be subject to tax on a distribution
that exceeds both our current and accumulated earnings and profits and the
adjusted basis of the common stock, if the non-U.S. stockholder otherwise would
be subject to tax on gain from the sale or disposition of its common stock, as
described below. Because we generally cannot determine at the time we make a
distribution whether or not the distribution will exceed our current and
accumulated earnings and profits, we normally will withhold tax on the entire
amount of any distribution at the same rate as we would withhold on a dividend.
However, by filing a U.S. tax return, a non-U.S. stockholder may obtain a refund
of amounts that we withhold if we later determine that a distribution in fact
exceeded our current and accumulated earnings and profits.
We must
withhold 10% of any distribution that exceeds our current and accumulated
earnings and profits. Consequently, although we intend to withhold at a rate of
30% on the entire amount of any distribution, to the extent that we do not do
so, we will withhold at a rate of 10% on any portion of a distribution not
subject to withholding at a rate of 30%.
For any
year in which we qualify as a REIT, a non-U.S. stockholder will incur tax on
distributions that are attributable to gain from our sale or exchange of “U.S.
real property interests” under special provisions of the federal income tax laws
known as “FIRPTA.” The term “U.S. real property interests” includes interests in
real property and shares in corporations at least 50% of whose assets consists
of interests in real property. For taxable years prior to 2005, a non-U.S.
stockholder was taxed on distributions attributable to gain from sales of U.S.
real property interests as if such gain were effectively connected with a U.S.
business of the non-U.S. stockholder. A non-U.S. stockholder thus was taxed on
such a distribution 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 a nonresident alien individual. For
taxable years beginning on and after January 1, 2005, capital gain distributions
that are attributable to our sale of real property are not subject to FIRPTA
and, therefore, will be treated as ordinary dividends rather than as gain from
the sale of a United States real property interest, as long as the non-U.S.
stockholder did not own more than 5% of the class of our stock on which the
distributions are made during the taxable year. As a result, such non-U.S.
stockholders generally are subject to withholding tax on such capital gain
distributions in the same manner as they are subject to withholding tax on
ordinary dividends. A non-U.S. corporate stockholder not entitled to treaty
relief or exemption also may be subject to the 30% branch profits tax on such a
distribution. We must withhold 35% of any distribution that we could designate
as a capital gain dividend. A non-U.S. stockholder will receive a credit against
its U.S. federal income tax liability for the amount we withhold.
A
non-U.S. stockholder generally will not incur tax under FIRPTA on gains from the
disposition of our stock as long as at all times non-U.S. persons hold, directly
or indirectly, less than 50% in value of our stock. We cannot assure you that
that test will be met. However, a non-U.S. stockholder that owned, actually or
constructively, 5% or less of our common stock at all times during a specified
testing period will not incur tax under FIRPTA on gain from the disposition of
our stock if the common stock is “regularly traded” on an established securities
market. Because the common stock is regularly traded on an established
securities market, a stockholder owning 5% or less of our common stock will not
incur tax under FIRPTA on gain from the disposition of the common stock. If the
gain on the sale of the common stock were taxed under FIRPTA, a non-U.S.
stockholder would be taxed on that gain in the same manner as U.S. stockholders,
and subject to applicable alternative minimum tax, a special alternative minimum
tax in the case of nonresident alien individuals. Furthermore, a non-U.S.
stockholder generally will incur tax on gain not subject to FIRPTA
if:
| · |
the
gain 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 U.S. stockholders with respect to such gain,
or |
| · |
the
non-U.S. stockholder is a nonresident alien individual who was present in
the U.S. for 183 days or more during the taxable year and has a “tax home”
in the United States, in which case the non-U.S. stockholder will incur a
30% tax on his or her capital gains. |
OTHER
TAX CONSEQUENCES
Tax
Aspects of our Investment in the Operating Partnership
The
following discussion summarizes certain federal income tax considerations
applicable to our direct or indirect investments in the operating partnership.
See “Partnership Agreement.” The discussion does not cover state or local tax
laws or any federal tax laws other than income tax laws.
