This preliminary
prospectus supplement relates to an effective registration statement, but is not
complete and may be changed. This preliminary prospectus supplement
and the accompanying prospectus are not an offer to sell nor do they seek an
offer to buy these securities in any jurisdiction where the offer or sale is not
permitted.
Filed
pursuant to Rule 424(b)(2)
Registration
No. 333-148653
|
PROSPECTUS
SUPPLEMENT
|
SUBJECT
TO COMPLETION DATED MARCH 25, 2010
|
|
(To
Prospectus dated January 25, 2008)
|
Shares
8.125%
Series A Cumulative Redeemable Preferred Stock
Liquidation
Preference $25.00 Per Share
We are
offering shares
of our 8.125% Series A cumulative redeemable preferred stock, par value $0.01
per share. As of December 31, 2009, there were 1,400,000 shares of
our Series A preferred stock outstanding.
Dividends
on the Series A preferred stock sold in this offering will be cumulative from
March , 2010, and will be payable quarterly on or about the
15th day of January, April, July and October of each year, commencing April 15,
2010. The dividend rate is 8.125% per annum of the $25.00 liquidation
preference, which is equivalent to $2.03125 per annum per share of Series A
preferred stock.
The
liquidation preference of each share of Series A preferred stock is
$25.00.
Beginning
on October 19, 2010 and at any time thereafter, we may redeem all or a portion
of the Series A preferred stock at $25.00 per share, plus accrued and unpaid
dividends. Prior to October 19, 2010, we may only redeem the Series A
preferred Stock to preserve our status as a real estate investment
trust.
The
Series A preferred stock has no stated maturity, will not be subject to any
sinking fund or mandatory redemption and will not be convertible into any of our
other securities.
Investors
in the Series A preferred stock generally will have no voting rights, but will
have limited voting rights if we fail to pay dividends for six or more quarters
(whether or not consecutive) and under certain other circumstances.
The
shares of Series A preferred stock are subject to certain restrictions on
ownership and transfer designed to preserve our qualification as a real estate
investment trust for federal income tax purposes. See “Description of
the Series A Preferred Stock — Restrictions on Ownership” on page S-10 of this
prospectus supplement and “Restrictions on Ownership and Transfer” on page 25 of
the accompanying prospectus for more information about these
restrictions.
Our
Series A preferred stock is listed on the New York Stock Exchange under the
symbol “LSEPrA.” On March 24, 2010, the closing sale price of the
Series A preferred stock was $25.14 per share.
Investing
in the Series A preferred stock involves risks. See “Risk Factors”
beginning on page S-4 of this prospectus supplement and page 1 of the
accompanying prospectus to read about certain risks you should consider before
buying shares of our Series A preferred stock.
|
Per Share
|
Total
|
|||||||
|
Initial
price to public (1)
|
$ | $ | ||||||
|
Underwriting
discounts and commissions
|
$ | $ | ||||||
|
Proceeds,
before expenses, to us
|
$ | $ | ||||||
(1) Including accrued dividends
We have
granted to the underwriters the right to purchase within 30 days from the date
of this prospectus supplement up to an
additional shares
of Series A preferred stock at the public offering price per share, less
underwriting discounts and commissions, to cover over-allotments.
We expect
that the Series A preferred stock will be ready for delivery in book-entry form
through the Depository Trust Company on or
about ,
2010.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus supplement and the accompanying
prospectus. Any representation to the contrary is a criminal
offense.
|
Joint
Book-Running Managers
|
|
|
Wells
Fargo Securities
|
Goldman,
Sachs & Co.
|
The date
of this prospectus supplement is March , 2010.
TABLE
OF CONTENTS
|
Page
|
|
|
Prospectus
Supplement
|
|
|
Forward-Looking
Statements
|
S-ii
|
|
About
This Prospectus Supplement
|
S-iii
|
|
Summary
|
S-1
|
|
Risk
Factors
|
S-4
|
|
Use
of Proceeds
|
S-5
|
|
Capitalization
|
S-6
|
|
Description
of the Series A Preferred Stock
|
S-7
|
|
Supplemental
Federal Income Tax Considerations
|
S-11
|
|
Underwriting
|
S-12
|
|
Legal
Matters
|
S-15
|
|
Experts
|
S-15
|
|
Where
You Can Find More Information
|
S-15
|
|
Prospectus
|
|
|
Risk
Factors
|
1
|
|
About
This Prospectus
|
2
|
|
Where
You Can Find More Information
|
2
|
|
Cautionary
Statement Regarding Forward-Looking Statements
|
4
|
|
The
Company
|
5
|
|
Use
of Proceeds
|
6
|
|
Ratio
of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and
Preferred Stock Dividends
|
7
|
|
Description
of Common Stock
|
8
|
|
Certain
Provisions of Maryland Law and of Our Charter and Bylaws
|
10
|
|
Partnership
Agreement
|
15
|
|
Description
of Preferred Stock
|
19
|
|
Restrictions
on Ownership
|
25
|
|
Description
of Debt Securities
|
28
|
|
Federal
Income Tax Consequences of Our Status as a REIT
|
33
|
|
Other
Tax Consequences
|
50
|
|
Book-Entry
Securities
|
51
|
|
Plan
of Distribution
|
52
|
|
Legal
Matters
|
53
|
|
Experts
|
53
|
You
should rely only on the information contained or incorporated by reference in
this prospectus supplement or the accompanying prospectus. We have
not, and the underwriters have not, authorized anyone else to provide you with
different information. If anyone provides you with different or
inconsistent information, you should not rely on it. An offer to sell
these securities will not be made in any jurisdiction where the offer or sale is
not permitted. You should assume that the information appearing in
this prospectus supplement and the accompanying prospectus, as well as
information we previously filed with the Securities and Exchange Commission and
incorporated by reference, is only accurate as of the date of the front cover of
this prospectus supplement or accompanying prospectus, as
applicable. Our business, financial condition, results of operations
and prospects may have changed since that date.
S-i
FORWARD-LOOKING
STATEMENTS
This
prospectus supplement, the accompanying prospectus and the information
incorporated by reference into this prospectus supplement and the accompanying
prospectus contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. 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. Such factors include, but are not limited to:
|
|
·
|
our
ability to renew leases as they expire or lease-up vacant
space;
|
|
|
·
|
our
ability to make additional investments in a timely manner or on acceptable
terms;
|
|
|
·
|
current
credit market conditions and 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;
|
|
|
·
|
access
to capital markets and capital market
conditions;
|
|
|
·
|
adverse
changes in the financial condition of the tenants underlying our
investments;
|
|
|
·
|
our
ability to make scheduled payments on our debt
obligations;
|
|
|
·
|
increases
in our financing costs (including as a result of LIBOR rate increases),
our general and administrative costs and/or our property
expenses;
|
|
|
·
|
changes
in our industry, the industries of our tenants, interest rates or the
general economy;
|
|
|
·
|
impairments
in the value of the collateral underlying our
investments;
|
|
|
·
|
the
degree and nature of our competition;
and
|
|
|
·
|
the
other factors discussed in this prospectus supplement, the accompanying
prospectus and the documents incorporated by reference into this
prospectus supplement and the accompanying prospectus, including those
described under the caption “Item 1A. Risk Factors” in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2009.
|
Any
forward-looking statement speaks only as of its date. 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.
