As
filed with the Securities and Exchange Commission on January 14,
2008
Registration
No. 333-
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-3
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
CAPLEASE,
INC.
(Exact
name of Registrant as specified in its Charter)
|
Maryland
(State
or Other Jurisdiction of Incorporation or Organization)
|
52-2414533
(I.R.S.
Employer Identification No.)
|
1065
Avenue of the Americas
New
York, New York 10018
(212) 217-6300
(Address
and telephone number of principal executive offices)
Paul
C. Hughes
Vice
President, General Counsel and Corporate Secretary
CapLease,
Inc.
1065
Avenue of the Americas
New
York, New York 10018
(212) 217-6300
(Name,
address and telephone number of agent for service)
Approximate
date of commencement of proposed sale to the public:
From
time to time after this registration statement becomes effective as determined
by the registrant.
If
the
only securities being registered on this form are being offered pursuant to
dividend or interest reinvestment plans, please check the following
box. o
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. x
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same
offering. o
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
form is a registration statement pursuant to General Instruction I.D. or a
post-effective amendment thereto that shall become effective upon filing with
the Commission pursuant to Rule 462(e) under the Securities Act, check the
following box. o
If
this
form is a post-effective amendment to a registration statement filed pursuant
to
General Instruction I.D. filed to register additional securities or additional
classes of securities pursuant to Rule 413(b) under the Securities Act,
check the following box. o
CALCULATION
OF REGISTRATION FEE
|
Title
of Each Class of
Securities
to be Registered (1)
|
|
Proposed Maximum
Aggregate Offering
Price
Per Unit (1)
|
|
Amount
of
Registration Fee
(1)
|
|
|
Preferred
Stock, par value $0.01 per share
|
|
|
|
|
|
|
|
|
Common
Stock, par value $0.01 per share
|
|
|
|
|
|
|
|
|
Debt
Securities(2)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
500,000,000
|
(3)
|
$
|
19,650
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(4)
|
|
(1)
|
The
securities covered by this Registration Statement may be sold or
otherwise
distributed separately or together with any other securities covered
by
this Registration Statement. This Registration Statement covers offers,
sales and other distributions of the securities listed in this table
from
time to time at prices to be determined, and shares of Common Stock
issuable upon the exchange or conversion of shares of Preferred Stock
or
debt securities so offered or sold that are exchangeable for or
convertible into shares of Common Stock. This Registration Statement
also
covers shares of Preferred Stock, shares of Common Stock and debt
securities that may be offered or sold under delayed delivery contracts
pursuant to which the counterparty may be required to purchase such
securities, as well as such contracts themselves. Such contracts
would be
issued with the shares of Preferred Stock, shares of Common Stock
and debt
securities.
|
|
(2)
|
The
debt securities covered by this Registration Statement may be senior
or
subordinated debt.
|
|
(3)
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The
aggregate maximum offering price of all securities issued under this
Registration Statement will not exceed $500,000,000. No separate
consideration will be received for shares of Common Stock that are
issued
upon exchange or conversion of shares of Preferred Stock or debt
securities.
|
|
(4)
|
Calculated
under Rule 457(o) under the Securities Act of 1933, as amended. Securities
registered under registration statement No. 333-124003, initially
filed by CapLease, Inc. (formerly known as Capital Lease Funding,
Inc.) on
April 11, 2005, having an aggregate offering price of $91,190,337,
remain unsold. Pursuant to Rule 457(p), the unused registration fee
of $10,733 associated with such unsold securities is applied to the
registration fee payable pursuant to this Registration
Statement.
|
The
registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
EXPLANATORY
NOTE
This
registration statement contains three prospectuses. One of these prospectuses,
which we refer to as the base prospectus, covers the offering, issuance and
sale
from time to time, in one or more series or classes of the following
securities:
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·
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shares
of our preferred stock;
|
| |
·
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shares
of our common stock; and
|
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·
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our
debt securities, which may be senior or
subordinated.
|
The
specific terms of any securities to be offered pursuant to the base prospectus
will be specified in a prospectus supplement.
A
second
prospectus, which we refer to as the Brinson Patrick sales agreement prospectus,
covers up to 2,239,100 shares of our common stock that we may offer, issue
and
sell under a sales agreement that we have entered into with Brinson Patrick
Securities Corporation. The Brinson Patrick sales agreement prospectus will
be
identical to the base prospectus in all respects, except that the Brinson
Patrick sales agreement prospectus will contain a different cover page and
a
different plan of distribution section. The cover page and plan of distribution
section to be contained in the Brinson Patrick sales agreement prospectus
are
set forth following the base prospectus included herein.
A
third
prospectus, which we refer to as the Cantor Fitzgerald sales agreement
prospectus, covers up to 2,400,000 shares of our common stock that we may offer,
issue and sell under a sales agreement that we have entered into with Cantor
Fitzgerald & Co. The Cantor Fitzgerald sales agreement prospectus will be
identical to the base prospectus in all respects, except that the Cantor
Fitzgerald sales agreement prospectus will contain a different cover page and
a
different plan of distribution section. The cover page and plan of distribution
section to be contained in the Cantor Fitzgerald sales agreement prospectus
are
set forth following the Brinson Patrick sales agreement prospectus included
herein.
The
information in this prospectus is not complete and may be changed. We may not
issue these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
SUBJECT
TO COMPLETION, DATED JANUARY 14, 2008
PROSPECTUS
$500,000,000
CapLease,
Inc.
Preferred
Stock, Common Stock and Debt Securities
Under
this prospectus, we may offer, from time to time, in one or more series or
classes the following securities:
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·
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shares
of our preferred stock;
|
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·
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shares
of our common stock; and
|
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·
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our
debt securities, which may be senior or
subordinated.
|
We
may
offer these securities with an aggregate offering price of up to $500,000,000,
in amounts, at initial prices and on terms determined at the time of the
offering. We may offer the securities separately or together, in separate series
or classes and in amounts, at prices and on terms described in one or more
supplements to this prospectus.
We
may
also provide you with one or more supplements to this prospectus including
specific terms of the offering. The prospectus supplement may also add, update
or change information contained in this prospectus. You should read this
prospectus and each applicable prospectus supplement carefully before you invest
in the securities.
We
may
offer the securities directly to investors, through agents designated from
time
to time, or to or through underwriters or dealers. If any agents, underwriters,
or dealers are involved in the sale of any of the securities, their names,
and
any applicable purchase price, fee, commission or discount arrangement with,
between or among them, will be set forth, or will be calculable from the
information set forth, in an accompanying prospectus supplement. For more
detailed information, see “Plan
of
Distribution”
beginning on page 52.
Our
common stock and 8.125% Series A Cumulative Redeemable Preferred Stock are
each
listed on the New York Stock Exchange under the symbols “LSE” and “LSE PrA,”
respectively. Each prospectus supplement will indicate if the securities offered
thereby will be listed on any securities exchange.
Our
executive offices are located at 1065 Avenue of the Americas, New York, New
York
10018. Our telephone number is (212) 217-6300. We maintain an Internet web
site
at http://www.caplease.com.
Investing
in these securities involves risks. Before investing in these securities, you
should carefully read and consider the “Risk Factors” beginning on page 1 of
this prospectus and in our periodic reports and other information that we file
from time to time with the Securities and Exchange Commission.
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
TABLE
OF CONTENTS
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RISK
FACTORS
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1
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ABOUT
THIS PROSPECTUS
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2
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WHERE
YOU CAN FIND MORE INFORMATION
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2
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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4
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THE
COMPANY
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5
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USE
OF PROCEEDS
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6
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RATIO
OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES
AND
PREFERRED STOCK DIVIDENDS
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7
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DESCRIPTION
OF COMMON STOCK
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8
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CERTAIN
PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
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10
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PARTNERSHIP
AGREEMENT
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15
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DESCRIPTION
OF PREFERRED STOCK
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19
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RESTRICTIONS
ON OWNERSHIP
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25
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DESCRIPTION
OF DEBT SECURITIES
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28
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FEDERAL
INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT
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33
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OTHER
TAX CONSEQUENCES
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50
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BOOK-ENTRY
SECURITIES
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51
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PLAN
OF DISTRIBUTION
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52
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LEGAL
MATTERS
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53
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EXPERTS
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53
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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. We are offering to sell, and seeking offers
to
buy, only the securities 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 securities covered
hereby.
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 CapLease, Inc. and its predecessors and
subsidiaries.
RISK
FACTORS
Investing
in any securities offered pursuant to this prospectus involves risks. You should
carefully consider the risk factors incorporated by reference to our most recent
Annual Report on Form 10-K and Quarterly Report on Form 10-Q, and the other
information contained in this prospectus and any prospectus supplement, as
the
same may be updated from time to time by our future filings under the Exchange
Act, before acquiring any of such securities. The occurrence of any of these
risks could cause you to lose all or part of your investment in the securities.
Please also refer to the section entitled “Cautionary Statement Regarding
Forward-Looking Statements.”
ABOUT
THIS PROSPECTUS
This
prospectus is part of a registration statement that we filed with the Securities
and Exchange Commission, or SEC, using a “shelf” registration process, which
enables us, from time to time, to offer and sell in one or more offerings the
securities described on the cover page of this prospectus. The aggregate public
offering price of the securities we sell in these offerings will not exceed
$500,000,000. This prospectus contains a general description of the securities
that we may offer. We may also file, from time to time, a prospectus supplement
containing specific information about the terms of the offering. That prospectus
supplement may contain additional risk factors or other special considerations
applicable to the securities. Any prospectus supplement may also add, update
or
change information contained in this prospectus. If there is any supplement,
you
should read the information in that prospectus supplement.
You
should read both this prospectus and any prospectus supplement together with
additional information described below under the heading “Where You Can Find
More Information.” Information filed with the SEC and incorporated by reference
after the date of this prospectus, or information included in any prospectus
supplement or an amendment to the registration statement of which this
prospectus forms a part, may add, update, or change information in this
prospectus or any prospectus supplement. If information in these subsequent
filings, prospectus supplements or amendments is inconsistent with this
prospectus or any prospectus supplement, the information incorporated by
reference or included in the subsequent prospectus supplement or amendment
will
supersede the information in this prospectus or any earlier prospectus
supplement. You should not assume that the information in this prospectus or
any
prospectus supplement is accurate as of any date other than the date on the
front of each document.
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 materials we file with the SEC at the
SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference
Room
by calling the SEC at 1-800-SEC-0330. 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:
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·
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our
Annual Report on Form 10-K for the year ended December 31, 2006 filed
with the SEC on March 7, 2007;
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·
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our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007
filed with the SEC on May 10, 2007, June 30, 2007 filed with the SEC
on August 9, 2007, and September 30, 2007 filed with the SEC on
November 7, 2007;
|
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·
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our
Current Reports on Form 8-K or Form 8-K/A, as the case may be,
filed with the SEC on February 20, 2007, March 16, 2007,
April 19, 2007 (excluding the item 2.02 information and related
exhibit), May 10, 2007, May 29, 2007, July 20, 2007,
July 31, 2007, August 29, 2007, October 9, 2007 (excluding the
item 7.01 information and related exhibit), December 12, 2007 and
December
20, 2007; and
|
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·
|
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 is 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 CapLease, 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 accessing
our Internet web site at http://www.caplease.com or by requesting them
from us in writing or by telephone at:
CapLease,
Inc.
1065
Avenue of the Americas
New
York,
New York 10018
(212)
217-6300
Attn:
Investor Relations
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 Exchange Act, including statements contained
in
our filings with the SEC 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:
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·
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our
ability to make additional investments in a timely manner or on
acceptable
terms;
|
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·
|
our
ability to obtain long-term financing for our asset investments
in a
timely manner and on terms that are consistent with those we project
when
we invest in the asset;
|
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·
|
adverse
changes in the financial condition of the tenants underlying our
investments;
|
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·
|
increases
in our financing costs, our general and administrative costs and/or
our
property expenses;
|
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·
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changes
in our industry, the industries of our tenants, interest rates
or the
general economy;
|
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·
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the
success of our hedging strategy;
|
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·
|
our
ability to raise additional
capital;
|
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·
|
impairments
in the value of the collateral underlying our
investments;
|
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·
|
the
degree and nature of our competition;
and
|
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·
|
the
other factors discussed in this prospectus and the documents incorporated
by reference into this prospectus.
|
In
addition, we may be required to defer revenue recognition on real properties
we
acquire if the property is under construction or is not yet ready for
occupancy.