Tax
Classification. Prior to
the time that third-party limited partners are admitted to the operating
partnership, the operating partnership will be treated as a disregarded entity
for federal income tax purposes. After such time, we will be entitled to include
in our income our distributive share of the operating partnership’s income and
to deduct our distributive share of the operating partnership’s losses only if
the operating partnership is classified for federal income tax purposes as a
partnership rather than as a corporation or an association taxable as a
corporation. The remainder of this discussion applies only in the event that the
third-party limited partners are admitted to the operating partnership. An
organization will be classified as a partnership, rather than as a corporation,
for federal income tax purposes if it:
| · |
is
treated as a partnership under Treasury regulations, effective January 1,
1997, relating to entity classification (the “check-the-box regulations”);
and |
| · |
is
not a “publicly traded” partnership. |
Under the
check-the-box regulations, an unincorporated entity with at least two members
may elect to be classified either as an association taxable as a corporation or
as a partnership. If such an entity fails to make an election, it generally will
be treated as a partnership for federal income tax purposes. The operating
partnership intends to be classified as a partnership for federal income tax
purposes and it will not elect to be treated as an association taxable as a
corporation under the check-the-box regulations.
A
publicly traded partnership is a partnership whose interests are traded on an
established securities market or are readily tradable on a secondary market or
the substantial equivalent thereof. A publicly traded partnership will not,
however, be treated as a corporation for any taxable year if 90% or more of the
partnership’s gross income for such year consists of certain passive-type
income, including real property rents (which includes rents that would be
qualifying income for purposes of the 75% gross income test, with certain
modifications that make it easier for the rents to qualify for the 90% passive
income exception), gains from the sale or other disposition of real property,
interest, and dividends (the “90% passive income exception”).
Treasury
regulations (the “PTP regulations”) provide limited safe harbors from the
definition of a publicly traded partnership. Pursuant to one of those safe
harbors (the “private placement exclusion”), interests in a partnership will not
be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all interests in the partnership were issued in a
transaction or transactions that were not required to be registered under the
Securities Act of 1933, as amended, and (ii) the partnership does not have more
than 100 partners at any time during the partnership’s taxable year. In
determining the number of partners in a partnership, a person owning an interest
in a partnership, grantor trust, or S corporation that owns, directly or
indirectly, an interest in the partnership is treated as a partner in such
partnership only if (i) substantially all of the value of the owner’s interest
in the entity is attributable to the entity’s direct or indirect interest in the
partnership and (ii) a principal purpose of the use of the tiered arrangement is
to permit the partnership to satisfy the 100-partner limitation. We believe that
the operating partnership will qualify for the private placement
exclusion.
We do not
intend to request a ruling from the Internal Revenue Service that the operating
partnership will be classified as a partnership for federal income tax purposes.
If for any reason the operating partnership were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, we likely would
not be able to qualify as a REIT. 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 we might incur tax liability without any
related cash distribution. See “—Requirements for Qualification—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. Consequently, the operating
partnership would be required to pay income tax at corporate 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.
State
and Local Taxes
We and/or
our stockholders may be subject to taxation by various states and localities,
including those in which we or a stockholder transacts business, owns property
or resides. The state and local tax treatment may differ from the federal income
tax treatment described above. Consequently, stockholders should consult their
own tax advisors regarding the effect of state and local tax laws upon an
investment in the common stock.
PLAN
OF DISTRIBUTION
The
shares of common stock are being registered to permit their resale by their
holders from time to time after the date of this prospectus. We will not receive
any of the proceeds from the sale by the selling securityholders of the shares
of common stock. We will bear the fees and expenses incurred in connection with
our obligation to register the shares of common stock. However, the selling
securityholders will pay all underwriting fees, discounts or commissions
attributable to the sale of their shares.
The
selling securityholders may offer and sell the shares of common stock from time
to time in one or more transactions at fixed prices, at prevailing market prices
at the time of sale, at varying prices determined at the time of sale or at
negotiated prices. These prices will be determined by the selling securityholder
or by agreement between such holder and underwriters or dealers who may receive
fees or commissions in connection with such sale. Such sales may be effected by
a variety of methods, including the following:
| · |
in
market transactions; |
| · |
in
privately negotiated transactions; |
| · |
through
the writing of options; |
| · |
in
a block trade in which a broker-dealer will attempt to sell a block of
common stock as agent but may position and resell a portion of the block
as principal to facilitate the transaction; |
| · |
through
one or more underwriters on a firm commitment or best-efforts
basis; |
| · |
through
broker-dealers, who may act as agents or
principals; |
| · |
directly
to one or more purchasers; |
| · |
in
any combination of the above or by any other legally available
means. |
In
connection with the sales of the shares of common stock, the selling
securityholders may enter into hedging transactions with broker-dealers, who may
in turn engage in short sales of the shares of common stock, deliver the shares
of common stock to close out such short positions, or loan or pledge the shares
of common stock to broker-dealers that in turn may sell such
shares.