S-ii
ABOUT
THIS PROSPECTUS SUPPLEMENT
This
document is in two parts. The first part is this prospectus
supplement, which describes the specific terms of the Series A preferred stock,
this offering and other matters relating to us. The second part, the
accompanying prospectus, gives more general information about our company and
securities we may offer from time to time, some of which does not apply to this
offering or the Series A preferred stock. It is important for you to
read and consider all information contained in this prospectus supplement and
the accompanying prospectus, including the documents we have referred you to in
“Where You Can Find More Information.” The information incorporated
by reference is considered part of this prospectus supplement, and information
we later file with the Securities and Exchange Commission, or SEC, may
automatically update and supersede this information.
To the
extent any inconsistency or conflict exists between the information included or
incorporated by reference in this prospectus supplement and the information
included in the accompanying prospectus, the information included or
incorporated by reference in this prospectus supplement updates and supersedes
the information in the accompanying prospectus.
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.
Except
where otherwise indicated or where the context is clear, the portfolio
statistics in this prospectus represent or are calculated from our carry value
for financial reporting purposes before depreciation and
amortization. With respect to our loan portfolio, we have adjusted
our carry value to exclude a $0.5 million general loss reserve.
References
in this prospectus to our “Single Tenant Portfolio” include all of our portfolio
investments (e.g., owned properties, loans and securities) and to our “Single
Tenant Owned Property Portfolio” include all of our owned property investments,
in each case other than two properties we own in Omaha, Nebraska and one in
Johnston, Rhode Island which we classify as “multi-tenant properties,” as each
has either become or we expect will become over time no longer leased primarily
by a single tenant.
S-iii
SUMMARY
This
summary highlights selected information about us and this
offering. It may not contain all the information that may be
important to you in deciding whether to invest in our Series A preferred
stock. You should read this entire prospectus supplement and the
accompanying prospectus, including the financial data and related notes included
or incorporated by reference herein, before making an investment
decision.
Our
Company
CapLease,
Inc. is 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.
We have
two complementary business lines: owning single tenant properties,
which comprised 81% of our portfolio as of December 31, 2009, and making first
mortgage loans and other debt investments on single tenant properties, which
comprised 19% of our portfolio as of December 31, 2009. Tenants
underlying our investments are primarily large public companies or their
significant operating subsidiaries and 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
December 31, 2009, some of the highlights of our investment portfolio were as
follows:
|
|
·
|
approximately
$2.0 billion total investment portfolio, including $1.6 billion of owned
property investments and $375 million of loans and mortgage securities
investments;
|
|
|
·
|
10.4
million square foot owned property portfolio with 95.4%
occupancy;
|
|
|
·
|
ten
largest underlying tenants all rated investment grade with an average
credit rating of A+;
|
|
|
·
|
approximately
90% of our Single Tenant Portfolio invested 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;
|
|
|
·
|
weighted
average underlying tenant credit rating of A- across the Single Tenant
Portfolio; and
|
|
|
·
|
weighted
average underlying tenant remaining lease term of approximately nine years
across the Single Tenant Portfolio and eight years across the Single
Tenant Owned Property Portfolio.
|
For
further information regarding CapLease and our financial information, you should
refer to our recent filings with the SEC. See “Where You Can Find
More Information.”
Recent
Developments
On March
24, 2010, we agreed to sell 3,144,654 shares of our common stock to an affiliate
of Golden Gate Capital for a price of $4.77 per share. We expect the
closing of the sale will occur on or about March 30, 2010. The shares
will be issued pursuant to a separate prospectus under our effective universal
shelf registration statement (File No. 333-148653). We intend to use
the net proceeds of the offering of $15 million to reduce principal on our
recourse debt obligations, which may include our convertible senior notes and
borrowings under our credit agreement with Wells Fargo Bank, N.A. (as successor
to Wachovia Bank, N.A.), and for general corporate purposes. The
offering of Series A preferred stock pursuant to this prospectus supplement and
accompany prospectus and the foregoing common stock offering are not contingent
on one another.
S-1
The
Offering
|
Issuer
|
CapLease,
Inc.
|
|
|
Securities
offered
|
shares
of 8.125% Series A cumulative redeemable preferred stock
( shares
if the underwriters exercise their over-allotment option in
full).
|
|
|
Series
A preferred stock to be outstanding after this offering
|
As
of December 31, 2009, there were 1,400,000 shares of 8.125% Series A
cumulative redeemable preferred stock outstanding. Since
December 31, 2009 and prior to the completion of this offering, we have
issued or expect to issue 600 shares of 8.125% Series A
cumulative redeemable preferred stock through an “at-the-market” offering
program as defined in Rule 415 promulgated under the Securities Act of
1933, as amended. Following this offering, we will
have shares
of 8.125% Series A cumulative redeemable preferred stock
outstanding.
|
|
|
Dividends
|
Investors
will be entitled to receive cumulative cash distributions on the Series A
preferred stock 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,”
investors will be entitled to receive cumulative cash dividends on the
Series A preferred stock at a rate of 9.125% per annum of the $25.00
liquidation preference (equivalent to $2.28125 per annum per share). To
see how we define change of control for this purpose, see “Description of
the Series A Preferred Stock—Dividends” below. Dividends on the
Series A preferred stock offered hereby will begin to accrue and will be
fully cumulative from March , 2010, and will be payable
quarterly in arrears on or about the 15th
day of each January, April, July and October of each year. The
first dividend on the Series A preferred stock offered in this offering
will be paid on April 15, 2010. Dividends on the Series A
preferred stock will accrue whether or not we have earnings, whether or
not there are funds legally available for the payment of such dividends
and whether or not such dividends are declared.
|
|
|
Liquidation
preference
|
If
we liquidate, dissolve or wind up our operations, the holders of our
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.
|
|
|
No
maturity
|
The
Series A preferred stock does not have any stated maturity date and will
not be subject to any sinking fund or mandatory redemption
provisions. Accordingly, the shares of Series A preferred stock
will remain outstanding indefinitely unless we decide to redeem them or
purchase all or a portion of the shares in the open market. We
are not required to set aside funds to redeem the Series A preferred
stock.
|
|
|
Optional
redemption
|
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. 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.
|
S-2
|
Ranking
|
The
Series A preferred stock will rank 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.
|
|
|
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 shares 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.
|
|
|
Information
rights
|
During
any period in which we are not subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), but
shares of Series A preferred stock are outstanding, we will mail to all
holders of Series A preferred stock, as their names and addresses appear
in our record books, copies of the annual reports and quarterly reports
that we would have been required to file with the Securities and Exchange
Commission (“SEC”) if we were so subject (other than any exhibits that
would have been required). We will mail the reports within 15
days after the respective dates by which we would have been required to
file the reports with the SEC if we were subject to the reporting
requirements of the Exchange Act. In addition, during the same period, we
will, promptly upon written request, supply copies of such reports to any
prospective holder of Series A preferred stock.
|
|
|
Ownership
limit
|
Subject
to certain exceptions, no person may own, directly or indirectly, more
than 9.9% of the value or number, whichever is more restrictive, of
outstanding shares of our capital stock.