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.
THE
COMPANY
We
are a
diversified real estate investment trust, or REIT, that invests primarily in
single tenant commercial real estate assets subject to long-term leases to
high
credit quality tenants. We focus on properties that are subject to a net lease,
or a lease that requires the tenant to pay all or substantially all expenses
normally associated with the ownership of the property (such as utilities,
taxes, insurance and routine maintenance) during the lease term. We also are
opportunistic and have made and expect to continue to make investments in single
tenant properties where the owner has exposure to property expenses when we
determine we can sufficiently underwrite that exposure and isolate a predictable
cash flow.
Our
primary business objective is to generate stable, long-term and attractive
returns based on the spread between the yields generated by our assets and
the
cost of financing our portfolio. We invest at all levels of the capital
structure of net lease and other single tenant properties, including equity
investments in real estate (owned real properties), debt investments (mortgage
loans and net lease mortgage backed securities) and mezzanine investments
secured by net leased or other single tenant real estate
collateral.
Our
current portfolio produces stable, high quality cash flows generated by
long-term leases to primarily investment grade tenants. Tenants underlying
our
investments are primarily large public companies or their significant operating
subsidiaries and governmental and quasi-governmental entities with investment
grade credit ratings, defined as a published senior unsecured credit rating
of
BBB-/Baa3 or above from one or both of Standard & Poor’s (“S&P”) and
Moody’s Investors Service (“Moody’s”). We also imply an investment grade credit
rating for tenants that are not publicly rated by S&P or Moody’s but (i) are
100% owned by an investment grade parent, (ii) for which we have obtained a
private investment grade rating from either S&P or Moody’s, or (iii) are
governmental entity branches or units of another investment grade rated
governmental entity.
As
of
September 30, 2007, some of the highlights of our investment portfolio were
as
follows:
| |
·
|
approximately
$2.1 billion total investment portfolio measured by carry value
before
depreciation and amortization;
|
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·
|
78%
owned real properties (approximately $1.7 billion) and 22% primarily
loans
and mortgage securities (approximately $474.3
million);
|
| |
·
|
approximately
90% invested (approximately $1.9 billion) in owned properties and
loans on
properties where the underlying tenant was rated investment grade
or
implied investment grade, and in investment grade rated real estate
securities;
|
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·
|
weighted
average underlying tenant credit rating of A-;
and
|
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·
|
weighted
average underlying tenant remaining lease term of approximately
11
years.
|
USE
OF PROCEEDS
Unless
otherwise provided in any applicable prospectus supplement, we intend to use
the
proceeds from the sale of securities under this prospectus for general corporate
purposes, which may include the funding of future investments, the repayment
of
outstanding indebtedness, working capital and other general
purposes.
RATIO
OF EARNINGS TO FIXED
CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK
DIVIDENDS
The
following table sets forth our ratios of earnings to fixed charges and of
earnings to combined fixed charges and preferred stock dividends for the periods
indicated.
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|
Nine
Months
Ended
|
|
Year
Ended
December
31,
|
|
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|
September 30,
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
Ratio
of earnings to fixed charges
|
|
|
0.98
|
|
|
1.11
|
|
|
1.11
|
|
|
1.48
|
|
|
4.06
|
|
|
1.28
|
|
|
Ratio
of earnings to combined fixed charges and preferred stock
dividends
|
|
|
0.95
|
|
|
1.07
|
|
|
1.09
|
|
|
1.48
|
|
|
4.06
|
|
|
1.28
|
|
We
computed the ratio of earnings to combined fixed charges by dividing earnings
by
fixed charges. We computed the ratio of earnings to combined fixed charges
and
preferred stock dividends by dividing earnings by the sum of fixed charges
and
dividends on our outstanding shares of preferred stock. Earnings have been
calculated by adding fixed charges to net income, and then subtracting
capitalized interest. Fixed charges consist of interest incurred (whether
expensed or capitalized), amortization of loan origination fees and the portion
of rental expense deemed to be the equivalent of interest.
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,
$0.01 par value per share, and 100,000,000 shares of preferred stock, $0.01
par
value per share. 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.
As
of
September 30, 2007, 45,874,720 shares of common stock were issued and
outstanding, 1,400,000 shares of our 8.125% Series A Cumulative Redeemable
Preferred Stock were issued and outstanding, 263,157 shares of common stock
have
been reserved for future issuance upon redemption of units of limited
partnership interest in our operating partnership, 925,755 shares of common
stock have been reserved for future issuance under our 2004 stock incentive
plan
and 3,888,359 shares of common stock have been reserved for future issuance
pursuant to our dividend reinvestment and stock purchase plan.
Voting
Rights
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
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 interests of our common stockholders.
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 interests of our common stockholders.
Restrictions
on Ownership and Transfer
Our
charter provides that no person may beneficially own, actually or
constructively, more than 9.9% in value or in number, whichever is more
restrictive, of our outstanding shares of capital stock, or more than 9.9%
in
value or in number, whichever is more restrictive, of our outstanding shares
of
common stock. See “Restrictions on Ownership.”
Transfer
Agent
The
transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company.
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, nor more than 15, 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:
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any
person who beneficially owns 10% or more of the voting power of our
stock;
or
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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.
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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:
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80%
of the votes entitled to be cast by holders of our then-outstanding
shares
of voting stock; and
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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.
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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:
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one-tenth
or more but less than one-third;
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one-third
or more but less than a majority;
or
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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 Exchange Act, 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:
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a
two-thirds vote requirement for removing a
director;
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a
requirement that the number of directors be fixed only by vote of
the
directors;
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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
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a
majority requirement for the calling of a special meeting of
stockholders.
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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 also (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:
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actual
receipt of an improper benefit or profit in money, property or services;
or
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active
and deliberate dishonesty established by a final judgment and which
is
material to the cause of action.
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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:
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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;
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the
director or officer actually received an improper personal benefit
in
money, property or services; or
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in
a criminal proceeding, the director or officer had reasonable cause
to
believe that the act or omission was
unlawful.
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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:
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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
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a
written undertaking to repay the amount advanced if the standard
of
conduct is not met.
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Insofar
as the above provisions permit indemnification of directors, officers, or
persons controlling us for liability arising under the Securities Act, we have
been informed that in the opinion of the SEC, this indemnification is against
public policy as expressed in the Securities Act, 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:
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pursuant
to our notice of the meeting;
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by
or at the direction of our board of directors;
or
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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.
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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:
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pursuant
to our notice of the meeting;
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by
or at the direction of our board of directors;
or
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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.
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Possible
Anti-Takeover Effect of Certain Provisions of Maryland Law and of Our Charter
and Bylaws
Our
board
or 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 stockholders.
PARTNERSHIP
AGREEMENT
We
conduct a significant portion of our business through our operating partnership,
Caplease, LP. Our operating partnership structure enables us to issue units
of
limited 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
enhances our ability to acquire properties because of the tax advantages to
sellers.
Our
wholly-owned subsidiary is the sole general partner of our operating
partnership. As of September 30, 2007, we owned directly or indirectly
approximately 98.5% and an unaffiliated third party owned approximately 1.5%
of
the limited partnership interests in our operating partnership. This third
party
acquired its limited partnership interest in June 2006 as partial consideration
for the sale of a real property to us. The third party owns 263,157 units of
limited partnership interest which, as described below, are redeemable for
cash
or shares of CapLease, Inc. common stock on a one-for-one basis. We may admit
additional limited partners to the partnership in the future, particularly
in
connection with the acquisition of real estate.
The
following is a summary of the material terms of the amended and restated
agreement of limited partnership of our operating partnership, a copy of which
is filed as an exhibit to the registration statement of which this prospectus
is
a part. See “Where You Can Find More Information.”
Management
As
the
sole general partner of the operating partnership, we 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:
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we
receive the consent of limited partners (other than our company or
its
subsidiaries) holding more than 50% of the partnership interests
of the
limited partners;
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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
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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.
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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
and
the third party limited partner have contributed capital to the operating
partnership in exchange for our partnership interests. 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 provides
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 contribute additional capital to the operating partnership
and receive in exchange additional partnership interests. We may also 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 may contribute
the proceeds of any offering of shares of stock of CapLease, Inc. as additional
capital to the operating partnership. We are 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 has issued to
us
preferred partnership interests that track the rights and obligations of the
preferred stock holders of CapLease, Inc. 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 receive redemption rights,
which 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:
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result
in any person owning, directly or indirectly, shares of common stock
in
excess of the stock ownership limits in our
charter;
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result
in our shares of our common stock being owned by fewer than 100 persons
(determined without reference to any rules of
attribution);
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result
in our being “closely held” within the meaning of section 856(h) of the
Code;
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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
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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.
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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:
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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;
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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
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a
limited partner may not exercise the redemption right more than two
times
annually.
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The
partnership agreement requires 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:
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all
expenses relating to our continuity of existence and our subsidiaries’
operations;
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all
expenses relating to offerings and registration of
securities;
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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;
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all
expenses associated with our compliance with laws, rules and regulations
promulgated by any regulatory body;
and
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all
of our other operating or administrative costs incurred in the ordinary
course of business on behalf of the operating
partnership.
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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 provides 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 perpetual term, or until sooner
dissolved upon:
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our
bankruptcy, dissolution, removal or withdrawal (unless the limited
partners elect to continue the
partnership);
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the
passage of 90 days after the sale or other disposition of all or
substantially all the assets of the
partnership;
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the
redemption of all limited partnership units (other than those held
by us,
if any); or
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an
election by us in our capacity as the general
partner.
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Tax
Matters
Pursuant
to the partnership agreement, we are the tax matters partner of the operating
partnership and have authority to handle tax audits and to make tax elections
under the Code on behalf of the operating partnership.
DESCRIPTION
OF PREFERRED STOCK
We
are
authorized to issue 100,000,000 shares of preferred stock, par value $0.01
per
share. As of the date of this prospectus, 1,610,000 shares have been classified
and designated as 8.125% Series A Cumulative Redeemable Preferred Stock, of
which 1,400,000 are outstanding. As of the date of this prospectus, there are
currently no other classes or series of preferred stock authorized.
The
following description sets forth certain general terms and provisions of the
preferred stock to which any prospectus supplement may relate. This description
and the description contained in any prospectus supplement are not complete
and
are in all respects subject to and qualified in their entirety by reference
to
our charter, the applicable articles supplementary describing the terms of
the
related class or series of preferred stock, and our bylaws, each of which we
have filed or will file with the SEC.
General
Subject
to the limitations prescribed by Maryland law and our charter and bylaws, our
board of directors is authorized to establish the number of shares constituting
each series of preferred stock and to designate and issue, from time to time,
one or more classes or series of preferred stock with the designations and
powers, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof, including such
provisions as may be desired concerning voting, redemption, dividends,
dissolution or the distribution of assets, conversion or exchange, and such
other subjects or matters as may be fixed by resolution of the board of
directors or duly authorized committee thereof. The preferred stock will, when
issued, be fully paid and nonassessable and will not have, or be subject to,
any
preemptive or similar rights.
