As filed with the Securities and Exchange Commission on
October 21, 2005
Registration No. 333-128783
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-3
Amendment No. 1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GLADSTONE COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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Maryland
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02-0681276 |
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(State of Organization) |
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(I.R.S. Employer
Identification No.) |
1521 Westbranch Drive, Suite 200, McLean, Virginia
22102
(703) 287-5800
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive
offices)
David Gladstone, Chairman and Chief Executive Officer
Gladstone Commercial Corporation
1521 Westbranch Drive, Suite 200
McLean, Virginia 22102
(703) 287-5800
(Name, address, including zip code, and telephone number,
including area code, of agent for service):
Copies to:
Thomas R. Salley, Esq.
Darren K. DeStefano, Esq.
Brian F. Leaf, Esq.
Cooley Godward LLP
One Freedom Square
Reston Town Center
11951 Freedom Drive
Reston, Virginia 20190-5656
(703) 456-8000
(703) 456-8100 (facsimile)
Approximate Date of Commencement of Proposed Sale to the
Public: From time to time after the Registration Statement
becomes effective.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans,
please check the following
box. o
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box: þ
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act
of 1933, please check the following box and list the Securities
Act of 1933 registration statement number of the earlier
effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act of 1933, check the
following box and list the Securities Act of 1933 registration
statement number of the earlier effective registration statement
for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and we are not soliciting any offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED OCTOBER
21, 2005
PROSPECTUS
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GLADSTONE COMMERCIAL CORPORATION |
$75,000,000
Shares of Common Stock
Shares of Preferred Stock
We may offer and sell from time to time securities in one or
more offerings up to an aggregate dollar amount of $75,000,000
of securities. This prospectus provides you with a general
description of the securities we may offer.
We may offer and sell the following securities:
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shares of common stock; and |
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shares of preferred stock, which may be convertible into our
shares of common stock. |
Each time securities are sold using this prospectus, we will
provide a supplement to this prospectus containing specific
information about the offering. The supplement may also add,
update or change information contained in this prospectus. You
should read this prospectus and any supplement before you invest.
The securities will be offered directly to investors or through
underwriters, dealers or agents. The supplements to this
prospectus will provide the specific terms of the plan of
distribution.
To ensure that we maintain our qualification as a real estate
investment trust under the applicable provisions of the Internal
Revenue Code of 1986, as amended, ownership of our equity
securities by any person is subject to certain limitations. See
“Certain Provisions of Maryland Law and of our Articles of
Incorporation and Bylaws — Restrictions on Ownership
and Transfer.”
Our common stock is traded on the Nasdaq National Market under
the symbol “GOOD.” On October 20, 2005, the last
reported sale price of our common stock on the Nasdaq National
Market was $16.30. The applicable prospectus supplement will
contain information, where applicable, as to any other listing
on the Nasdaq National Market or any other securities exchange
of the securities covered by such prospectus.
We maintain our executive offices at 1521 Westbranch Drive,
Suite 200, McLean, Virginia 22102. Our telephone number is
(703) 287-5800.
Please see page 3 for risk factors relating to an
investment in Gladstone Commercial Corporation which you should
consider.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus
is ,
2005.
TABLE OF CONTENTS
You should rely only on the information contained in or
incorporated by reference in this prospectus. We have not
authorized anyone to provide you with information different from
that contained in or incorporated by reference in this
prospectus. We are offering to sell, and seeking offers to buy,
the securities described in this prospectus only in
jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery
of this prospectus or of any sale of shares. You should not
assume that the information appearing in this prospectus or any
applicable prospectus supplement or the documents incorporated
by reference herein or therein is accurate as of any date other
than their respective dates. Our business, financial condition,
results of operation and prospects may have changed since those
dates.