|
|
|
Listing
|
The
Series A preferred stock is listed on the New York Stock Exchange (NYSE)
under the symbol “LSEPrA.” We will apply to list the shares of
Series A preferred stock offered hereby on the NYSE under the existing
symbol “LSEPrA” covering the outstanding shares of Series A preferred
stock.
|
|
|
Form
|
The
Series A preferred stock will be issued and maintained in book-entry form
registered in the name of the nominee of The Depository Trust Company
except under limited circumstances.
|
|
|
Conversion
|
The
Series A preferred stock is not convertible into or exchangeable for any
of our other securities or property.
|
|
|
Use
of proceeds
|
We
intend to use the net proceeds from the sale of the Series A preferred
stock for one or more of the following purposes: to reduce debt
obligations that are recourse to our company, to add new portfolio
investments and for other general corporate purposes.
|
|
|
Risk
factors
|
See
“Risk Factors” beginning on page S-4 of this prospectus supplement and
page 1 of the accompanying prospectus to read about certain risks you
should consider before buying shares of our Series A preferred
stock.
|
S-3
RISK
FACTORS
An
investment in the Series A preferred stock involves certain risks,
including those described below and in the section entitled “Risk Factors”
beginning on page 1 of the accompanying prospectus. Before you invest
in the Series A preferred stock, you should carefully consider these risks,
together with the other information contained in or incorporated by reference in
this prospectus supplement and the accompanying prospectus.
Our
Series A preferred stock has not been rated and is subordinate to our debt,
and your interests could be diluted by the issuance of additional preferred
stock and by other transactions.
The
Series A preferred stock has not been rated by any nationally recognized
statistical rating organization and is subordinate to all of our existing and
future debt. Our future debt may include restrictions on our ability
to pay dividends to preferred stockholders. Our charter currently
authorizes the issuance of up to 100,000,000 shares of preferred stock in one or
more series. Our charter currently authorizes the issuance of up to
500,000,000 shares of common stock. In addition, our board of
directors has the power to reclassify unissued common stock as preferred stock,
and to amend our charter, without any action by our stockholders, to increase
the aggregate number of shares of our stock or the number of shares of stock of
any class or series, including preferred stock, that we have authority to
issue. The issuance of additional preferred stock on parity with or
senior to the Series A preferred stock would dilute the interests of the
holders of the Series A preferred stock, and any issuance of preferred
stock senior to the Series A preferred stock or of additional indebtedness
could affect our ability to pay dividends on, redeem or pay the liquidation
preference on the Series A preferred stock. None of the
provisions relating to the Series A preferred stock contains any provisions
affording the holders of the Series A preferred stock protection in the
event of a highly leveraged or other transaction, including a merger or the
sale, lease or conveyance of all or substantially all our assets or business,
that might adversely affect the holders of the Series A preferred stock, so
long as the rights of the Series A preferred stock holders are not
materially and adversely affected.
As
a holder of Series A preferred stock you have extremely limited voting
rights.
Your
voting rights as a holder of Series A preferred stock will be
limited. Shares of our common stock are the only class carrying full
voting rights. Voting rights for holders of Series A preferred
stock exist primarily with respect to adverse changes in the terms of the
Series A preferred stock, the creation of additional classes or series of
preferred stock that are senior to the Series A preferred stock and our
failure to pay dividends on the Series A preferred stock.
Listing
on the New York Stock Exchange does not guarantee a market for our Series A
preferred stock.
Although
the Series A preferred stock is listed on the New York Stock Exchange, an
active and liquid trading market to sell the Series A preferred stock has not
developed and may not ever develop or be sustained. Since the
Series A preferred stock has no stated maturity date, investors seeking
liquidity may be limited to selling their shares in the secondary
market. If an active trading market does not develop, the market
price and liquidity of the Series A preferred stock may be adversely
affected. Even if an active public market does develop, we cannot
guarantee you that the market price for the Series A preferred stock will
equal or exceed the price you pay for your shares.
The
market determines the trading price for the Series A preferred stock and
may be influenced by many factors, including our history of paying dividends on
the Series A preferred stock, variations in our financial results, the
market for similar securities, investors’ perception of us, our issuance of
additional preferred equity or indebtedness and general economic, industry,
interest rate and market conditions. Because the Series A
preferred stock carries a fixed dividend rate, its value in the secondary market
will be influenced by changes in interest rates and will tend to move inversely
to such changes.
S-4
USE
OF PROCEEDS
We expect
to receive approximately $ million from this
offering, after deducting underwriting discounts and commissions and estimated
offering expenses (approximately $ million if the
underwriters exercise their over-allotment option in full). We intend
to use the net proceeds for one or more of the following purposes: to reduce
debt obligations that are recourse to our company, to add new portfolio
investments and for other general corporate purposes.
To the
extent we determine to reduce recourse debt obligations with the net proceeds of
this offering, we expect to repurchase our convertible senior notes and/or repay
principal outstanding under our credit facility with Wells Fargo Bank, N.A. (as
successor to Wachovia Bank, N.A.). As of December 31, 2009, the
effective financing rate on our convertible senior notes was
7.9%. The notes mature in October 2027 but the holders of the notes
may require us to repurchase all or part of their notes in October 2012 for a
cash price equal to 100% of the principal amount of the notes
repurchased.
Borrowings
under our credit agreement with Wells Fargo Bank, N.A. bear interest at
prevailing short-term interest rates (30-day LIBOR) plus a pricing spread
(currently 250 basis points). As of December 31, 2009, our effective
financing rate on these borrowings was 3.2% and principal outstanding was $126.3
million. Our credit agreement with Wells Fargo Bank, N.A. is
scheduled to mature on April 29, 2011.
Wells
Fargo Bank, N.A. is an affiliate of Wells Fargo Securities, LLC, one of the
joint book-running managers of this offering. If we elect to use all
or a portion of the proceeds of this offering to repay all or a portion of the
principal outstanding under our credit facility, Wells Fargo Bank, N.A. will
receive those proceeds. See “Underwriting.”
S-5
CAPITALIZATION
The
following table sets forth our capitalization as of December 31, 2009, on a
historical basis and as adjusted to give effect to the issuance and sale
of shares
of our Series A preferred stock in this offering (excluding the effect of the
exercise of the over-allotment option in full) and the anticipated issuance of
3,144,654 shares of our common stock to an affiliate of Golden Gate Capital, and
the application of the net proceeds to repurchase our convertible senior notes
at a price of 100% of the principal amount of the notes repurchased, and with
any remaining net proceeds, to reduce borrowings under the credit agreement with
Wells Fargo Bank, N.A. (as successor to Wachovia Bank, N.A.), as if each had
occurred on December 31, 2009. As described above under “Use of
Proceeds,” we may apply some, all or none of the net proceeds of this offering
and the separate common stock offering to repurchase the convertible senior
notes and reduce borrowings to Wells Fargo Bank, N.A.