The
prospectus supplement relating to the class or series of preferred stock being
offered thereby will describe the specific terms of such securities,
including:
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the
title and stated value of such preferred
stock;
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the
number of shares of such preferred stock offered, the liquidation
preference per share and the offering price of such preferred
stock;
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the
dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such preferred
stock;
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whether
dividends shall be cumulative or non-cumulative and, if cumulative,
the
date from which dividends on such preferred stock shall
accumulate;
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the
procedures for any auction and remarketing, if any, for such preferred
stock;
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the
provisions for a sinking fund, if any, for such preferred
stock;
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the
provisions for redemption, if applicable, of such preferred
stock;
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any
listing of such preferred stock on any securities
exchange;
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the
terms and conditions, if applicable, upon which such preferred stock
will
be convertible into our common stock, including the conversion price
(or
manner of calculation thereof) and conversion
period;
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any
voting rights of such preferred
stock;
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a
discussion of any material U.S. federal income tax considerations
applicable to such preferred stock;
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the
relative ranking and preferences of such preferred stock as to dividend
rights and rights upon our liquidation, dissolution or winding
up;
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any
limitations on issuance of any class or series of preferred stock
ranking
senior to or on a parity with such class or series of preferred stock
as
to dividend rights and rights upon our liquidation, dissolution or
winding
up;
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any
other limitations on actual and constructive ownership and restrictions
on
transfer, in each case as may be appropriate to preserve our status
as a
REIT; and
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any
other specific terms, preferences, rights, limitations or restrictions
of
such preferred stock.
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Rank
Unless
otherwise specified in the prospectus supplement relating to a particular class
or series of preferred stock, the preferred stock will, with respect to dividend
rights and rights upon our liquidation, dissolution or winding up,
rank:
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senior
to all classes or series of our common stock, and to all equity securities
ranking junior to such preferred
stock;
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on
a parity with all equity securities issued by us, the terms of which
specifically provide that such equity securities rank on a parity
with the
preferred stock; and
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junior
to all equity securities issued by us, the terms of which specifically
provide that such equity securities rank senior to the preferred
stock.
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As
used
for these purposes, the term “equity securities” does not include convertible
debt securities.
Dividends
Unless
otherwise specified in the prospectus supplement, the preferred stock will
have
the rights with respect to payment of dividends set forth below.
Subject
to the preferential rights of the holders of any class or series of our capital
stock ranking senior to the preferred stock as to dividends, holders of shares
of each class or series of preferred stock shall be entitled to receive, when,
as and if declared and authorized by our board of directors, out of assets
legally available for payment, cash dividends at such rates and on such dates
as
will be set forth in the applicable prospectus supplement. Each such dividend
will be payable to holders of record as they appear on our stock transfer books
on such record dates as are fixed by our board of directors.
Dividends
on any class or series of the preferred stock may be cumulative or
non-cumulative, as provided in the applicable prospectus supplement. Dividends,
if cumulative, will accumulate from and after the date set forth in the
applicable prospectus supplement. If our board of directors fails to declare
a
dividend payable on a dividend payment date on any class or series of preferred
stock for which dividends are non-cumulative, then the holders of such class
or
series of preferred stock will have no right to receive a dividend in respect
of
the dividend period ending on such dividend payment date, and we will have
no
obligation to pay the dividend accrued for such period, whether or not dividends
on such class or series of preferred stock are declared payable on any future
dividend payment date.
Unless
otherwise specified in the applicable prospectus supplement, if any shares
of
any class or series of preferred stock are outstanding, we generally may not
declare, pay or set apart for payment full dividends on any of our capital
stock
of any other class or series ranking, as to dividends, on a parity with or
junior to such class or series of preferred stock for any period
unless:
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if
such class or series of preferred stock has a cumulative dividend,
full
cumulative dividends have been or contemporaneously are declared
and paid
or declared and a sum sufficient for the payment thereof irrevocably
set
apart for such payment on such class or series of preferred stock
for all
past dividend periods and the then current dividend period;
or
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if
such class or series of preferred stock does not have a cumulative
dividend, full dividends for the then current dividend period have
been or
contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof irrevocably set apart for such payment on
such
class or series of preferred stock.
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When
dividends are not paid in full (or a sum sufficient for such full payment is
not
so irrevocably set apart) upon the shares of preferred stock of any class or
series and the shares of any other class or series of preferred stock ranking
on
a parity as to dividends with the preferred stock of such class or series,
all
dividends declared upon shares of such class or series of preferred stock and
any other class or series of preferred stock ranking on a parity as to dividends
with such preferred stock will be declared pro rata so that the amount of
dividends declared per share on the preferred stock of such class or series
and
such other class or series of preferred stock will in all cases bear to each
other the same ratio that accrued and unpaid dividends per share on the shares
of preferred stock of such class or series (which shall not include any
accumulation in respect of unpaid dividends for prior dividend periods if such
preferred stock does not have a cumulative dividend) and such other class or
series of preferred stock bear to each other. No interest, or sum of money
in
lieu of interest, will be payable in respect of any dividend payment or payments
on shares of preferred stock which may be in arrears.
Except
as
provided in the immediately preceding paragraph, unless
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if
such class or series of preferred stock has a cumulative dividend,
full
cumulative dividends on such class or series of preferred stock have
been
or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof irrevocably set apart for payment
for
all past dividend periods and the then current dividend period,
and
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if
such series of preferred stock does not have a cumulative dividend,
full
dividends on the preferred stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof irrevocably set apart for payment for the
then
current dividend period,
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no
dividends (other than in common stock or other capital stock ranking junior
to
such class or series of preferred stock as to dividends and upon our
liquidation, dissolution or winding up) may be declared or paid or set aside
for
payment or other distribution may be declared or made upon our common stock
or
any other of our capital stock ranking junior to or on a parity with such class
or series of preferred stock as to dividends or upon our liquidation,
dissolution or winding up, and no common stock or any other of our capital
stock
ranking junior to or on a parity with such class or series of preferred stock
as
to dividends or upon liquidation, dissolution or winding up may be redeemed,
purchased or otherwise acquired for any consideration (or any moneys be paid
to
or made available for a sinking fund for the redemption of any shares of any
such stock) by us (except by conversion into or exchange for our other capital
stock ranking junior to such class or series of preferred stock as to dividends
and upon our liquidation, dissolution or winding up, and except for a redemption
or purchase or other acquisition of shares of our common stock made for purposes
of an employee benefit plan of the Company or any subsidiary or as provided
for
under our charter to protect our status as a REIT).
Any
dividend payment made on shares of a class or series of preferred stock will
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such class or series which remains payable.
Redemption
If
so
provided in the applicable prospectus supplement, the shares of preferred stock
will be subject to mandatory redemption or redemption at our option, in whole
or
in part, in each case upon the terms, at the times and at the redemption prices
set forth in such prospectus supplement.
The
prospectus supplement relating to a class or series of preferred stock that
is
subject to mandatory redemption will specify:
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the
number of shares of preferred stock that we will
redeem;
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the
dates on or the period during which we will redeem the shares;
and
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the
redemption price that we will pay per share, together with an amount
equal
to all accrued and unpaid dividends thereon (which shall not, if
such
preferred stock does not have a cumulative dividend, include any
accumulation in respect of unpaid dividends for prior dividend periods)
to
the date of redemption.
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The
redemption price may be payable in cash or other property, as described in
the
applicable prospectus supplement. If the redemption price for any class or
series of preferred stock is payable only from the net proceeds of the issuance
of our capital stock, the terms of such preferred stock may provide that, if
no
such capital stock was issued or to the extent the net proceeds from any
issuance are insufficient to pay in full the aggregate redemption price then
due, such preferred stock will automatically and mandatorily be converted into
shares of our applicable capital stock pursuant to conversion provisions
specified in the applicable prospectus supplement.
Notwithstanding
the foregoing, unless
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if
such class or series of preferred stock has a cumulative dividend,
full
cumulative dividends on all shares of any class or series of preferred
stock shall have been or contemporaneously are declared and paid
or
declared and a sum sufficient for the payment thereof irrevocably
set
apart for payment for all past dividend periods and the then current
dividend period, and
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if
such class or series of preferred stock does not have a cumulative
dividend, full dividends on the preferred stock of any series have
been or
contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof irrevocably set apart for payment for the
then
current dividend period,
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no
shares
of any class or series of preferred stock shall be redeemed unless all
outstanding shares of such class or series of preferred stock are simultaneously
redeemed; provided, however, that the foregoing shall not prevent the purchase
or acquisition of shares of such class or series of preferred stock pursuant
to
a purchase or exchange offer made on the same terms to holders of all
outstanding shares of such class or series of preferred stock.
In
addition, unless
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if
such class or series of preferred stock has a cumulative dividend,
full
cumulative dividends on all shares of any class or series of preferred
stock have been or contemporaneously are declared and paid or declared
and
a sum sufficient for the payment thereof irrevocably set apart for
payment
for all past dividend periods and the then current dividend period,
and
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if
such class or series of preferred stock does not have a cumulative
dividend, full dividends on the preferred stock of any class or series
have been or contemporaneously are declared and paid or declared
and a sum
sufficient for the payment thereof irrevocably set apart for payment
for
the then current dividend period,
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we
will
not purchase or otherwise acquire directly or indirectly any shares of preferred
stock of such class or series (except by conversion into or exchange for our
capital stock ranking junior to such class or series of preferred stock as
to
dividends and upon our liquidation, dissolution or winding up).
If
fewer
than all of the outstanding shares of preferred stock of any class or series
are
to be redeemed, we will determine the number of shares to be redeemed and such
shares may be redeemed pro rata from the holders of record of such shares in
proportion to the number of such shares held by such holders (with adjustments
to avoid redemption of fractional shares) or any other equitable method
determined by us that will not result in violation of the ownership limitations
set forth in our charter.
Notice
of
redemption will be mailed at least 30 days but not more than 60 days before
the
redemption date to each holder of record of a share of preferred stock of any
class or series to be redeemed at the address shown on our stock transfer books.
Each notice of redemption will state:
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the
number of shares and class or series of the preferred stock to be
redeemed;
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the
place or places where certificates for such preferred stock are to
be
surrendered for payment of the redemption
price;
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that
dividends on the shares to be redeemed will cease to accrue on such
redemption date; and
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the
date upon which the holder’s conversion rights, if any, as to such shares
will terminate.
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If
fewer
than all the shares of preferred stock of any class or series are to be
redeemed, the notice of redemption will also specify the number of shares of
preferred stock to be redeemed from each holder. If notice of redemption of
any
shares of preferred stock has been given and if the funds necessary for such
redemption have been irrevocably set apart by us in trust for the benefit of
the
holders of any shares of preferred stock so called for redemption, then from
and
after the redemption date dividends will cease to accrue on such shares of
preferred stock, such shares of preferred stock will no longer be deemed
outstanding and all rights of the holders of such shares will terminate, except
the right to receive the redemption price.
Any
shares of preferred stock that we redeem or repurchase will be retired and
restored to the status of authorized but unissued shares of preferred
stock.
Liquidation
Preference
Upon
any
voluntary or involuntary liquidation, dissolution or winding up of our affairs,
then, before any distribution or payment may be made to the holders of any
common stock or any other class or series of our capital stock ranking junior
to
the preferred stock in the distribution of assets upon our liquidation,
dissolution or winding up, the holders of each class or series of preferred
stock will be entitled to receive out of our assets legally available for
distribution to stockholders liquidating distributions in the amount of the
liquidation preference per share (set forth in the applicable prospectus
supplement and articles supplementary), plus an amount equal to all dividends
accrued and unpaid thereon (which will not include any accumulation in respect
of unpaid dividends for prior dividend periods if such preferred stock does
not
have a cumulative dividend). After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of preferred stock will
have no right or claim to any of our remaining assets. In the event that, upon
any such voluntary or involuntary liquidation, dissolution or winding up, our
legally available assets are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of preferred stock and the corresponding
amounts payable on all shares of other classes or series of our capital stock
ranking on a parity with the preferred stock in the distribution of assets
upon
our liquidation, dissolution or winding up, then the holders of the preferred
stock and all other such classes or series of capital stock will share ratably
in any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively
entitled.