If a
material arrangement with any underwriter, broker, dealer or other agent is
entered into for the sale of any shares of common stock through a secondary
distribution or a purchase by a broker or dealer, or if other material changes
are made in the plan of distribution of the shares of common stock, a prospectus
supplement will be filed, if necessary, under the Securities Act disclosing the
material terms and conditions of such arrangement. The underwriter or
underwriters with respect to an underwritten offering of shares of common stock
and the other material terms and conditions of the underwriting will be set
forth in a prospectus supplement relating to such offering and, if an
underwriting syndicate is used, the managing underwriter or underwriters will be
set forth on the cover of the prospectus supplement. In connection with the sale
of the shares of common stock, underwriters may receive compensation in the form
of underwriting discounts or commissions and may also receive commissions from
purchasers of shares of common stock for whom they may act as agent.
Underwriters may sell to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters or commissions from the purchasers for whom they may act as
agent.
To our
knowledge, there are currently no plans, arrangements or understandings between
any selling securityholders and any underwriter, broker-dealer or agent
regarding the sale of the shares of common stock by the selling securityholders.
Selling securityholders may decide to sell all or a portion of the shares of
common stock offered by them pursuant to this prospectus or may decide not to
sell any shares of common stock under this prospectus. In addition, any selling
securityholder may transfer, devise or give the shares of common stock by other
means not described in this prospectus. Any shares of common stock covered by
this prospectus that qualify for sale pursuant to Rule 144 of the Securities Act
may be sold under Rule 144 rather than pursuant to this prospectus.
The
selling securityholders and any underwriters, broker-dealers or agents
participating in the distribution of the shares of common stock may be deemed to
be “underwriters” within the meaning of the Securities Act, and any profit on
the sale of the shares of common stock by the selling securityholders and any
commissions received by any such underwriters, broker-dealers or agents may be
deemed to be underwriting commissions under the Securities Act. If the selling
securityholders were deemed to be underwriters, the selling securityholders may
be subject to statutory liabilities including, but not limited to, those of
Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange
Act.
The
selling securityholders and any other person participating in the distribution
will be subject to the applicable provisions of the Exchange Act and the rules
and regulations under the Exchange Act, including, without limitation,
Regulation M, which may limit the timing of purchases and sales of any of the
shares of common stock by the selling securityholders and any other relevant
person. Furthermore, Regulation M may restrict the ability of any person engaged
in the distribution of the shares of common stock to engage in market-making
activities with respect to the particular shares of common stock being
distributed. All of the above may affect the marketability of the shares of
common stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of common stock.
Under the
securities laws of certain states, the shares of common stock may be sold in
those states only through registered or licensed brokers or dealers. In
addition, in certain states the shares of common stock may not be sold unless
the shares of common stock have been registered or qualified for sale in the
state or an exemption from registration or qualification is available and
complied with.
We are
registering the resale of the shares of common stock offered by this prospectus
in accordance with the terms of a registration rights agreement we entered into
in connection with our initial public offering. Pursuant to the registration
rights agreement:
| · |
we
have agreed to indemnify the selling securityholders against certain civil
liabilities, including certain liabilities arising under the Securities
Act; |
| · |
the
selling securityholders will indemnify us against certain civil
liabilities, including liabilities arising under the Securities Act; and
|
| · |
we
are permitted to suspend the use of this prospectus under certain
circumstances relating to corporate developments, public filings with the
SEC and similar events. |
LEGAL
MATTERS
The
legality of any securities offered hereby will be passed upon for us by Hunton
& Williams
LLP. In addition, we have based the description of federal income tax
consequences in “Federal Income Tax Consequences of Our Status as a REIT” upon
the opinion of Hunton & Williams
LLP.
EXPERTS
The
consolidated financial statements of Capital Lease Funding, Inc. and
subsidiaries appearing in Capital Lease Funding, Inc. and subsidiaries’ Annual
Report (Form 10-K) for the year ending December 31, 2004 (including schedules
appearing therein), have been audited by Ernst & Young LLP, independent
registered public accounting firm, as set forth in their report thereon,
included therein, and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.