TABLE OF CONTENTS
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Prospectus Summary
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Recent Developments
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About This Prospectus
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Risk Factors
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Use of Proceeds
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Ratio of Earnings to Fixed Charges and Preferred Dividends
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Description of Our Capital Stock
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Description of Preferred Stock
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Certain Provisions of Maryland Law and of Our Articles of
Incorporation and Bylaws
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Certain United States Federal Tax Considerations
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Plan of Distribution
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Experts
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Legal Matters
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Where You Can Find More Information
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Incorporation by Reference
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Forward-Looking Statements
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PROSPECTUS SUMMARY
As used in this prospectus, references to “we,”
“our,” “us,” the “Company” and the
“REIT” are to Gladstone Commercial Corporation and,
except as the context otherwise requires, its wholly owned
subsidiaries Gladstone Commercial Limited Partnership, Gladstone
Commercial Partners, LLC, Gladstone Lending LLC and Gladstone
Commercial Advisers, Inc. References to the “Operating
Partnership” are to Gladstone Commercial Limited
Partnership, a Delaware limited partnership, which we control
through Gladstone Commercial Partners, LLC, the general partner
of the Operating Partnership. When we use the term
“Adviser” we are referring to our Adviser, Gladstone
Management Corporation. The Operating Partnership is also the
sole member of Gladstone Lending, LLC, which we refer to herein
as “Gladstone Lending.” Gladstone Lending is a
Delaware limited liability company created to hold all real
estate mortgage loans issued by the Operating Partnership.
We were incorporated under the General Corporation Law of the
State of Maryland on February 14, 2003 primarily for the
purpose of investing in and owning net leased industrial and
commercial rental property and selectively making long-term
mortgage loans collateralized by industrial and commercial
property. We expect that a large portion of our tenants and
borrowers will be small and medium-sized businesses. We seek to
enter into purchase agreements for real estate that have triple
net leases with terms of 10 to 15 years, with rent
increases built into the leases. Under a triple net lease, the
tenant is required to pay all operating, maintenance and
insurance costs and real estate taxes with respect to the leased
property. At June 30, 2005, we owned eighteen properties
and had two mortgage loans. We have also acquired five
properties subsequent to June 30, 2005. We are actively
communicating with buyout funds, real estate brokers and other
third parties to locate properties for potential acquisition or
mortgage financing in an effort to build our portfolio.
We conduct substantially all of our activities through, and all
of our properties are held directly or indirectly by, the
Operating Partnership. We control the Operating Partnership
through our wholly owned subsidiary Gladstone Commercial
Partners, LLC, which serves as the Operating Partnership’s
sole general partner, and we also own all limited partnership
units of the Operating Partnership. We expect the Operating
Partnership to issue limited partnership units from time to time
in exchange for industrial and commercial real property. By
structuring our acquisitions in this manner, the sellers of the
real estate will generally be able to defer the realization of
gains until they redeem the limited partnership units. Limited
partners who hold limited partnership units in the Operating
Partnership will be entitled to redeem these units for cash or,
at our election, shares of our common stock on a one-for-one
basis at any time. Whenever we issue common stock for cash, we
will be obligated to contribute any net proceeds we receive from
the sale of the stock to the Operating Partnership and the
Operating Partnership will, in turn, be obligated to issue an
equivalent number of limited partnership units to us. The
Operating Partnership will distribute the income it generates
from its operations to Gladstone Commercial Partners, LLC and
its limited partners, including us, on a pro rata basis. We
will, in turn, distribute the amounts we receive from the
Operating Partnership to our stockholders in the form of monthly
cash distributions. We have historically operated, and intend to
continue to operate, so as to qualify as a REIT for federal tax
purposes, thereby generally avoiding federal and state income
taxes on the distributions we make to our stockholders.
The Operating Partnership is also the sole member of Gladstone
Lending. Gladstone Lending is a Delaware limited liability
company formed on January 27, 2004 and was created to hold
all real estate mortgage loans issued by the Operating
Partnership.
Gladstone Management Corporation, a registered investment
adviser and an affiliate of ours, serves as our external adviser
(our “Adviser”). Our Adviser is responsible for
managing our business on a day-to-day basis and for identifying
and making acquisitions and dispositions that it believes meet
our investment criteria.
RECENT DEVELOPMENTS
On August 5, 2005, the Company acquired a 51,155 square
foot office and warehouse building in Hazelwood, Missouri for
$3.2 million, including transaction costs, and the purchase
was funded using
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borrowings from the Company’s line of credit. Upon
acquisition of the property, the Company was assigned the
previously existing triple net lease with the sole tenant, which
had a remaining term of approximately seven years at the time of
assignment. The lease provides for annual rents of approximately
$277,000 in 2006, with prescribed escalations thereafter.