|
As
of December 31, 2009
|
||||||||
|
(in
thousands)
|
||||||||
|
Historical
|
As
Adjusted
|
|||||||
|
Debt:
|
||||||||
|
Mortgages
on real estate investments
|
$ | 943,811 | $ | 943,811 | ||||
|
Collateralized
debt obligations
|
263,310 | 263,310 | ||||||
|
Credit
facility
|
126,262 | |||||||
|
Secured
term loan
|
114,070 | 114,070 | ||||||
|
Convertible
senior notes
|
49,452 | |||||||
|
Other
long-term debt
|
30,930 | 30,930 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, $0.01 par value, 100,000,000 shares authorized, 1,400,000 shares
issued and outstanding
historical, shares
issued and outstanding as adjusted (liquidation preference of $25.00 per
share)
|
33,657 | |||||||
|
Common
stock, $0.01 par value, 500,000,000 shares authorized, 51,709,511 shares
issued and outstanding, historical and 54,854,165 shares issued and
outstanding, as adjusted
|
517 | 549 | ||||||
|
Additional
paid-in capital
|
303,368 | |||||||
|
Accumulated
other comprehensive (loss)
|
(24,332 | ) | (24,332 | ) | ||||
|
Total
stockholders’ equity
|
313,210 | |||||||
|
Non-controlling
interest in consolidated subsidiaries
|
1,257 | 1,257 | ||||||
|
Total
equity
|
$ | 314,467 | $ | |||||
|
Total
capitalization
|
$ | 1,842,302 | $ | |||||
S-6
DESCRIPTION
OF THE SERIES A PREFERRED STOCK
The
description of the particular terms of the Series A preferred stock
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of the preferred stock set forth in the
accompanying prospectus, to which description reference is hereby
made. The following summary of the material terms and provisions of
the Series A preferred stock does not purport to be complete and is
qualified in its entirety by reference to the pertinent sections in the Articles
Supplementary, as amended, setting forth the terms of the Series A
preferred stock, which we sometimes refer to as the “articles supplementary,”
our charter, bylaws and applicable laws.
General
Our
authorized capital stock consists of 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. Our charter authorizes our board of directors to issue
shares of preferred stock and to classify and reclassify any unissued shares of
preferred stock into one or more classes or series of stock. The
preferred stock may be issued from time to time with such designations,
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption as shall be determined by the board of
directors. See “Description of Preferred Stock” in the accompanying
prospectus.
Our board
of directors has adopted articles supplementary to our charter establishing the
number and fixing the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption of a series of our
preferred stock classified as 8.125% Series A Cumulative Redeemable Preferred
Stock. As of December 31, 2009, 1,400,000 shares were issued and
outstanding. Since December 31, 2009 and prior to the completion of
this offering, we have issued or expect to issue 600 shares of 8.125%
Series A preferred stock through an “at-the-market” offering program as defined
in Rule 415 promulgated under the Securities Act of 1933, as
amended. Our board of directors has authorized up to 2,610,000 shares
of Series A preferred stock. To the extent the shares of Series
A preferred stock to be issued pursuant to this prospectus supplement and the
accompanying prospectus exceed 2,610,000, we intend to increase the number of
authorized shares of Series A preferred stock. Our board of directors
may, without the consent of the holders of the Series A preferred stock,
authorize and issue additional shares of Series A preferred stock from time to
time.
The
Series A preferred stock will be issued and maintained in book-entry form
registered in the name of the nominee, The Depository Trust Company, except in
limited circumstances. See “Book-Entry Securities” in the
accompanying prospectus.
The
transfer agent, registrar and dividends disbursement agent for the shares of
Series A preferred stock is American Stock Transfer & Trust
Company.
Ranking
The
Series A preferred stock ranks senior to our shares of common stock and to
any other of our equity securities that by their terms rank junior to the
Series A preferred stock with respect to payments of distributions or
amounts upon our liquidation, dissolution or winding up. The
Series A preferred stock ranks on a parity with other equity securities
that we may later authorize or issue and that by their terms are on a parity
with the Series A preferred stock. The Series A preferred
stock ranks junior to any equity securities that we may later authorize or issue
and that by their terms rank senior to the Series A preferred
stock. Any authorization or issuance of equity securities senior to
the Series A preferred stock would require the affirmative vote of the
holders of two-thirds of the outstanding shares of Series A preferred
stock. Any convertible debt securities that we may issue are not
considered to be equity securities for these purposes.
Dividends
Holders
of the Series A preferred stock are entitled to receive, when and as
authorized by our board of directors and declared by us, out of funds legally
available for the payment of dividends, cumulative cash dividends at the rate of
8.125% per annum of the $25.00 per share 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” (as defined below), holders of the Series A preferred stock will
be entitled to receive, when and as authorized by our board of directors and
declared by us, out of funds legally available for the payment of dividends,
cumulative cash dividends at the rate of 9.125% per annum of the $25.00
liquidation preference, equivalent to $2.28125 per annum per
share. Dividends on the Series A preferred stock will accrue and
be cumulative from (but excluding) the date of original issue and will be
payable quarterly in arrears on or about the 15th day of each January, April,
July and October. Dividends payable on the shares of Series A
preferred stock for any partial period will be computed on the basis of a
360-day year consisting of twelve 30-day months.
S-7
We will
pay dividends to holders of record as they appear in our stock records at the
close of business on the applicable record date, which will be the last day of
the calendar month that immediately precedes the calendar month in which the
applicable dividend payment date falls, or such other date as designated by our
board of directors or an officer of our company duly authorized by our board of
directors for the payment of dividends that is not more than 30 days nor less
than 10 days prior to the dividend payment date.
We will
not declare or pay or set aside for payment any dividend on the shares of
Series A preferred stock if the terms of any of our agreements, including
agreements relating to our indebtedness, prohibit that declaration, payment or
setting aside of funds or provide that the declaration, payment or setting aside
of funds is a breach of or a default under that agreement, or if the
declaration, payment or setting aside of funds is restricted or prohibited by
law.
Notwithstanding
the foregoing, dividends on the shares of Series A preferred stock will
accrue whether or not we have earnings, whether or not there are funds legally
available for the payment of distributions and whether or not dividends are
authorized. Accrued but unpaid distributions on the shares of
Series A preferred stock will not bear interest, and holders of the shares
of Series A preferred stock will not be entitled to any distributions in
excess of full cumulative distributions as described above. All of
our dividends on the shares of Series A preferred stock, including any
capital gain distributions, will be credited to the previously accrued dividends
on the shares of Series A preferred stock. We will credit any
dividends made on the shares of Series A preferred stock first to the
earliest accrued and unpaid dividend due.
We will
not declare or pay any dividends, or set aside any funds for the payment of
dividends, on shares of common stock or other shares that rank junior to the
shares of Series A preferred stock, or redeem or otherwise acquire shares
of common stock or other junior shares, unless we also have declared and either
paid or set aside for payment the full cumulative dividends on the shares of
Series A preferred stock for the current and all past dividend
periods. This restriction will not limit our redemption or other
acquisition of shares under an employee benefit plan or to ensure our status as
a REIT.
If we do
not declare and either pay or set aside for payment the full cumulative
dividends on the shares of Series A preferred stock and all shares that
rank on a parity with the shares of Series A preferred stock, the amount
which we have declared will be allocated pro rata to the shares of Series A
preferred stock and to each parity series of shares so that the amount declared
for each share of Series A preferred stock and for each share of each
parity series is proportionate to the accrued and unpaid distributions on those
shares.