After
liquidating distributions have been made in full to all holders of shares of
preferred stock, our remaining assets will be distributed among the holders
of
any other classes or series of capital stock ranking junior to the preferred
stock upon liquidation, dissolution or winding up, according to their respective
rights and preferences and in each case according to their respective number
of
shares. For such purposes, our consolidation or merger with or into any other
corporation, or the sale, lease, transfer or conveyance of all or substantially
all of our property or business, will not be deemed to constitute our
liquidation, dissolution or winding up.
Voting
Rights
Holders
of our preferred stock generally will not have any voting rights, except as
otherwise required by law from time to time or as indicated in the applicable
prospectus supplement.
Conversion
Rights
The
terms
and conditions, if any, upon which shares of any class or series of preferred
stock are convertible into our common stock will be set forth in the applicable
prospectus supplement relating thereto. Such terms will include the number
of
shares of common stock into which the preferred stock is convertible, the
conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of
the
preferred stock or at our option, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such preferred stock.
Restrictions
on Ownership
Our
charter provides that no person may beneficially own, actually or
constructively, more than 9.9% in value or in number, whichever is more
restrictive, of our outstanding shares of capital stock. See “Restrictions on
Ownership.”
Transfer
Agent
The
registrar and transfer agent for a particular series of preferred stock will
be
set forth in the applicable prospectus supplement.
Description
of Series A Preferred Stock
Our
board
of directors has adopted articles supplementary to our charter establishing
the
number and fixing the terms, designations, powers, preferences, rights,
limitations and restrictions of a series of preferred stock designated the
8.125% Series A Cumulative Redeemable Preferred Stock. The Series A Preferred
Stock is listed on the New York Stock Exchange.
Rank.
The
Series A Preferred Stock ranks senior to our common stock and future junior
securities, equal with future parity securities and junior to future senior
securities and to all our existing and future indebtedness, with respect to
the
payment of dividends and the distribution of amounts upon liquidation,
dissolution or winding up.
Dividends.
Holders
of the Series A Preferred Stock are entitled to receive cumulative cash
distributions at a rate of 8.125% per annum of the $25.00 liquidation preference
(equivalent to $2.03125 per annum per share). However, if the Series A Preferred
Stock is delisted from the New York Stock Exchange following a “change of
control,” holders of the Series A Preferred Stock will be entitled to receive
cumulative cash dividends at a rate of 9.125% per annum of the $25.00
liquidation preference (equivalent to $2.28125 per annum per share). Dividends
are payable quarterly on or about the 15th
day of
each January, April, July and October.
Redemption.
We may
not redeem the Series A Preferred Stock prior to October 19, 2010, except in
certain limited circumstances relating to the ownership limitation necessary
to
preserve our qualification as a REIT. On and after October 19, 2010, we may
redeem the Series A Preferred Stock for cash at our option, in whole or from
time to time in part, at a redemption price of $25.00 per share, plus accrued
and unpaid dividends (whether or not declared) to the redemption
date.
Maturity.
The
Series A Preferred Stock does not have any stated maturity date and is not
subject to any sinking fund or mandatory redemption provisions.
Liquidation
Preference.
If we
liquidate, dissolve or wind up our operations, the holders of the Series A
Preferred Stock will have the right to receive $25.00 per share, plus all
accrued and unpaid dividends (whether or not declared) to the date of payment,
before any payment is made to the holders of our common stock and any other
of
our equity securities ranking junior to the Series A Preferred Stock. The rights
of the holders of the Series A Preferred Stock to receive the liquidation
preference will be subject to the rights of holders of our debt, holders of
any
equity securities senior in liquidation preference to the Series A Preferred
Stock and the proportionate rights of holders of each other series or class
of
our equity securities ranked on a parity with the Series A Preferred
Stock.
Voting
Rights.
Holders
of our Series A Preferred Stock generally will have no voting rights. However,
if we do not pay dividends on the Series A Preferred Stock for six or more
quarterly periods (whether or not consecutive), the holders of the shares
(voting together as a single class with all other shares of any class or series
of shares ranking on a parity with the Series A Preferred Stock which are
entitled to similar voting rights, if any) will be entitled to vote for the
election of two additional directors to serve on our board of directors until
all dividends in arrears on outstanding shares of Series A Preferred Stock
have
been paid or declared and set apart for payment. In addition, the issuance
of
future senior equity securities or certain changes to the terms of the Series
A
Preferred Stock that would be materially adverse to the rights of holders of
Series A Preferred Stock cannot be made without the affirmative vote of holders
of two-thirds of the outstanding Series A Preferred Stock and shares of any
class or series of shares ranking on a parity with the Series A Preferred Stock
which are entitled to similar voting rights, if any, voting as a single class.
Conversion
Rights.
The
Series A Preferred Stock is not convertible into or exchangeable for any of
our
other securities or property.
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
or persons acting as a group may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.9% in value or in number,
whichever is more restrictive, of our outstanding shares of capital stock (the
“Aggregate Stock Ownership Limit”). 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:
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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;
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any
transfer of shares of our stock if that would result in our stock
being
beneficially owned by fewer than 100 persons;
and
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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).
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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 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.
Our
board
of directors has 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:
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rescind
as void any vote cast by a Prohibited Owner prior to our discovery
that
such shares have been transferred to the trustee;
and
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recast
such vote in accordance with the desires of the trustee acting for
the
benefit of the trust’s beneficiary.
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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:
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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
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the
price per share received by the trustee from the sale or other disposition
of the shares held in the charitable
trust.
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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:
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such
shares will be deemed to have been sold on behalf of the charitable
trust;
and
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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.
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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:
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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
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the
market price on the date we, or our designee, accept such
offer.
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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.
DESCRIPTION
OF DEBT SECURITIES
The
following description, together with the additional information we include
in
any applicable prospectus supplements, summarizes the material terms and
provisions of the debt securities that we may offer under this prospectus.
While
the terms we have summarized below will apply generally to any future debt
securities we may offer, we will describe the particular terms of any debt
securities that we may offer in more detail in the applicable prospectus
supplement. The terms of any debt securities we offer under that prospectus
supplement may differ from the terms we describe below.
The
debt
securities will be our direct unsecured general obligations and may include
debentures, notes, bonds or other evidences of indebtedness. The debt securities
will be either senior debt securities or subordinated debt securities. The
debt
securities will be issued under one or more separate indentures. Senior debt
securities will be issued under a senior indenture, and subordinated debt
securities will be issued under a subordinated indenture. We use the term
“indentures” to refer to both the senior indenture and the subordinated
indenture. A form of each of the senior indenture and the subordinated indenture
is filed as an exhibit to the registration statement of which this prospectus
is
a part. The indentures will be qualified under the Trust Indenture Act. We
use
the term “indenture trustee” to refer to either the senior trustee or the
subordinated trustee, as applicable.
The
following summaries of material provisions of the debt securities and indentures
are subject to, and qualified in their entirety by reference to, all the
provisions of the indenture applicable to a particular series of debt
securities.
General
We
will
describe in each prospectus supplement the following terms relating to a series
of debt securities:
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the
title or designation;
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any
limit on the principal amount that may be
issued;
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whether
or not we will issue the series of debt securities in global form,
the
terms and the depository;
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the
annual interest rate, which may be fixed or variable, or the method
for
determining the rate and the date interest will begin to accrue,
the dates
interest will be payable and the regular record dates for interest
payment
dates or the method for determining such
dates;
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whether
or not the debt securities will be secured or unsecured, and the
terms of
any secured debt;
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the
terms of the subordination of any series of subordinated
debt;
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the
place where payments will be
payable;
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our
right, if any, to defer payment of interest and the maximum length
of any
such deferral period;
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the
date, if any, after which, and the price at which, we may, at our
option,
redeem the series of debt securities pursuant to any optional redemption
provisions;
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the
date, if any, on which, and the price at which we are obligated,
pursuant
to any mandatory sinking fund provisions or otherwise, to redeem,
or at
the holder’s option to purchase, the series of debt
securities;
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whether
the indenture will restrict our ability to pay dividends, or will
require
us to maintain any asset ratios or
reserves;
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whether
we will be restricted from incurring any additional
indebtedness;
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a
discussion on any material or special U.S. federal income tax
considerations applicable to the debt
securities;
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the
denominations in which we will issue the series of debt securities,
if
other than denominations of $1,000 and any integral multiple thereof;
and
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any
other specific terms, preferences, rights or limitations of, or
restrictions on, the debt
securities.
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Conversion
or Exchange Rights
We
will
set forth in the prospectus supplement the terms on which a series of debt
securities may be convertible into or exchangeable for common stock or other
securities. We will include provisions as to whether conversion or exchange
is
mandatory, at the option of the holder or at our option. We may include
provisions pursuant to which the number of shares of common stock or other
securities that the holders of the series of debt securities receive would
be
subject to adjustment.
Consolidation,
Merger or Sale
The
indentures will not contain any covenant which restricts our ability to merge
or
consolidate, or sell, convey, transfer or otherwise dispose of all or
substantially all of our assets. However, any successor to or acquirer of our
assets must assume all of our obligations under the indentures or the debt
securities, as appropriate.
Events
of Default Under the Indenture
The
following will be events of default under the indentures with respect to any
series of debt securities that we may issue:
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if
we fail to pay interest when due and our failure continues for a
number of
days to be stated in the indenture and the time for payment has not
been
extended or deferred;
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if
we fail to pay the principal, or premium, if any, when due and the
time
for payment has not been extended or
delayed;
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if
we fail to observe or perform any other covenant contained in the
debt
securities or the indentures, other than a covenant specifically
relating
to another series of debt securities, and our failure continues for
a
number of days to be stated in the indenture after we receive notice
from
the indenture trustee or holders of at least 25% in aggregate principal
amount of the outstanding debt securities of the applicable series;
and
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if
specified events of bankruptcy, insolvency or reorganization occur
as to
us.
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If
an
event of default with respect to debt securities of any series occurs and is
continuing, the indenture trustee or the holders of at least 25% in aggregate
principal amount of the outstanding debt securities of that series, by notice
to
us in writing, and to the indenture trustee if notice is given by such holders,
may declare the unpaid principal of, premium, if any, and accrued interest,
if
any, due and payable immediately.
The
holders of a majority in principal amount of the outstanding debt securities
of
an affected series may waive any default or event of default with respect to
the
series and its consequences, except defaults or events of default regarding
payment of principal, premium, if any, or interest, unless we have cured the
default or event of default in accordance with the indenture. Any waiver will
cure the default or event of default.
Subject
to the terms of the indentures, if an event of default under an indenture occurs
and is continuing, the indenture trustee will be under no obligation to exercise
any of its rights or powers under such indenture at the request or direction
of
any of the holders of the applicable series of debt securities, unless such
holders have offered the indenture trustee reasonable indemnity. The holders
of
a majority in principal amount of the outstanding debt securities of any series
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the indenture trustee, or exercising
any
trust or power conferred on the indenture trustee, with respect to the debt
securities of that series, provided that:
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the
direction given by the holder is not in conflict with any law or
the
applicable indenture; and
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subject
to its duties under the Trust Indenture Act, the indenture trustee
need
not take any action that might involve it in personal liability or
might
be unduly prejudicial to the holders not involved in the
proceeding.
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A
holder
of the debt securities of any series will only have the right to institute
a
proceeding under the indentures or to appoint a receiver or trustee, or to
seek
other remedies if:
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·
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the
holder has given written notice to the indenture trustee of a continuing
event of default with respect to that
series;
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the
holders of at least 25% in aggregate principal amount of the outstanding
debt securities of that series have made written request, and such
holders
have offered reasonable indemnity to the indenture trustee to institute
the proceeding as trustee; and
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the
indenture trustee does not institute the proceeding, and does not
receive
from the holders of a majority in aggregate principal amount of the
outstanding debt securities of that series other conflicting directions
within 60 days after the notice, request and
offer.
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These
limitations do not apply to a suit instituted by a holder of debt securities
if
we default in the payment of the principal, premium, if any, or interest on,
the
debt securities.