On September 2, 2005, the Company acquired three separate
properties from a single seller: a 52,080 square foot industrial
building in Angola, Indiana; a 50,000 square foot industrial
building located in Angola, Indiana; and a 52,000 square foot
industrial building located in Rock Falls, Illinois. These three
properties were acquired for an aggregate cost to the Company of
$3.2 million, including transaction costs, and the purchase
was funded using borrowings from the Company’s line of
credit. Upon acquisition of the properties, the Company extended
a fifteen year triple net lease with the tenant of each
building. The lease provides for annual rents of approximately
$281,000 in 2006, with prescribed escalations thereafter.
On October 17, 2005, the Company acquired a 70,598 square
foot industrial building in Newburyport, Massachusetts for
$7.8 million, including transaction costs, and the purchase
was funded using borrowings from the Company’s line of
credit. Upon acquisition of the property, the Company was
assigned the previously existing triple net lease with the sole
tenant, which had a remaining term of approximately seven years
at the time of assignment. The tenant also has one option to
extend the lease for an additional period of five years. The
lease provides for annual rents of approximately $669,000 in
2006, with prescribed escalations thereafter.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we
filed with the SEC using a “shelf” registration
process or continuous offering process. Under this shelf
registration process, we may, from time to time, sell the
securities described in this prospectus in one or more
offerings. This prospectus provides you with a general
description of the securities that may be offered by us. We may
also file, from time to time, a prospectus supplement or an
amendment to the registration statement of which this prospectus
forms a part containing specific information about us and the
terms of the securities being offered. That prospectus
supplement or amendment may include additional risk factors or
other special considerations applicable to those securities. Any
prospectus supplement or amendment may also add, update, or
change information in this prospectus. If there is any
supplement or amendment, you should rely on the information in
that prospectus supplement or amendment.
This prospectus and any accompanying prospectus supplement do
not contain all of the information included in the registration
statement. For further information, we refer you to the
registration statement and any amendments to such registration
statement, including its exhibits. Statements contained in this
prospectus and any accompanying prospectus supplement about the
provisions or contents of any agreement or other document are
not necessarily complete. If the SEC’s rules and
regulations require that an agreement or document be filed as an
exhibit to the registration statement, please see that agreement
or document for a complete description of these matters.
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 incorporated by reference with
the SEC 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.
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RISK FACTORS
You should carefully consider the risk factors set forth
below as well as the other information included or incorporated
by reference in this prospectus. An investment in the securities
offered by this prospectus involves a significant degree of
risk, including but not limited to the risks described below.
Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial may also materially and
adversely affect our business operations. Any of the following
risks could materially adversely affect our business, financial
condition or results of operations. In such case, you could lose
a portion of your original investment.
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We are a relatively new company with little operating
history and may not be able to operate successfully. |
We were incorporated in February 2003 and at June 30, 2005
we owned eighteen properties, all of which are fully leased, and
had extended two mortgage loans. As a result, we are subject to
all of the business risks and uncertainties associated with any
new business enterprise. Our failure to operate successfully or
profitably or accomplish our investment objectives could have a
material adverse effect on our ability to generate cash flow to
make distributions to our stockholders, and the value of an
investment in our common stock may decline substantially or be
reduced to zero.
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We are not currently able to set a consistent distribution
rate, and the distribution rate we fix in the future may have an
adverse effect on the market price for our common stock. |
Because we are relatively newly organized and as of
June 30, 2005 we held only eighteen properties and two
mortgage loans, we currently do not have the ability to predict
with any certainty the amount of our future cash flows or our
distribution rate. For the year ended December 31, 2004, we
declared quarterly distributions of $0.12 per share of
common stock, or a total of $0.48 for the entire year. Beginning
in January 2005, our board began to declare monthly
distributions, setting our monthly distributions for each of the
first three months of 2005 at $0.06 per share. Our board of
directors subsequently increased our monthly distributions to
$0.08 per share for each of the following six months. Our
future distribution rate will depend entirely on the timing and
amount of rent and mortgage payments from investments we make.
Our failure to make investments at acceptable rates of return
could result in our fixing a distribution rate that is not
competitive with alternative investments, which could adversely
affect the market price of our common stock.