A “change
of control” shall be deemed to have occurred at such time as (a) the date a
“person” or “group” (within the meaning of Sections 13(d) and 14(d) of the
Exchange Act) becomes the ultimate “beneficial owner” (as defined in Rules 13d-3
and 13d-5 under the Exchange Act, except that a person or group shall be deemed
to have beneficial ownership of all shares of voting stock that such person or
group has the right to acquire regardless of when such right is first
exercisable), directly or indirectly, of voting stock representing more than 50%
of the total voting power of the total voting stock of our company on a fully
diluted basis; (b) the date we sell, transfer or otherwise dispose of all or
substantially all of our assets; or (c) the date of the consummation of a merger
or share exchange of our company with another entity where our stockholders
immediately prior to the merger or share exchange would not beneficially own
immediately after the merger or share exchange, shares representing 50% or more
of all votes (without consideration of the rights of any class of stock to elect
directors by a separate group vote) to which all stockholders of the corporation
issuing cash or securities in the merger or share exchange would be entitled in
the election of directors, or where members of our board of directors
immediately prior to the merger, or share exchange would not immediately after
the merger or share exchange constitute a majority of the board of directors of
the corporation issuing cash or securities in the merger or share
exchange. “Voting stock” shall mean capital stock of any class or
kind having the power to vote generally for the election of
directors.
S-8
Liquidation
Rights
In the
event of our liquidation, dissolution or winding up, the holders of the shares
of Series A preferred stock will be entitled to receive out of our assets
legally available for distribution to our stockholders a liquidation preference
of $25.00 per share, plus any accrued and unpaid dividends through and including
the date of the payment. The holders of shares of Series A
preferred stock will be entitled to receive this liquidating distribution before
we distribute any assets to holders of shares of our common stock or any other
shares of capital stock that rank junior to the shares of Series A
preferred stock. The rights of holders of shares of Series A
preferred stock to receive their liquidation preference would be subject to
preferential rights of the holders of any series of shares that is senior to the
shares of Series A preferred stock. Written notice will be given
to each holder of shares of Series A preferred stock of any such
liquidation not less than 30 days and no more than 60 days prior to the payment
date. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of shares of Series A
preferred stock will have no right or claim to any of our remaining
assets. If we consolidate or merge with any other entity, sell,
lease, transfer or convey all or substantially all of our property or business,
or engage in a statutory share exchange, we will not be deemed to have
liquidated. In the event our assets are insufficient to pay the full
liquidating distributions to the holders of shares of Series A preferred
stock and all other classes or series of our equity securities ranking on a
parity with our shares of Series A preferred stock, then we will distribute
our assets to the holders of shares of Series A preferred stock and all
other classes or series of parity securities ratably in proportion to the full
liquidating distributions they would otherwise have received.
The
articles supplementary provide that in determining whether a distribution (other
than voluntary or involuntary liquidation), by dividend, redemption or
otherwise, is permitted under the Maryland General Corporation Law, amounts that
would be needed, if we were to be dissolved at the time of the distribution, to
satisfy the Series A preferred stock liquidation preference will not be
added to our total liabilities.
Redemption
We may
not redeem the shares of Series A preferred stock prior to October 19,
2010, except as described below under “Restrictions on Ownership.” On
and after October 19, 2010, at our option upon not less than 30 days’ nor more
than 60 days’ written notice to the holder, we may redeem the shares of
Series A preferred stock, in whole or from time to time in part, at a
redemption price of $25.00 per share, plus any accrued and unpaid dividends
through the date fixed for redemption.
We will
give notice of redemption by publication in a newspaper of general circulation
in the City of New York and by mail to each holder of record of shares of
Series A preferred stock at the address shown on our stock transfer
books. A failure to give notice of redemption or any defect in the
notice or in its mailing will not affect the validity of the redemption of any
shares of Series A preferred stock except as to the holder to whom notice
was defective. Each notice will state the following:
|
|
·
|
the
redemption date;
|
|
|
·
|
the
redemption price;
|
|
|
·
|
the
number of shares of Series A preferred stock to be
redeemed;
|
|
|
·
|
the
place or places where the certificates for the shares of Series A
preferred stock are to be surrendered for payment;
and
|
|
|
·
|
that
dividends on the shares of Series A preferred stock to be redeemed
will cease to accrue on the redemption
date.
|
If we
redeem fewer than all of the shares of Series A preferred stock, the notice
of redemption mailed to each stockholder will also specify the number of shares
of Series A preferred stock that we will redeem from each
stockholder. In this case, we will determine the number of shares of
Series A preferred stock to be redeemed on a pro rata basis, by lot or by
any other equitable method we may choose.
If we
have given a notice of redemption and have set aside sufficient funds for the
redemption in trust for the benefit of the holders of the shares of
Series A preferred stock called for redemption, then from and after the
redemption date, those shares of Series A preferred stock will be treated
as no longer being outstanding, no further dividends will accrue and all other
rights of the holders of those shares of Series A preferred stock will
terminate. The holders of those shares of Series A preferred
stock will retain their right to receive the redemption price for their shares
and any accrued and unpaid dividends through the redemption date.
The
holders of shares of Series A preferred stock at the close of business on a
dividend record date will be entitled to receive the dividend payable with
respect to the shares of Series A preferred stock on the corresponding
payment date (including any accrued and unpaid distributions for prior periods)
notwithstanding the redemption of the shares of Series A preferred stock
between such record date and the corresponding payment date or our default in
the payment of the dividend due. Except as provided above, we will
make no payment or allowance for unpaid dividends, whether or not in arrears, on
shares of Series A preferred stock for which a notice of redemption has
been given.
The
shares of Series A preferred stock have no stated maturity and will not be
subject to any sinking fund or mandatory redemption provisions, except as
provided under “Restrictions on Ownership” below.
S-9
Subject
to applicable law, we may purchase shares of Series A preferred stock in
the open market, by tender or by private agreement. Any shares of
Series A preferred stock that we reacquire will return to the status of
authorized but unissued shares of preferred stock.
Voting
Rights
Holders
of shares of Series A preferred stock have no voting rights, except as set
forth below.
If
distributions on the shares of Series A preferred stock are due but unpaid
for six or more quarterly periods, whether or not consecutive, holders of the
shares of Series A preferred stock (voting together as a single class with
all other shares of any class or series of stock ranking on a parity with the
Series A preferred stock which are entitled to similar voting rights, if
any) will be entitled to elect a total of two additional directors to serve on
our board of directors until all distribution arrearages have been paid or
authorized and set aside for payment in full. The holders of record
of at least 10% of the outstanding shares of Series A preferred stock (or
of any other series of preferred stock ranking on a parity and with like voting
rights) may compel us to call a special meeting to elect these additional
directors unless we receive the request less than 120 days before the date of
the next annual meeting of stockholders if all the classes of voting preferred
stock are offered the opportunity to elect such directors at the annual
meeting. Whether or not the holders call a special meeting, the
holders of the Series A preferred stock (and any other series of preferred
stock ranking on a parity and with like voting rights) may vote for the
additional directors at the next annual meeting of stockholders and at each
subsequent meeting until we have fully paid all unpaid dividends on the shares
for the past dividend periods and the then current dividend period, or we have
declared the unpaid dividends and set apart a sufficient sum for their
payment. These two additional directors may be removed at any time
with or without cause by the holders of a majority of the outstanding shares of
Series A preferred stock.