We
will
periodically file statements with the indenture trustee regarding our compliance
with specified covenants in the indentures.
Modification
of Indenture; Waiver
We
and
the indenture trustee may change an indenture without the consent of any holders
with respect to specific matters, including:
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to
fix any ambiguity, defect or inconsistency in the indenture;
and
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to
change anything that does not materially adversely affect the interests
of
any holder of debt securities of any
series.
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In
addition, under the indentures, the rights of holders of a series of debt
securities may be changed by us and the indenture trustee with the written
consent of the holders of at least a majority in aggregate principal amount
of
the outstanding debt securities of each series that is affected. However, we
and
the indenture trustee may only make the following changes with the consent
of
each holder of any outstanding debt securities affected:
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extending
the fixed maturity of the series of debt
securities;
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reducing
the principal amount, reducing the rate of or extending the time
of
payment of interest, or any premium payable upon the redemption of
any
debt securities; or
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reducing
the percentage of debt securities, the holders of which are required
to
consent to any amendment.
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Discharge
Each
indenture provides that we can elect to be discharged from our obligations
with
respect to one or more series of debt securities, except for obligations
to:
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register
the transfer or exchange of debt securities of the
series;
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replace
stolen, lost or mutilated debt securities of the
series;
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maintain
paying agencies;
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hold
monies for payment in trust;
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compensate
and indemnify the indenture trustee;
and
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appoint
any successor indenture trustee.
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In
order
to exercise our rights to be discharged, we must deposit with the indenture
trustee money or government obligations sufficient to pay all the principal
of,
any premium, if any, and interest on, the debt securities of the series on
the
dates payments are due.
Form,
Exchange and Transfer
We
will
issue the debt securities of each series only in fully registered form without
coupons and, unless we otherwise specify in the applicable prospectus
supplement, in denominations of $1,000 and any integral multiple thereof. The
indentures provide that we may issue debt securities of a series in temporary
or
permanent global form and as book-entry securities that will be deposited with,
or on behalf of, The Depository Trust Company or another depository named by
us
and identified in a prospectus supplement with respect to that series. See
“Book-Entry Securities” for a further description of the terms relating to any
book-entry securities.
Subject
to the terms of the indentures and the limitations applicable to global
securities described in the applicable prospectus supplement, the holder of
the
debt securities of any series, at its option, can exchange the debt securities
for other debt securities of the same series, in any authorized denomination
and
of like tenor and aggregate principal amount.
Subject
to the terms of the indentures and the limitations applicable to global
securities set forth in the applicable prospectus supplement, holders of the
debt securities may present the debt securities for exchange or for registration
of transfer, duly endorsed or with the form of transfer endorsed thereon duly
executed if so required by us or the security registrar, at the office of the
security registrar or at the office of any transfer agent designated by us
for
this purpose. Unless otherwise provided in the debt securities that the holder
presents for transfer or exchange, no service charge will be required for any
registration of transfer or exchange, but we may require payment of any taxes
or
other governmental charges.
We
will
name in the applicable prospectus supplement the security registrar, and any
transfer agent in addition to the security registrar, that we initially
designate for any debt securities. We may at any time designate additional
transfer agents or rescind the designation of any transfer agent or approve
a
change in the office through which any transfer agent acts, except that we
will
be required to maintain a transfer agent in each place of payment for the debt
securities of each series.
If
we
elect to redeem the debt securities of any series, we will not be required
to:
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issue,
register the transfer of, or exchange any debt securities of that
series
during a period beginning at the opening of business 15 days before
the
day of mailing of a notice of redemption of any debt securities that
may
be selected for redemption and ending at the close of business on
the day
of the mailing; or
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register
the transfer of or exchange any debt securities so selected for
redemption, in whole or in part, except the unredeemed portion of
any debt
securities we are redeeming in
part.
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Information
Concerning the Indenture Trustee
The
indenture trustee, other than during the occurrence and continuance of an event
of default under an indenture, undertakes to perform only those duties as are
specifically set forth in the applicable indenture. Upon an event of default
under an indenture, the indenture trustee must use the same degree of care
as a
prudent person would exercise or use in the conduct of his or her own affairs.
Subject to this provision, the indenture trustee is under no obligation to
exercise any of the powers given it by the indentures at the request of any
holder of debt securities unless it is offered reasonable security and indemnity
against the costs, expenses and liabilities that it might incur.
Payment
and Paying Agents
Unless
we
otherwise indicate in the applicable prospectus supplement, we will make payment
of the interest on any debt securities on any interest payment date to the
person in whose name the debt securities, or one or more predecessor securities,
are registered at the close of business on the regular record date for the
interest.
We
will
pay principal of and any premium and interest on the debt securities of a
particular series at the office of the paying agents designated by us, except
that unless we otherwise indicate in the applicable prospectus supplement,
we
will make interest payments by check which we will mail to the holder. Unless
we
otherwise indicate in a prospectus supplement, we will designate the corporate
trust office of the indenture trustee in the City of New York as our sole paying
agent for payments with respect to debt securities of each series. We will
name
in the applicable prospectus supplement any other paying agents that we
initially designate for the debt securities of a particular series. We will
maintain a paying agent in each place of payment for the debt securities of
a
particular series.
All
money
we pay to a paying agent or the indenture trustee for the payment of the
principal of or any premium or interest on any debt securities which remains
unclaimed at the end of two years after such principal, premium or interest
has
become due and payable will be repaid to us, and the holder of the security
thereafter may look only to us for payment thereof.
Governing
Law
The
indentures and the debt securities will be governed by and construed in
accordance with the laws of the State of New York, except to the extent that
the
Trust Indenture Act is applicable.
Subordination
of Subordinated Notes
The
subordinated notes will be unsecured and will be subordinate and junior in
priority of payment to certain of our other indebtedness to the extent described
in a prospectus supplement. The subordinated indenture does not limit the amount
of subordinated notes which we may issue. It also does not limit us from issuing
any other secured or unsecured debt.
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
securities, may consider relevant. The discussion in this section does not
purport to be a complete analysis of all the potential tax considerations
relating to our securities or our taxation as a REIT. This section is based
on
the Internal Revenue Code of 1986, as amended (the “Code”), current, temporary
and proposed Treasury regulations promulgated thereunder, current administrative
interpretations and practices of the Internal Revenue Service (“IRS”), and
judicial decisions now in effect, all of which are subject to change (possibly
with retroactive effect) or to different interpretations.
We
have
not requested, and do not plan to request, any rulings from the IRS concerning
the tax treatment with respect to matters contained in this discussion, and
the
statements in this prospectus are not binding on the IRS or any court. Thus,
we
can provide no assurance that the tax considerations contained in this summary
will not be challenged by the IRS or will be sustained by a court if challenged
by the IRS.
This
summary of certain U.S. federal income tax consequences applies to you if hold
our securities as a “capital asset” (generally, property held for investment
within the meaning of Section 1221 of the Code). Because this discussion is
only
a summary, it may not contain all the information that may be important to
you.
As you review this discussion, you should keep in mind that:
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the
tax consequences to you may vary depending on your particular tax
situation;
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special
rules that are not discussed below may apply to you if, for example,
you
are a tax-exempt organization, a broker-dealer, a trust, an estate,
a
cooperative, a regulated investment company, a financial institution,
an
insurance company, a partnership or other pass-through entity (or
a
partner or member thereof) that holds our notes or shares, or are
otherwise subject to special tax treatment under the Code;
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this
summary does not address state, local or non-U.S. tax considerations;
and
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this
discussion is not intended to be, and should not be construed as
tax
advice.
|
We
urge you to consult your own tax advisor regarding the specific tax consequences
to you of ownership of our securities 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
elected to be taxed as a REIT under the federal income tax laws commencing
with
our short taxable year ended on December 31, 2004. We believe that, commencing
with such short taxable year, we were organized and have operated 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.
In
the
opinion of Hunton & Williams LLP, we qualified to be taxed as a REIT under
the federal income tax laws for our taxable years ended December 31, 2004
through December 31, 2006, and our current and proposed method of operation
will
enable us to continue to meet the requirements for qualification and taxation
as
a REIT under the federal income tax laws for our taxable year ended December
31,
2007 and in the future. Investors should be aware that Hunton & Williams
LLP’s opinion is based upon customary assumptions, is conditioned upon certain
representations made by us as to factual matters, including representations
regarding the nature of our assets and the conduct of our business, and is
not
binding upon the IRS or any court. In addition, Hunton & Williams LLP’s
opinion is based on existing federal income tax law governing qualification
as a
REIT, which is subject to change either prospectively or retroactively.
Moreover, our qualification and taxation as a REIT depend upon our ability
to
meet on a continuing basis, through actual annual operating results, certain
qualification tests set forth in the federal tax laws. Those qualification
tests
involve the percentage of income that we earn from specified sources, the
percentage of our assets that falls within specified categories, the diversity
of our stock ownership, and the percentage of our earnings that we distribute.
Hunton & Williams LLP will not review our compliance with those tests on a
continuing basis. Accordingly, no assurance can be given that our actual results
of operations for any particular taxable year will satisfy such requirements.
For a discussion of the tax consequences of our failure to qualify as a REIT,
see “Federal Income Tax Consequences of Our Status as a REIT—Failure to Qualify”
below.
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:
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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.
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We
may be subject to the “alternative minimum tax” on items of tax
preference.
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·
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We
will pay income tax at the highest corporate rate
on:
|
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·
|
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
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other
non-qualifying income from foreclosure
property.
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·
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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.
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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:
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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
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·
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a
fraction intended to reflect our
profitability.
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·
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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.
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·
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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.
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·
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If
we fail to distribute during a calendar year at least the sum
of:
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·
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85%
of our REIT ordinary income for the calendar
year,
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·
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95%
of our REIT capital gain net income for the calendar year,
and
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·
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any
undistributed income required to be distributed from earlier
periods,
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we
will
pay a 4% nondeductible excise tax on the excess of the required distribution
over the amount we actually distributed.
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·
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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.
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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.
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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:
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·
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the
amount of gain that we recognize at the time of the sale or disposition,
and
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·
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the
amount of gain that we would have recognized if we had sold the asset
at
the time we acquired it.
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If
we own a residual interest in a real estate mortgage investment conduit,
or REMIC, we will be taxable at the highest corporate rate on the
portion
of any excess inclusion income that we derive from the REMIC residual
interests equal to the percentage of our stock that is held in record
name
by “disqualified organizations.” Although the law is unclear, similar
rules may apply if we own an equity interest in a taxable mortgage
pool.
To the extent that we own a REMIC residual interest or an equity
interest
in a taxable mortgage pool through a TRS, we will not be subject
to this
tax. For a discussion of “excess inclusion income,” see “—Requirements for
Qualification—Taxable Mortgage Pools and Excess Inclusion Income.” A
“disqualified organization”
includes:
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any
state or political subdivision of the United
States;
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any
foreign government;
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any
international organization;
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any
agency or instrumentality of any of the
foregoing;
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any
other tax-exempt organization, other than a farmer’s cooperative described
in section 521 of the Internal Revenue Code, that is exempt both
from
income taxation and from taxation under the unrelated business taxable
income provisions of the Internal Revenue Code;
and
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·
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any
rural electrical or telephone
cooperative.
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Requirements
for Qualification
A
REIT is
a corporation, trust, or association that meets each of the following
requirements:
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1.
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It
is managed by one or more trustees or
directors.
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2.
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Its
beneficial ownership is evidenced by transferable shares or by
transferable certificates of beneficial
interest.
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3.
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It
would be taxable as a domestic corporation but for the REIT provisions
of
the federal income tax laws.
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4.
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It
is neither a financial institution nor an insurance company subject
to
special provisions of the federal income tax
laws.
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5.
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At
least 100 persons are beneficial owners of its shares or ownership
certificates.
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6.
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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.
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7.
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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.
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8.