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Highly leveraged tenants or borrowers may be unable to pay
rent or make mortgage payments, which could adversely affect our
cash available to make distributions to our stockholders. |
Some of our tenants or borrowers may have been recently
restructured using leverage or been acquired in a leveraged
transaction. Tenants or borrowers that are subject to
significant debt obligations may be unable to make their rent or
mortgage payments if there are adverse changes to their
businesses or economic conditions. Tenants that have experienced
leveraged restructurings or acquisitions will generally have
substantially greater debt and substantially lower net worth
than they had prior to the leveraged transaction. In addition,
the payment of rent and debt service may reduce the working
capital available to leveraged entities and prevent them from
devoting the resources necessary to remain competitive in their
industries. In situations where management of the tenant or
borrower will change after a transaction, it may be difficult
for our Adviser to determine with certainty the likelihood of
the tenant’s or borrower’s business success and of it
being able to pay rent or make mortgage payments throughout the
lease or loan term. These companies are more vulnerable to
adverse conditions in their businesses or industries, economic
conditions generally and increases in interest rates.
Leveraged tenants and borrowers are more susceptible to
bankruptcy than unleveraged tenants. Bankruptcy of a tenant or
borrower could cause:
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the loss of lease or mortgage payments to us; |
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an increase in the costs we incur to carry the property occupied
by such tenant; |
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a reduction in the value of our common stock; and |
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a decrease in distributions to our stockholders. |
Under bankruptcy law, a tenant who is the subject of bankruptcy
proceedings has the option of continuing or terminating any
unexpired lease. If a bankrupt tenant terminates a lease with
us, any claim we might have for breach of the lease (excluding a
claim against collateral securing the claim) will be treated as
a general unsecured claim. Our claim would likely be capped at
the amount the tenant owed us for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one
year’s lease payments or 15% of the remaining lease
payments payable under the lease (but no more than three
years’ lease payments). In addition, due to the long-term
nature of our leases and terms providing for the repurchase of a
property by the tenant, a bankruptcy court could recharacterize
a net lease transaction as a secured lending transaction. If
that were to occur, we would not be treated as the owner of the
property, but might have additional rights as a secured creditor.
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Our real estate investments may include special use and
single tenant properties that may be difficult to sell or
re-lease upon tenant defaults or early lease
terminations. |
We focus our investments on commercial and industrial
properties, a number of which include manufacturing facilities,
special use storage or warehouse facilities and special use
single tenant properties. These types of properties are
relatively illiquid compared to other types of real estate and
financial assets. This illiquidity will limit our ability to
quickly change our portfolio in response to changes in economic
or other conditions. With these properties, if the current lease
is terminated or not renewed or, in the case of a mortgage loan,
if we take such property in foreclosure, we may be required to
renovate the property or to make rent concessions in order to
lease the property to another tenant or sell the property. In
addition, in the event we are forced to sell the property, we
may have difficulty selling it to a party other than the tenant
or borrower due to the special purpose for which the property
may have been designed. These and other limitations may affect
our ability to sell or re-lease properties without adversely
affecting returns to our stockholders.
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The inability of a tenant in a single tenant property to
pay rent will reduce our revenues. |
Most of our properties are occupied by a single tenant and,
therefore, the success of our investments will be materially
dependent on the financial stability of these tenants. Lease
payment defaults by these tenants could adversely affect our
cash flows and cause us to reduce the amount of distributions to
stockholders. In the event of a default by a tenant, we may
experience delays in enforcing our rights as landlord and may
incur substantial costs in protecting our investment and
re-leasing our property. If a lease is terminated, we may not be
able to lease the property for the rent previously received or
sell the property without incurring a loss.
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Our business strategy relies heavily on external
financing, which may expose us to risks associated with leverage
such as restrictions on additional borrowing and payment of
distributions, risks associated with balloon payments, and risk
of loss of our equity upon foreclosure. |
Our strategy contemplates the use of leverage so that we may
make more investments than would otherwise be possible in order
to maximize potential returns to stockholders. If the income
generated by our properties and other assets fails to cover our
debt service, we could be forced to reduce or eliminate
distributions to our stockholders and may experience losses. We
may borrow on a secured or unsecured basis. Neither our articles
of incorporation nor our bylaws impose any limitation on
borrowing on us. However, our board of directors has adopted a
policy that our aggregate borrowing will not result in a total
debt to total equity ratio greater than two-to-one. This
coverage ratio means that, for each dollar of equity we have, we
can incur up to two dollars of debt. Our board of directors may
change this policy at any time. We expect that our board of
directors will expand this ratio to three-to-one in the near
future, which would permit us to leverage up to 75% loan to
value.