In
addition, the affirmative vote of the holders of two-thirds of the outstanding
shares of Series A preferred stock is required for us to authorize, create
or increase equity securities ranking senior to the shares of Series A
preferred stock or to amend, alter or repeal our charter in a manner that
materially and adversely affects the rights of the holders of the shares of
Series A preferred stock. We may issue additional shares of
Series A preferred stock, or other parity stock, without any vote of the
holders of the shares of Series A preferred stock.
In any
matter in which the shares of Series A preferred stock are entitled to
vote, each share of Series A preferred stock will be entitled to one
vote. If the holders of shares of Series A preferred stock and
another series of preferred stock are entitled to vote together as a single
class on any matter, the shares of Series A preferred stock and the shares
of the other series will have one vote for each $25.00 of liquidation
preference.
The
holders of Series A preferred stock (or any other series of preferred stock
ranking on a parity and with like voting rights) will have no voting rights,
however, if we redeem or call for redemption all outstanding shares of the
series and deposit sufficient funds in a trust to effect the redemption on or
before the time the act occurs requiring the vote.
Conversion
Rights
The
Series A preferred stock is not convertible into or exchangeable for any
property or other securities.
Information
Rights
During
any period in which we are not subject to Section 13 or 15(d) of the Exchange
Act and any shares of Series A preferred stock are outstanding, we will (i)
transmit by mail to all holders of Series A preferred stock, as their names
and addresses appear in our record books and without cost to such holders,
copies of the annual reports and quarterly reports that we would have been
required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange
Act if we were subject to such Sections (other than any exhibits that would have
been required), and (ii) promptly upon written request, supply copies of such
reports to any prospective holder of Series A preferred
stock. We will mail the reports to the holders of Series A
preferred stock within 15 days after the respective dates by which we would have
been required to file the reports with the SEC if we were subject to Section 13
or 15(d) of the Exchange Act.
Restrictions
on Ownership
For
information regarding restrictions on ownership of the shares of Series A
preferred stock, see “Restrictions on Ownership” in the accompanying
prospectus. The articles supplementary for the shares of
Series A preferred stock provide that the ownership limitation described in
the accompanying prospectus applies to ownership of shares of Series A
preferred stock. We have the right to purchase or refuse to transfer
any shares of Series A preferred stock that would result in any person
owning shares in excess of the ownership limitation, as provided in our
charter. If we elect to purchase such shares, the purchase price will
be equal to $25.00 per share, plus any accrued and unpaid distributions through
the date of purchase.
S-10
SUPPLEMENTAL
FEDERAL INCOME TAX CONSIDERATIONS
This
discussion supplements the discussion contained under the caption “Federal
Income Tax Consequences of Our Status as a REIT” in the accompanying prospectus
and should be read in conjunction therewith.
Redemption
of Series A Preferred Stock
In
general, a redemption of the Series A preferred stock will be treated under
Section 302 of the Internal Revenue Code of 1986, as amended (the “Code”) as a
distribution that is taxable at ordinary income tax rates as a dividend (to the
extent of our current or accumulated earnings and profits), unless the
redemption satisfies certain tests set forth in Section 302(b) of the Code
enabling the redemption to be treated as a sale of the Series A preferred
stock (in which case the redemption will be treated in the same manner as a sale
described in “Federal Income Tax Consequences of Our Status as a REIT—Taxation
of U.S. Stockholders on the Disposition of Common Stock” in the accompanying
prospectus). The redemption will satisfy such tests and be treated as
a sale of the Series A preferred stock if the redemption:
|
|
·
|
is
“substantially disproportionate” with respect to the holder’s interest in
our stock;
|
|
|
·
|
results
in a “complete termination” of the holder’s interest in all classes of our
stock; or
|
|
|
·
|
is
“not essentially equivalent to a dividend” with respect to the holder, all
within the meaning of Section 302(b) of the
Code.
|
In
determining whether any of these tests have been met, stock considered to be
owned by the holder by reason of certain constructive ownership rules set forth
in the Code, as well as stock actually owned, generally must be taken into
account. Because the determination as to whether any of the three
alternative tests of Section 302(b) of the Code described above will be
satisfied with respect to any particular holder of the Series A preferred
stock depends upon the facts and circumstances at the time that the
determination must be made, prospective investors are advised to consult their
own tax advisors to determine such tax treatment.
If a
redemption of the Series A preferred stock does not meet any of the three
tests described above, the redemption proceeds will be treated as a
distribution, as described in “Federal Income Tax Consequences of Our Status as
a REIT—Taxation of Taxable U.S. Stockholders” in the accompanying
prospectus. In that case, a stockholder’s adjusted tax basis in the
redeemed Series A preferred stock will be transferred to such stockholder’s
remaining stock holdings in our company. If the stockholder does not
retain any of our stock, such basis could be transferred to a related person
that holds our stock or it may be lost.
Recently
Enacted Legislation Affecting Taxation of Series A Preferred Stock Held By
or Through Foreign Entities
Legislation
was enacted on March 18, 2010 that generally imposes a withholding tax of 30%
on dividends paid with respect to stock of U.S. issuers and the gross
proceeds of a disposition of such obligations paid to a foreign financial
institution, unless such institution enters into an agreement with the U.S.
government to collect and provide to the U.S. tax authorities substantial
information regarding U.S. account holders of such institution (which would
include certain account holders that are foreign entities with U.S.
owners). The legislation also generally imposes a withholding tax of
30% on dividends from such stock and the gross proceeds of a
disposition of such stock paid to a non-financial foreign entity unless
such entity provides the withholding agent with a certification that it does not
have any substantial U.S. owners or a certification identifying the direct and
indirect substantial U.S. owners of the entity. Under certain
circumstances, a holder of such stock might be eligible for refunds or
credits of such taxes. These withholding and reporting requirements
will generally apply to payments made on or after January 1, 2013; however, the
withholding tax will not be imposed on payments pursuant to obligations
outstanding as of March 18, 2012. The legislation also imposes new
U.S. return disclosure obligations (and related penalties for failure to
disclose) on U.S. individuals that hold certain specified foreign financial
assets (which include financial accounts in foreign financial
institutions). Investors are urged to consult with their own tax
advisors regarding the possible implications of this recently enacted
legislation on their investment in the Series A preferred
stock.
S-11
UNDERWRITING
Under the
terms and subject to the conditions contained in an underwriting agreement dated
the date of this prospectus supplement, the underwriters named below, for whom
Wells Fargo Securities, LLC and Goldman, Sachs & Co. are acting as
representatives, have severally agreed to purchase, and we have agreed to sell
to them, severally, the number of shares of Series A preferred stock indicated
below.
|
Number of Shares
|
||||
|
Wells
Fargo Securities, LLC
|
||||
|
Goldman,
Sachs & Co.
|
||||
|
Total
|
||||
The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of Series A preferred stock offered
hereby are subject to the approval of certain legal matters by their counsel and
to certain other conditions. The underwriters are obligated to
purchase and accept delivery of all shares of Series A preferred stock offered
by this prospectus supplement and the accompanying prospectus, other than those
shares of Series A preferred stock covered by the over-allotment option
described below.