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It
meets certain other qualification tests, described below, regarding
the
nature of its income and assets and the distribution of its
income.
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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 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. 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. Commencing with our 2005 taxable year, our proportionate
share for purposes of the 10% value test (see “—Asset Tests”) is based on our
proportionate interest in the equity interests and certain debt securities
issued by the partnership. For all of the other asset and income tests, our
proportionate share is based on our proportionate interest in the capital
interests in the partnership. Our proportionate share of the assets,
liabilities, and items of income of any partnership, including Caplease, LP
(the
“operating 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 and Excess Inclusion Income.
An
entity, or a portion of an entity, may be classified as a taxable mortgage
pool
under the federal income tax laws if:
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substantially
all of its assets consist of debt obligations or interests in debt
obligations;
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more
than 50% of those debt obligations are real estate mortgages or interests
in real estate mortgages as of specified testing
dates;
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the
entity has issued debt obligations that have two or more maturities;
and
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·
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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.
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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.”
Recently
issued IRS guidance indicates that our excess inclusion income would be
allocated among our stockholders in proportion to our dividends paid. 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.” To the extent that excess inclusion income
is allocated from REMIC residual interests to “disqualified organizations” (see
“—Taxation of Our Company”) that hold our stock in record name, we may be
taxable on this income at the highest applicable corporate tax rate (currently
35%). Although the law is unclear, recently issued IRS guidance indicates that
the same tax will apply in the case of excess inclusion income from a taxable
mortgage pool that is allocated to “disqualified organizations” that hold our
stock in record name. To the extent that our common stock owned by “disqualified
organizations” is held in street name by a broker/dealer or other nominee, the
broker/dealer or other nominee would be liable for the corporate level tax
on
the portion of our excess inclusion income allocable to the common stock held
by
the broker/dealer or other nominee on behalf of the “disqualified
organizations.” A regulated investment company or other pass-through entity
owning our common stock will be subject to tax at the highest corporate tax
rate
on excess inclusion income allocated to their record name owners that are
disqualified organizations. 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:
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rents
from real property;
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interest
on debt secured by mortgages on real property or on interests in
real
property;
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dividends
or other distributions on. and gain from the sale of, shares in other
REITs;
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gain
from the sale of real estate
assets;
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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
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·
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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.
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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:
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·
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are
fixed at the time the leases are entered
into;
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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
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conform
with normal business practice.
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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:
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an
amount that is based on a fixed percentage or percentages of receipts
or
sales; and
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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.
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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:
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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;
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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
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for
which the REIT makes a proper election to treat the property as
foreclosure property.
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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:
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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;
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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
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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.
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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:
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our
failure to meet such tests is due to reasonable cause and not due
to
willful neglect; and
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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.
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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:
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cash
or cash items, including certain
receivables;
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interests
in real property, including leaseholds and options to acquire real
property and leaseholds;
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interests
in mortgages on real property;
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stock
in other REITs; and
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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.
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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:
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“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:
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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
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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;
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Any
loan to an individual or an estate;
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Any
“section 467 rental agreement,” other than an agreement with a related
party tenant;
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Any
obligation to pay “rents from real
property”;
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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;
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Any
security issued by a REIT;
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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
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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.”
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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:
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we
satisfied the asset tests at the end of the immediately preceding
calendar
quarter; and
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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.
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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:
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90%
of our “REIT taxable income,” computed without regard to the dividends
paid deduction and our net capital gain or loss,
and
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90%
of our after-tax net income, if any, from foreclosure property,
minus
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the
sum of certain items of non-cash
income.
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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:
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85%
of our REIT ordinary income for such calendar
year,
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95%
of our REIT capital gain income for such calendar year,
and
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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,
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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:
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Because
we may deduct capital losses only to the extent of our capital gains,
we
may have taxable income that exceeds our economic
income.
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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.
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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.
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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.
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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.
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We
may recognize phantom taxable income from any retained ownership
interests
in mortgage loans subject to collateralized mortgage obligation debt
that
we own.
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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:
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a
citizen or resident of the United
States;
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a
corporation (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;
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an
estate whose income is subject to U.S. federal income taxation regardless
of its source; or
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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.
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If
a
partnership, including any entity that is treated as a partnership for U.S.
federal income tax purposes, is a beneficial owner of our common stock, the
treatment of the partner in the partnership will generally depend on the status
of the partner and the activities of the partnership. Persons that have an
indirect interest in shares of common stock through an entity treated as a
partnership for U.S. federal income tax purposes should consult their tax
advisors about the U.S. federal income tax consequences of acquiring, holding
and disposing of our common stock.
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 121-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.
To
the
extent that we recognize “excess inclusion income,” such 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%.
The
maximum tax rate on long-term capital gain applicable to non-corporate taxpayers
is 15% through December 31, 2010. 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:
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is
a corporation or comes within certain other exempt categories and,
when
required, demonstrates this fact;
or
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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.
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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:
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the
percentage of our dividends that the tax-exempt trust must treat
as UBTI
is at least 5%;
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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
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at
least one pension trust owns more than 25% of the value of our stock;
or
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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.
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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:
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a
lower treaty rate applies and the non-U.S. stockholder files an IRS
Form
W-8BEN evidencing eligibility for that reduced rate with us,
or
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the
non-U.S. stockholder files an IRS Form W-8ECI with us claiming that
the
distribution is effectively connected
income.
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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
may be
required to withhold 10% of any distribution that exceeds our current and
accumulated earnings and profits if we are not a domestically controlled
qualified investment entity at the time of distribution. 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%, if we
determine that we are not a domestically controlled qualified investment
entity.
For
any
year in which we qualify as a REIT, a non-U.S. stockholder may incur tax on
distributions that are attributable to gain from our sale or exchange of a
USRPI
under FIRPTA. The term USRPI includes certain interests in real property and
stock in corporations at least 50% of whose assets consist of interests in
real
property. Under those rules, a non-U.S. stockholder is taxed on distributions
attributable to gain from sales of USRPIs as if such gain were effectively
connected with a U.S. business of the non-U.S. Holder. A non-U.S. stockholder
thus would be taxed on such a distribution at the normal capital gains 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. A corporate non-U.S. stockholder not entitled to treaty relief
or
exemption also may be subject to the 30% branch profits tax on such a
distribution. Unless the exception described in the next paragraph applies,
we
must withhold 35% of any distribution that we could designate as a capital
gain
dividend. A non-U.S. stockholder may receive a credit against its tax liability
for the amount we withhold.
Capital
gain distributions to non-U.S. stockholders of common stock that are
attributable to our sale of real property are treated as ordinary dividends
rather than as gain from the sale of a USRPI, as long as (1) our common stock
is
“regularly traded” on an established securities market in the United States and
(2) the non-U.S. stockholder did not own more than 5% of our common stock at
any
time during the one-year period preceding the date of the distribution. As
a
result, non-U.S. stockholders generally will be subject to withholding tax
on
such capital gain distributions in the same manner as they are subject to
withholding tax on ordinary dividends. If the common stock ceases to be
regularly traded on an established securities market in the United States or
the
non-U.S. stockholder owned more than 5% of our common stock at any time during
the one-year period preceding the date of the distribution, capital gain
distributions that are attributable to our sale of real property would be
subject to tax under FIRPTA, as described in the preceding
paragraph.
A
non-U.S. stockholder generally will not incur tax under FIRPTA with respect
to
gain realized upon a disposition of common stock as long as at all times
non-U.S. persons hold, directly or indirectly, less than 50% in value of our
outstanding stock. We cannot assure you that that test will be met. However,
a
non-U.S. Holder that owned, actually or constructively, 5% or less of the common
stock at all times during a specified testing period will not incur tax under
FIRPTA if the common stock is “regularly traded” on an established securities
market in the United States. Because the common stock is regularly traded on
an
established securities market in the United States, a non-U.S. stockholder
will
not incur tax under FIRPTA with respect to any such gain unless it owns,
actually or constructively, more than 5% of our common stock. If the gain on
the
sale of the common stock was taxed under FIRPTA, a non-U.S. Holder would be
taxed in the same manner as U.S. stockholders with respect to such gain, subject
to applicable alternative minimum tax or a special alternative minimum tax
in
the case of nonresident alien individuals. Furthermore, a non-U.S. stockholder
will incur tax on gain not subject to FIRPTA if (1) the gain is effectively
connected with the non-U.S. stockholder’s U.S. trade or business (and, if
required by an applicable tax treaty, is attributable to a U.S. permanent
establishment or fixed base maintained by the non-U.S. Holder), 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 (2) the non-U.S. stockholder is
a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and has a “tax home” in the United States, in
which case the non-U.S. stockholder will incur a 30% tax on his 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.
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. An organization will be classified as
a
partnership, rather than as a corporation, for federal income tax purposes
if
it:
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is
treated as a partnership under Treasury regulations, effective January
1,
1997, relating to entity classification (the “check-the-box regulations”);
and
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is
not a “publicly traded”
partnership.
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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
have
not requested and 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.
BOOK-ENTRY
SECURITIES
We
may
issue the securities offered by means of this prospectus in whole or in part
in
book-entry form, meaning that beneficial owners of the securities will not
receive certificates representing their ownership interests in the securities,
except as described below. If securities are issued in book-entry form, they
will be evidenced by one or more global securities that will be deposited with,
or on behalf of, a depository identified in the applicable prospectus supplement
relating to the securities. The Depository Trust Company is expected to serve
as
depository. Unless and until it is exchanged in whole or in part for the
individual securities represented thereby, a global security may not be
transferred except as a whole by the depository for the global security to
a
nominee of such depository or by a nominee of such depository to such depository
or another nominee of such depository or by the depository or any nominee of
such depository to a successor depository or a nominee of such successor. Global
securities may be issued in either registered or bearer form and in either
temporary or permanent form. The specific terms of the depository arrangement
with respect to a class or series of securities that differ from the terms
described herein will be described in the applicable prospectus
supplement.
Unless
otherwise indicated in the applicable prospectus supplement, we anticipate
that
the following provisions will apply to depository arrangements.
Upon
the
issuance of a global security, the depository for the global security or its
nominee will credit on its book-entry registration and transfer system the
respective principal amounts of the individual securities represented by such
global security to the accounts of persons that have accounts with such
depository, who are called “participants.” Such accounts shall be designated by
the underwriters, dealers or agents with respect to the securities or by us
if
the securities are offered and sold directly by us. Ownership of beneficial
interests in a global security will be limited to the depository’s participants
or persons that may hold interests through such participants. Ownership of
beneficial interests in the global security will be shown on, and the transfer
of that ownership will be effected only through, records maintained by the
applicable depository or its nominee (with respect to beneficial interests
of
participants) and records of the participants (with respect to beneficial
interests of persons who hold through participants). The laws of some states
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and laws may impair the ability
to
own, pledge or transfer beneficial interest in a global security.
So
long
as the depository for a global security or its nominee is the registered owner
of such global security, such depository or nominee, as the case may be, will
be
considered the sole owner or holder of the securities represented by such global
security for all purposes under the applicable instrument defining the rights
of
a holder of the securities. Except as provided below or in the applicable
prospectus supplement, owners of beneficial interest in a global security will
not be entitled to have any of the individual securities of the series
represented by such global security registered in their names, will not receive
or be entitled to receive physical delivery of any such securities in definitive
form and will not be considered the owners or holders thereof under the
applicable instrument defining the rights of the holders of the
securities.
Payments
of amounts payable with respect to individual securities represented by a global
security registered in the name of a depository or its nominee will be made
to
the depository or its nominee, as the case may be, as the registered owner
of
the global security representing such securities. None of us, our officers
and
directors or any trustee, paying agent or security registrar for an individual
series of securities will have any responsibility or liability for any aspect
of
the records relating to or payments made on account of beneficial ownership
interests in the global security for such securities or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
We
expect
that the depository for a series of securities offered by means of this
prospectus or its nominee, upon receipt of any payment of principal, premium,
interest, dividend or other amount in respect of a permanent global security
representing any of such securities, will immediately credit its participants’
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such global security for such securities
as
shown on the records of such depository or its nominee. We also expect that
payments by participants to owners of beneficial interests in such global
security held through such participants will be governed by standing
instructions and customary practices, as is the case with securities held for
the account of customers in bearer form or registered in “street name.” Such
payments will be the responsibility of such participants.
If
a
depository for a series of securities is at any time unwilling, unable or
ineligible to continue as depository and a successor depository is not appointed
by us within 90 days, we will issue individual securities of such series in
exchange for the global security representing such series of securities. In
addition, we may, at any time and in our sole discretion, subject to any
limitations described in the applicable prospectus supplement relating to such
securities, determine not to have any securities of such series represented
by
one or more global securities and, in such event, will issue individual
securities of such series in exchange for the global security or securities
representing such series of securities.
PLAN
OF DISTRIBUTION
We
may
sell the securities offered by means of this prospectus to one or more
underwriters for public offering and sale by them or may sell such securities
to
investors directly or through agents. Any such underwriter or agent involved
in
the offer and sale of such securities will be named in a prospectus supplement
relating to the securities.
Underwriters
may offer and sell the securities at a fixed price or prices, which may be
changed, related to the prevailing market prices at the time of sale or at
negotiated prices. We may, from time to time, authorize underwriters acting
as
our agents to offer and sell the securities upon the terms and conditions as
are
set forth in the applicable prospectus supplement. In connection with a sale
of
the securities offered by means of this prospectus, underwriters may be deemed
to have received compensation from us in the form of underwriting discounts
or
commissions and may also receive commissions from purchasers or securities
for
whom they may act as agent. Underwriters may sell the securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agent.
Any
underwriting compensation paid by us to the underwriters or agents in connection
with the offering of the securities, and any discounts, concessions or
commissions allowed by underwriters to participating dealers, will be set forth
in the applicable prospectus supplement. Underwriters, dealers and agents
participating in the distribution of the offered securities may be deemed to
be
underwriters, and any discounts or commissions received by them and any profit
realized by them upon the resale of the offered securities may be deemed to
be
underwriting discounts and commissions, under the Securities Act. Underwriters,
dealers and agents may be entitled, under agreements entered into with us,
to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act.
If
so
indicated in a prospectus supplement, we will authorize agents, underwriters
or
dealers to solicit offers by certain institutional investors to purchase offered
securities for payment and delivery on a future date specified in such
prospectus supplement. There may be limitations on the minimum amount which
may
be purchased by any such institutional investors or on the portion of the
aggregate principal amount of the particular offered security which may be
sold
pursuant to such arrangements. Institutional investors to which such offers
may
be made, when authorized, include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and such other institutions as may be approved by us. The
obligations of any such purchasers pursuant to such delayed delivery and payment
arrangements will not be subject to any conditions except that:
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the
purchase by an institution of the offered securities will not at
the time
of delivery be prohibited under the laws of any jurisdiction in the
U.S.
to which such institution is subject;
and
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if
the offered securities are being sold to underwriters, we will have
sold
to such underwriters the total principal amount of such securities
covered
by such arrangements. Underwriters will not have any responsibility
in
respect of the validity of such arrangements or our or such institutional
investors’ performance thereunder.
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We
may
agree to sell the securities to an underwriter for a delayed public offering
and
may further agree to adjustments before the public offering to the underwriters’
purchase price for the securities based on changes in the market value of the
securities. A prospectus supplement relating to any such public offering will
contain information on the number of securities to be sold, the manner of sale
or other distribution, and other material facts relating to the public
offering.
LEGAL
MATTERS
Unless
otherwise indicated in any applicable prospectus supplement, the legality of
any
securities offered hereby will be passed upon for us by Hunton &
Williams
LLP. If legal matters in connection with the offerings made pursuant to this
prospectus are passed upon by counsel for the underwriters, dealers of agents,
if any, such counsel will be named in the prospectus supplement relating to
such
offering. 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, the related financial statement schedules,
and management’s report on the effectiveness of internal control over financial
reporting as of December 31, 2006 and 2005 and for the years then ended
incorporated by reference in these Prospectuses and Registration Statement
have
been audited by McGladrey & Pullen, LLP, an independent registered public
accounting firm, as stated in their reports incorporated by reference herein,
and are included in reliance upon such reports and upon the authority of such
firm as experts in accounting and auditing.
The
consolidated financial statements of CapLease,
Inc. (formerly known as Capital Lease Funding, Inc.)
appearing in Capital Lease Funding, Inc.’s Annual Report (Form 10-K) for the
year ended December 31, 2004, 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.
The
information in this prospectus is not complete and may be changed. We may not
issue these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
SUBJECT
TO COMPLETION, DATED JANUARY 14, 2008
PROSPECTUS
CapLease,
Inc.
2,239,100
Shares of Common Stock
This
prospectus relates to our issuance and sale of up to 2,239,100 shares of common
stock from time to time through Brinson Patrick Securities Corporation, as
sales
manager. These sales, if any, will be made pursuant to a sales agreement between
us and the sales manager.
Our
common stock trades on the New York Stock Exchange under the symbol “LSE.” We
will make any sales of our common stock under this prospectus on or through
the
facilities of the New York Stock Exchange, to or through a market maker, or
to
or through an electronic communications network, at prices prevailing at the
time of sale, or in any other manner permitted by law (including, without
limitation, privately negotiated transactions). We will make these sales through
the sales manager on a best efforts basis.
On
, , the closing price of our common stock on the
NYSE was $ .
The
compensation to the sales manager for sales of our common stock will be at
commission rates ranging from 2.0% to 3.0% of the gross sales price per share
sold. In connection with the sale of common stock on our behalf, the sales
manager will be deemed to be an “underwriter” within the meaning of the
Securities Act of 1933, as amended, and the compensation of the sales manager
may be deemed to be underwriting commissions or discounts. We have agreed to
provide indemnification and contribution to the sales manager against
liabilities, including liabilities under the Securities Act.
Our
executive offices are located at 1065 Avenue of the Americas, New York, New
York
10018. Our telephone number is (212) 217-6300. We maintain an Internet web
site
at http://www.caplease.com.
Before
investing in our common stock, you should carefully read and consider the “Risk
Factors” beginning on page 1 of this prospectus and in our periodic reports and
other information that we file from time to time with the Securities and
Exchange Commission.
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
PLAN
OF DISTRIBUTION
We
may
sell up to 2,239,100 shares of common stock from time to time through Brinson
Patrick Securities Corporation, as sales manager. These sales, if any, will
be
made pursuant to a sales agreement between us and the sales manager. Sales
of
our common stock under this prospectus, if any, will be made on or through
the
facilities of the New York Stock Exchange, to or through a market maker, or
to
or through an electronic communications network, at prices prevailing at the
time of the sale, or in any other manner permitted by law (including, without
limitation, privately negotiated transactions). These sales will be made by
the
sales manager on a best efforts basis.
The
compensation to the sales manager for sales of up to 2,239,100 shares of our
common stock will be at a commission rate ranging from 2.0% to 3.0% of the
gross
sales price per share of common stock sold, depending upon the aggregate
proceeds raised by the sales manager in any calendar year. In connection with
the sale of common stock on our behalf, the sales manager will be deemed to
be
an “underwriter” within the meaning of the Securities Act of 1933, as amended,
and the compensation of the sales manager may be deemed to be underwriting
commissions or discounts. We have agreed to provide indemnification and
contribution to the sales manager against liabilities, including liabilities
under the Securities Act.
The
following table shows the public offering price, underwriting commissions and
proceeds, before expenses, to us, assuming all 2,239,100 shares of common stock
subject to the sales agreement are sold by the sales manager at $ per share,
the
closing price of our common stock on the New York Stock Exchange
on , .
The “Per Share” price assumes an offering that will be made, if at all, from
time to time at the then-prevailing market prices. Therefore, there can be
no
assurances that the public offering price, underwriting commissions, and
proceeds, before expenses, will be as set forth below. The commissions are
computed based upon the highest applicable rate under the sales
agreement.
| |
|
Per
Share
|
|
Total
|
|
|
Public
offering price
|
|
$
|
|
|
$
|
|
|
|
Underwriting
commissions (3.0%)
|
|
|
|
|
|
|
|
|
Proceeds,
before expenses to us
|
|
|
|
|
|
|
|
The
information in this prospectus is not complete and may be changed. We may not
issue these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
SUBJECT
TO COMPLETION, DATED JANUARY 14, 2008
PROSPECTUS
CapLease,
Inc.
2,400,000
Shares of Common Stock
This
prospectus relates to our issuance and sale of up to 2,400,000 shares of common
stock from time to time through Cantor Fitzgerald & Co., as sales manager.
These sales, if any, will be made pursuant to a sales agreement between us
and
the sales manager.
Our
common stock trades on the New York Stock Exchange under the symbol “LSE.” We
will make any sales of our common stock under this prospectus on or through
the
facilities of the New York Stock Exchange, to or through a market maker, or
to
or through an electronic communications network, at prices prevailing at the
time of sale, or in any other manner permitted by law (including, without
limitation, privately negotiated transactions). We will make these sales through
the sales manager on a best efforts basis.
On
, , the closing price of our common stock on the
NYSE was $ .
The
compensation to the sales manager for sales of our common stock will be at
commission rates ranging from 2.0% to 3.0% of the gross sales price per share
sold. In connection with the sale of common stock on our behalf, the sales
manager will be deemed to be an “underwriter” within the meaning of the
Securities Act of 1933, as amended, and the compensation of the sales manager
may be deemed to be underwriting commissions or discounts. We have agreed to
provide indemnification and contribution to the sales manager against
liabilities, including liabilities under the Securities Act.
Our
executive offices are located at 1065 Avenue of the Americas, New York, New
York
10018. Our telephone number is (212) 217-6300. We maintain an Internet web
site
at http://www.caplease.com.
Before
investing in our common stock, you should carefully read and consider the “Risk
Factors” beginning on page 1 of this prospectus and in our periodic reports and
other information that we file from time to time with the Securities and
Exchange Commission.
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
PLAN
OF DISTRIBUTION
We
may
sell up to 2,400,000 shares of common stock from time to time through Cantor
Fitzgerald & Co., as sales manager. These sales, if any, will be made
pursuant to a sales agreement between us and the sales manager. Sales of our
common stock under this prospectus, if any, will be made on or through the
facilities of the New York Stock Exchange, to or through a market maker, or
to
or through an electronic communications network, at prices prevailing at the
time of the sale, or in any other manner permitted by law (including, without
limitation, privately negotiated transactions). These sales will be made by
the
sales manager on a best efforts basis.
The
compensation to the sales manager for sales of up to 2,400,000 shares of our
common stock will be at a commission rate ranging from 2.0% to 3.0% of the
gross
sales price per share of common stock sold, depending upon the aggregate
proceeds raised by the sales manager in any calendar year. In connection with
the sale of common stock on our behalf, the sales manager will be deemed to
be
an “underwriter” within the meaning of the Securities Act of 1933, as amended,
and the compensation of the sales manager may be deemed to be underwriting
commissions or discounts. We have agreed to provide indemnification and
contribution to the sales manager against liabilities, including liabilities
under the Securities Act.