We have
granted to the underwriters an option, exercisable for 30 days from the date of
this prospectus supplement, to purchase up to an aggregate
of additional
shares of Series A preferred stock at the public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The underwriters
may exercise this option solely for the purpose of covering over-allotments, if
any, made in connection with this offering of the Series A preferred stock. To
the extent such option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
additional shares of Series A preferred stock as the number set forth next to
such underwriter's name in the preceding table bears to the total number of
shares of Series A preferred stock in the preceding table.
The
underwriters initially propose to offer the shares of Series A preferred stock
directly to the public at the public offering price set forth on the cover page
of this prospectus supplement and to certain dealers at a price that represents
a concession not in excess of $ per share below the
public offering price. Any underwriters may allow, and such dealers
may re-allow, a concession not in excess of $ per
share to other underwriters or to certain dealers. If the shares are
not sold at the initial price to the public, the underwriters may change the
offering price and the other selling terms. The offering of the
shares by the underwriters is subject to receipt and acceptance and subject to
the underwriters’ right to reject any order in whole or in part.
The
following table summarizes the compensation we will pay the underwriters in
connection with this offering assuming either no exercise or full exercise by
the underwriters of their over-allotment option described above.
|
Per Share
|
Total
|
|||||||||||
|
No Exercise of Option
|
Full Exercise of Option
|
|||||||||||
|
Initial price to public (1)
|
$ | $ | $ | |||||||||
|
Underwriting
discounts and commissions
|
$ | $ | $ | |||||||||
|
Proceeds,
before expenses, to us
|
$ | $ | $ | |||||||||
(1)
Including accrued dividends.
We
estimate that the total expenses payable by us in connection with this offering,
other than the underwriting discount referred to above, will be
$ 100,000.
The
Series A preferred stock is listed on the NYSE under the symbol
“LSEPrA.” We will apply to list the shares of Series A preferred
stock offered hereby on the NYSE under the existing symbol “LSEPrA” covering the
outstanding shares of Series A preferred stock.
S-12
In order
to facilitate the offering of the shares of Series A preferred stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Series A preferred stock. Specifically, the
underwriters may over-allot in connection with the offering, creating a short
position in the shares for their own account. In addition, to cover
over-allotments or to stabilize the price of the shares of Series A preferred
stock, the underwriters may bid for and purchase, shares of Series A preferred
stock in the open market or the underwriters may elect to reduce the short
position by exercising all or a portion of the underwriters’ over-allotment
option described above. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a dealer for
distributing the shares of Series A preferred stock in the offering if the
syndicate repurchases previously distributed shares in transactions to cover
syndicate short positions, in stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the
market price of the shares above independent market levels. The
underwriters are not required to engage in these activities and may end any of
these activities at any time.
We have
agreed to indemnify the several underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
We have
agreed not to authorize or effect the sale or issuance, or to agree to sell or
issue any shares of Series A preferred stock or securities substantially similar
to or ranking on par with or senior to the shares of Series A preferred stock
with respect to dividend rights or rights upon liquidation, dissolution or
winding up, or securities that are convertible into or exchangeable for or
represent the right to receive Series A preferred stock or such parity or senior
securities, for the period commencing on the date of this prospectus supplement
and ending 30 days hereafter without first obtaining the written consent of the
representatives.
The
company may enter into derivative transactions with third parties, or sell
securities not covered by this prospectus to third parties in privately
negotiated transactions. In connection with those derivatives, the
third parties may sell securities covered by this prospectus, including in short
sale transactions. If so, the third party may use securities pledged
by the company or borrowed from the company or others to settle those sales or
to close out any related open borrowings of stock, and may use securities
received from the company in settlement of those derivatives to close out any
related open borrowings of stock. The third party in such sale
transactions will be an underwriter or will be identified in a post-effective
amendment.
European
Economic Area
In
relation to each Member State of the European Economic Area which has
implemented the Prospectus Directive (each, a Relevant Member State), each
underwriter has represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that Relevant Member
State (the Relevant Implementation Date) it has not made and will not make an
offer of shares of Series A preferred stock to the public in that Relevant
Member State prior to the publication of a prospectus in relation to the shares
of Series A preferred stock which has been approved by the competent authority
in that Relevant Member State or, where appropriate, approved in another
Relevant Member State and notified to the competent authority in that Relevant
Member State, all in accordance with the Prospectus Directive, except that it
may, with effect from and including the Relevant Implementation Date, make an
offer of shares of Series A preferred stock to the public in that Relevant
Member State at any time:
(a) to
legal entities which are authorized or regulated to operate in the financial
markets or, if not so authorized or regulated, whose corporate purpose is solely
to invest in securities;
(b) to
any legal entity which has two or more of (1) an average of at least 250
employees during the last financial year; (2) a total balance sheet of more than
€43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in
its last annual or consolidated accounts;
(c) to
fewer than 100 natural or legal persons (other than qualified investors as
defined in the Prospectus Directive) subject to obtaining the prior consent of
the representatives for any such offer; or
(d) in
any other circumstances which do not require the publication by the Issuer of a
prospectus pursuant to Article 3 of the Prospectus Directive.
For the
purposes of this provision, the expression an “offer of shares to the public” in
relation to any shares of Series A preferred stock in any Relevant Member State
means the communication in any form and by any means of sufficient information
on the terms of the offer and the shares of Series A preferred stock to be
offered so as to enable an investor to decide to purchase or subscribe the
shares of Series A preferred stock, as the same may be varied in that Relevant
Member State by any measure implementing the Prospectus Directive in that
Relevant Member State and the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in each Relevant
Member State.
S-13
United
Kingdom
Each
underwriter has represented and agreed that:
(a) it
has only communicated or caused to be communicated and will only communicate or
cause to be communicated an invitation or inducement to engage in investment
activity (within the meaning of Section 21 of the FSMA) received by it in
connection with the issue or sale of the shares of Series A preferred stock in
circumstances in which Section 21(1) of the FSMA does not apply to the
issuer; and
(b) it
has complied and will comply with all applicable provisions of the FSMA with
respect to anything done by it in relation to the shares of Series A preferred
stock in, from or otherwise involving the United Kingdom.
Hong
Kong
The
shares of Series A preferred stock may not be offered or sold by means of any
document other than (i) in circumstances which do not constitute an offer to the
public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong
Kong), or (ii) to “professional investors” within the meaning of the Securities
and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made
thereunder, or (iii) in other circumstances which do not result in the document
being a "prospectus" within the meaning of the Companies Ordinance (Cap.32, Laws
of Hong Kong), and no advertisement, invitation or document relating to the
shares of Series A preferred stock may be issued or may be in the possession of
any person for the purpose of issue (in each case whether in Hong Kong or
elsewhere), which is directed at, or the contents of which are likely to be
accessed or read by, the public in Hong Kong (except if permitted to do so under
the laws of Hong Kong) other than with respect to shares of Series A preferred
stock which are or are intended to be disposed of only to persons outside Hong
Kong or only to “professional investors” within the meaning of the Securities
and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made
thereunder.