The
following table shows the public offering price, underwriting commissions and
proceeds, before expenses, to us, assuming all 2,400,000 shares of common stock
subject to the sales agreement are sold by the sales manager at $ per share,
the
closing price of our common stock on the New York Stock Exchange
on
, . The “Per Share” price assumes an offering
that will be made, if at all, from time to time at the then-prevailing market
prices. Therefore, there can be no assurances that the public offering price,
underwriting commissions, and proceeds, before expenses, will be as set forth
below. The commissions are computed based upon the highest applicable rate
under
the sales agreement.
| |
|
Per
Share
|
|
Total
|
|
|
Public
offering price
|
|
$ |
|
|
$
|
|
|
|
Underwriting
commissions (3.0%)
|
|
|
|
|
|
|
|
|
Proceeds,
before expenses to us
|
|
|
|
|
|
|
|
Part
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
14. Other
Expenses of Issuance and Distribution
The
following table sets forth the estimated fees and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
issuance and distribution of the securities being registered:
|
Registration
Fee
|
|
$
|
19,650
|
|
|
Printing
and Duplicating Expenses
|
|
|
150,000
|
|
|
Legal
Fees and Expenses
|
|
|
150,000
|
|
|
Accounting
Fees and Expenses
|
|
|
250,000
|
|
|
Transfer
Agent and/or Trustee Fees
|
|
|
30,000
|
|
|
Miscellaneous
|
|
|
150,350
|
|
|
Total
|
|
$
|
750,000
|
|
Item
15. Indemnification
of Directors and Officers
The
Maryland General Corporation Law permits a Maryland corporation to include
in
its charter a provision limiting the liability of its directors and officers
to
the corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by
a
final judgment as being material to the cause of action. Our charter contains
a
provision which limits the liability of our directors and officers to the
maximum extent permitted by Maryland law.
Our
charter permits us, to the maximum extent permitted by Maryland law, to obligate
ourselves to indemnify and to pay or reimburse reasonable expenses in advance
of
the final disposition of a proceeding to (a) any present or former director
or
officer or (b) any individual who, while a director and at our request, serves
or has served another real estate investment trust, corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
trustee, director, officer or partner of such real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his status as a
present or former director or officer of our company. Our bylaws obligate us,
to
the maximum extent permitted by Maryland law, to indemnify and to pay or
reimburse reasonable expenses in advance of the final disposition of a
proceeding to (a) any present or former director or officer who is made a party
to the proceeding by reason of his service in that capacity or (b) any
individual who, while a director of our company and at our request, serves
or
has served another real estate investment trust, corporation, partnership,
joint
venture, trust, employee benefit plan or other enterprise as a trustee,
director, officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
and
who is made a party to the proceeding by reason of his service in that capacity.
Our charter and bylaws also permit us to indemnify and advance expenses to
any
person who served a predecessor of our company in any of the capacities
described above and to any employee or agent of our company or a predecessor
of
our company.
The
Maryland General Corporation Law requires a corporation (unless its 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 is made a party by reason of his service in that
capacity. The Maryland General Corporation Law permits a corporation to
indemnify its present and former directors and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be a party
by reason of their service in those or other capacities unless it is established
that (a) the act or omission of the director or officer was material to the
matter giving rise to the proceeding and (i) was committed in bad faith or
(ii)
was a result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or
(c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However,
a
Maryland corporation may not indemnify for an adverse judgment in a suit by
or
in the right of the corporation 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. The Maryland General Corporation
Law permits a corporation to advance reasonable expenses to a director or
officer upon the corporation’s receipt of (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the corporation and (b) a written
undertaking by him or on his behalf to repay the amount paid or advanced by
the
corporation if it shall ultimately be determined that the standard of conduct
was not met.
It
is the
position of the Securities and Exchange Commission that indemnification of
directors and officers for liabilities arising under the Securities Act of
1933,
as amended, is against public policy and is unenforceable pursuant to Section
14
of such act.
We
also
maintain insurance on behalf of all of our directors and executive officers
against liability asserted against or incurred by them in their official
capacities with us, whether or not we are required or have the power to
indemnify them against the same liability.
Item
16. Exhibits
The
Exhibits to this Registration Statement are listed on the exhibit index, which
appears elsewhere herein and is incorporated herein by reference.
Item
17. Undertakings
(a)
The
undersigned Registrant hereby undertakes:
(1)
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)
To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii)
To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in this registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the
effective registration statement; and
(iii)
To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in this registration statement;
provided,
however,
that
subparagraphs (i), (ii) and (iii) above shall not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in the periodic reports filed with or furnished to the Commission
by
the Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this registration
statement, or is contained in a prospectus filed pursuant to Rule 424(b) that
is
part of the registration statement.
(2)
That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial
bona
fide
offering
thereof.
(3)
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4)
That,
for the purpose of determining liability under the Securities Act of 1933 to
any
purchaser:
(i)
Each
prospectus filed by a Registrant pursuant to Rule 424(b)(3) shall be deemed
to be part of the registration statement as of the date the filed prospectus
was
deemed part of and included in the registration statement: and
(ii)
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5) or
(b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii) or (x)
for the purpose of providing the information required by Section 10(a) of
the Securities Act of 1933 shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of prospectus
is
first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in
Rule 430B, for liability purposes of the issuer and any person that is at
that date an underwriter, such date shall be deemed to be a new effective date
of the registration statement relating to the securities in the registration
statement to which the prospectus relates, and the offering of such securities
at that time shall be deemed to be the initial bona
fide
offering
thereof. Provided, however, that no statement made in a registration statement
or prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such effective date.
(5)
That,
for the purpose of determining liability of the Registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the securities,
the
undersigned Registrant undertakes that in a primary offering of securities
of
the undersigned Registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if
the
securities are offered or sold to such purchaser by means of any to the
following communications, the undersigned Registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i)
Any
preliminary prospectus or prospectus of the undersigned Registrant relating
to
the offering required to be filed pursuant to Rule 424;
(ii)
Any
free writing prospectus relating to the offering prepared by or on behalf of
the
undersigned Registrant or used or referred to by the undersigned
Registrant;
(iii)
The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned Registrant or its securities provided
by or on behalf of the undersigned Registrant; and
(iv)
Any
other communication that is an offer in the offering made by the undersigned
Registrant to the purchaser.
(b)
That,
for the purposes of determining any liability under the Securities Act of 1933,
each filing of the Registrant’s annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in this registration statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial
bona
fide
offering
thereof.
(c)
Insofar as indemnification for liabilities arising under the Securities Act
of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to existing provisions or arrangements whereby the
Registrant may indemnify a director, officer or controlling person of the
Registrant against liabilities arising under the Securities Act of 1933, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the Registrant of expenses incurred or paid by a director, officer
or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant certifies
that
it has reasonable grounds to believe that it meets all of the requirements
for
filing on Form S-3 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City
of New York, State of New York, on January 14, 2008.
|
|
|
(Registrant)
|
| |
|
|
By:
|
/s/
Paul H.
McDowell
|
| |
|
| |
Chairman
of the Board and Chief Executive
Officer
|
POWER
OF ATTORNEY
We,
the
undersigned directors and officers of CapLease, Inc., a Maryland corporation,
do
hereby constitute and appoint Paul H. McDowell, Shawn P. Seale and Paul C.
Hughes and each and any of them, our true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, to do any and all
acts and things in our names and on our behalf in our capacities as directors
and officers and to execute any and all instruments for us and in our name
in
the capacities indicated below, which said attorneys and agents may deem
necessary or advisable to enable said corporation to comply with the Securities
Act of 1933 and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with this Registration Statement, or any
registration statement for this offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, including
specifically, but without limitation, any and all amendments (including
post-effective amendments) hereto; and we hereby ratify and confirm all that
said attorneys and agents, or any of them, shall do or cause to be done by
virtue thereof.
Pursuant
to the requirements of the Securities Act of 1933, the registration statement
has been signed by the following persons in the capacities indicated on January
14, 2008.
|
Signature
|
|
Title
|
| |
|
|
|
/s/
Paul H. McDowell
|
|
Chairman
of the Board and Chief Executive Officer
(Principal
Executive Officer)
|
|
Paul
H. McDowell
|
|
| |
|
|
|
/s/
William R. Pollert
|
|
Director
and President
|
|
William
R. Pollert
|
|
| |
|
|
|
/s/
Shawn P. Seale
|
|
Senior
Vice President, Chief Financial Officer and
Treasurer (Principal
Financial Officer)
|
|
Shawn
P. Seale
|
|
| |
|
|
|
/s/
John E. Warch
|
|
Senior
Vice President and Chief Accounting Officer
(Principal Accounting
Officer)
|
|
John
E. Warch
|
|
| |
|
|
|
/s/
Michael E. Gagliardi
|
|
Director
|
|
Michael
E. Gagliardi
|
|
| |
|
|
|
/s/
Stanley Kreitman
|
|
Director
|
|
Stanley
Kreitman
|
|
| |
|
|
|
/s/
Jeffrey F. Rogatz
|
|
Director
|
|
Jeffrey
F. Rogatz
|
|
| |
|
|
|
/s/
Howard A. Silver
|
|
Director
|
|
Howard
A. Silver
|
|
Exhibit
INDEX
|
Exhibit Number
|
|
Description
|
|
1.1*
|
|
Form
of Common Stock Underwriting Agreement
|
|
1.2*
|
|
Form
of Preferred Stock Underwriting Agreement
|
|
1.3*
|
|
Form
of Debt Securities Underwriting Agreement
|
|
1.4
|
|
Sales
Agreement, dated as of August 15, 2005, between the Registrant and
Brinson
Patrick Securities Corporation (incorporated by reference to Exhibit
10.1
to the Registrant’s Form 8-K filed with the Securities and Exchange
Commission on August 17, 2005)
|
|
1.5
|
|
Sales
Agreement, dated as of August 15, 2005, between the Registrant and
Cantor
Fitzgerald & Co. (incorporated by reference to Exhibit 10.2 to the
Registrant’s Form 8-K filed with the Securities and Exchange Commission on
August 17, 2005)
|
|
4.1
|
|
Amended
and Restated Articles of Incorporation (incorporated by reference
to
Exhibit 3.1 to the Registrant’s Amendment No. 4 to Registration Statement
on Form S-11 filed with the Securities and Exchange Commission on
March 8,
2004)
|
|
4.2
|
|
Articles
Supplementary Establishing the Rights and Preferences of the 8.125%
Series
A Cumulative Redeemable Preferred Stock of the Registrant (incorporated
by
reference to Exhibit 3.2 to the Registrant’s Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on October
17,
2005)
|
|
4.3
|
|
Articles
of Amendment to Articles of Incorporation (incorporated by reference
to
Exhibit 3.1 to the Registrant’s Form 8-K filed with the Securities and
Exchange Commission on July 31, 2007)
|
|
4.4
|
|
Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.2 to
the
Registrant’s Amendment No. 4 to Registration Statement on Form S-11 filed
with the Securities and Exchange Commission on March 8, 2004)
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4.5
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First
Amendment to Amended and Restated Bylaws (incorporated by reference
to
Exhibit 3.2 to the Registrant’s Form 8-K filed with the Securities and
Exchange Commission on July 31, 2007)
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4.6
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First
Amended and Restated Limited Partnership Agreement of Caplease, LP,
dated
June 13, 2006 (incorporated by reference to Exhibit 4.6 to the
Registrant’s Registration Statement on Form S-3 filed with the Securities
and Exchange Commission on January 14, 2008 (Registration No.
333-148649))
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4.7
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Form
of Senior Debt Indenture
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4.8
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Form
of Senior Debt Security
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4.9
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Form
of Subordinated Debt Indenture
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4.10
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Form
of Subordinated Debt Security
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5.1
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Opinion
of Hunton & Williams LLP regarding the legality of the securities
being registered
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8.1
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Opinion
of Hunton & Williams LLP regarding certain tax matters
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12.1
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Statement
on Computation of Ratios
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23.1
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Consent
of McGladrey & Pullen LLP
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23.2
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Consent
of Ernst & Young LLP
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23.3
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Consent
of Hunton & Williams LLP (included as part of Exhibit
5.1)
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23.4
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Consent
of Hunton & Williams LLP (included as part of Exhibit
8.1)
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24.1
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Powers
of Attorney (included on signature page)
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25.1*
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Statement
as to Eligibility to act as trustee to the Senior Debt
Securities
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25.2*
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Statement
as to Eligibility to act as trustee to the Subordinated Debt
Securities
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*
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To
be incorporated by reference prior to or in connection with the offering
of specific securities.
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