Singapore
This
prospectus has not been registered as a prospectus with the Monetary Authority
of Singapore. Accordingly, this prospectus and any other document or material in
connection with the offer or sale, or invitation for subscription or purchase,
of the shares of Series A preferred stock may not be circulated or distributed,
nor may the shares of Series A preferred stock be offered or sold, or be made
the subject of an invitation for subscription or purchase, whether directly or
indirectly, to persons in Singapore other than (i) to an institutional investor
under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore
(the “SFA), (ii) to a relevant person, or any person pursuant to Section
275(1A), and in accordance with the conditions, specified in Section 275 of the
SFA or (iii) otherwise pursuant to, and in accordance with the conditions of,
any other applicable provision of the SFA.
Where the
shares of Series A preferred stock are subscribed or purchased under Section 275
by a relevant person which is: (a) a corporation (which is not an accredited
investor) the sole business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of whom is an
accredited investor; or (b) a trust (where the trustee is not an accredited
investor) whose sole purpose is to hold investments and each beneficiary is an
accredited investor, shares, debentures and units of shares and debentures of
that corporation or the beneficiaries' rights and interest in that trust shall
not be transferable for 6 months after that corporation or that trust has
acquired the shares under Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions, specified in Section 275
of the SFA; (2) where no consideration is given for the transfer; or (3) by
operation of law.
Japan
The
securities have not been and will not be registered under the Financial
Instruments and Exchange Law of Japan (the Financial Instruments and Exchange
Law) and each underwriter has agreed that it will not offer or sell any
securities, directly or indirectly, in Japan or to, or for the benefit of, any
resident of Japan (which term as used herein means any person resident in Japan,
including any corporation or other entity organized under the laws of Japan), or
to others for re-offering or resale, directly or indirectly, in Japan or to a
resident of Japan, except pursuant to an exemption from the registration
requirements of, and otherwise in compliance with, the Financial Instruments and
Exchange Law and any other applicable laws, regulations and ministerial
guidelines of Japan.
S-14
The
underwriters and their respective affiliates are full service financial
institutions engaged in various activities, which may
include securities trading, commercial and investment banking, financial
advisory, investment management, principal investment, hedging, financing and
brokerage activities. Some of the underwriters or their affiliates
from time to time perform investment banking and other financial services for us
and our affiliates for which they receive advisory or transaction fees, as
applicable, plus out-of-pocket expenses, of the nature and in amounts customary
in the industry for these financial services. We have entered into a
credit agreement with Wells Fargo Bank, N.A. (as successor to Wachovia Bank,
N.A.) and have borrowed $126.3 million from Wells Fargo Bank, N.A. pursuant to
the credit agreement as of December 31, 2009. We may use a portion of
the proceeds from this offering to reduce our current borrowings under the
credit agreement, which proceeds would be received by Wells Fargo Bank,
N.A. We have in the past obtained long-term mortgage financings on
our owned property investments from Wells Fargo Bank, N.A., and we expect to
continue to do so in the future. In the ordinary course of their
various business activities, the underwriters and their respective affiliates
may make or hold a broad array of investments and actively trade debt and equity
securities (or related derivative securities) and financial instruments
(including bank loans) for their own account and for the accounts of their
customers and may at any time hold long and short positions in such securities
and instruments. Such investment and securities activities may
involve securities and instruments of the issuer.
LEGAL
MATTERS
Certain
legal matters in connection with this offering, including the validity of the
Series A preferred stock offered hereby, will be passed upon for us by Hunton
& Williams LLP. Certain legal matters in connection with this
offering will be passed upon for the underwriters by DLA Piper LLP
(US).
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, 2009 and 2008 and for the years then ended
incorporated by reference in this Prospectus 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.
WHERE
YOU CAN FIND MORE INFORMATION
We file
annual, quarterly and current reports, proxy statements and other information
with the SEC under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). You may read and copy any reports, statements or
other information on file at the SEC’s public reference room located at 100 F
Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference
room. The SEC filings are also available at the Internet website
maintained by the SEC at http://www.sec.gov. These filings are also
available to the public from commercial document retrieval
services.
This
prospectus supplement and accompanying prospectus do 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 supplement and accompanying 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 supplement and accompanying
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 supplement and accompanying prospectus, except to the extent
superseded by information contained herein or by information contained in
documents filed with the SEC after the date of this prospectus supplement and
accompanying prospectus. This prospectus supplement and accompanying
prospectus incorporate 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, 2009 filed with
the SEC on March 4, 2010; and
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·
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our
Current Report on Form 8-K filed with the SEC on March 17,
2010.
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We also
incorporate by reference into this prospectus supplement and accompanying
prospectus additional documents that we may file with the SEC under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act until completion of this offering
(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.
S-15
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 on our
website at http://www.caplease.com and without
charge 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
S-16
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.
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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 January 25, 2008
TABLE
OF CONTENTS
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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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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.”
1
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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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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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 9, 2007;
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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.
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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.
2
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
3
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:
· 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;
· increases
in our financing costs, our general and administrative costs and/or our property
expenses;
· changes
in our industry, the industries of our tenants, interest rates or the general
economy;
· the
success of our hedging strategy;
· our
ability to raise additional capital;
· impairments
in the value of the collateral underlying our investments;
· 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.
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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.
4
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:
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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);
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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.
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5
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.
6
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
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Year Ended
December 31,
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September
30, 2007
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2006
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2005
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2004
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2003
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2002
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Ratio
of earnings to fixed charges
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0.98 | 1.11 | 1.11 | 1.48 | 4.06 | 1.28 | ||||||||||||||||||
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Ratio
of earnings to combined fixed charges and preferred stock
dividends
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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.
7
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.
8
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.
9
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 six 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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10
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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a
majority or more.
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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
classified board;
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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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13
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.
14
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.
15
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.
18
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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19
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.
20
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, 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.
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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
redemption date;
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the
number of shares and class or series of the preferred stock to be
redeemed;
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the
redemption price;
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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.
22
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.
23
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.
24
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.
26
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.
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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
maturity date;
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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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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.
30
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.
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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.
32
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.
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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.
33
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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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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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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·
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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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a
fraction intended to reflect our
profitability.
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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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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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If
we fail to distribute during a calendar year at least the sum
of:
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85%
of our REIT ordinary income for the calendar
year,
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95%
of our REIT capital gain net income for the calendar year,
and
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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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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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34
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the
amount of gain that we recognize at the time of the sale or disposition,
and
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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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the
United States;
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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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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.”
35
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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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.
36
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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37
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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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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.”
38
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.
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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.
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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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government
securities;
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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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the
sum of
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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.”
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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.
46
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.”
47
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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either
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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.
48
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.
49
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.
50
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.
51
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.
52
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.
53
Shares
8.125%
Series A Cumulative Redeemable Preferred Stock
(Liquidation
Preference $25.00 Per Share)
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PROSPECTUS
SUPPLEMENT
MARCH ,
2010
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Wells
Fargo Securities
Goldman,
Sachs & Co.