Our ability to achieve our investment objectives will be
affected by our ability to borrow money in sufficient amounts
and on favorable terms. We expect that we will borrow money that
will be secured by our properties and that these financing
arrangements will contain customary covenants such as those that
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limit our ability, without the prior consent of the lender, to
further mortgage the applicable property or to discontinue
insurance coverage. In addition, our short-term line of credit
contains, and any other credit facility we might enter into is
likely to contain certain customary restrictions, requirements
and other limitations on our ability to incur indebtedness, and
will specify debt ratios that we will be required to maintain.
Accordingly, we may be unable to obtain the degree of leverage
we believe to be optimal, which may cause us to have less cash
for distribution to stockholders than we would have with an
optimal amount of leverage. Our use of leverage could also make
us more vulnerable to a downturn in our business or the economy
generally. There is also a risk that a significant increase in
the ratio of our indebtedness to the measures of asset value
used by financial analysts may have an adverse effect on the
market price of our common stock.
Some of our debt financing arrangements may require us to make
lump-sum or “balloon” payments at maturity. Our
ability to make a balloon payment at maturity is uncertain and
may depend upon our ability to obtain additional financing or to
sell the financed property. At the time the balloon payment is
due, we may not be able to refinance the balloon payment on
terms as favorable as the original loan or sell the property at
a price sufficient to make the balloon payment, which could
adversely affect the amount of our distributions to stockholders.
Since the net proceeds of our initial public offering have been
invested, we are now acquiring additional properties by using
our $60 million short-term line of credit established in
February of 2005. We have also recently received long-term
financing, where we have borrowed funds and secured these
borrowings with three of our properties. We expect to continue
to use this strategy to obtain additional long term financing,
borrowing all or a portion of the purchase price of a potential
acquisition and securing the loan with a mortgage on some or all
of our existing real property. If we are unable to make our debt
payments as required, a lender could foreclose on the property
securing its loan. This could cause us to lose part or all of
our investment in such property which in turn could cause the
value of our common stock or the amount of distributions to our
stockholders to be reduced. In general, the long-term mortgages
we obtain are secured only by the property being financed,
without recourse to our other properties or to us. In the event
that a non-recourse mortgage is in default, the lender would
only be able to foreclose against the property securing the
mortgage or look to that property for repayment of the loan.
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We are subject to certain risks associated with real
estate ownership and lending which could reduce the value of our
investments. |
Our investments include net leased industrial and commercial
property and mortgage loans secured by industrial and commercial
real estate. Our performance, and the value of our investments,
is subject to risks incident to the ownership and operation of
these types of properties, including:
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changes in the general economic climate; |
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changes in local conditions such as an oversupply of space or
reduction in demand for real estate; |
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changes in interest rates and the availability of financing; |
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competition from other available space; and |
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changes in laws and governmental regulations, including those
governing real estate usage, zoning and taxes. |
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Competition for the acquisition of real estate may impede
our ability to make acquisitions or increase the cost of these
acquisitions, which could adversely affect our operating results
and financial condition. |
We compete for the acquisition of properties with many other
entities engaged in real estate investment activities, including
financial institutions, institutional pension funds, other
REITs, other public and private real estate companies and
private real estate investors. These competitors may prevent us
from acquiring desirable properties or may cause an increase in
the price we must pay for real estate. Our competitors may have
greater resources than we do, and may be willing to pay more for
certain assets or may have a more compatible operating
philosophy with our acquisition targets. In particular, larger
REITs may enjoy significant competitive advantages that result
from, among other things, a lower cost of capital
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and enhanced operating efficiencies. Our competitors may also
adopt transaction structures similar to ours, which would
decrease our competitive advantage in offering flexible
transaction terms. In addition, the number of entities and the
amount of funds competing for suitable investment properties may
increase, resulting in increased demand and increased prices
paid for these properties. If we pay higher prices for
properties, our profitability may decrease, and you may
experience a lower return on your investment. Increased
competition for properties may also preclude us from acquiring
those properties that would generate attractive returns to us.
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Most of our tenants are small and medium-sized businesses,
which exposes us to additional risks unique to these
entities. |
Leasing real property or making mortgage loans to small and
medium-sized businesses exposes us to a number of unique risks
related to these entities, including the following:
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Small and medium-sized businesses may have limited financial
resources and may not be able to make their lease or mortgage
payments. A small or medium-sized tenant or borrower is more
likely to have difficulty making its lease or mortgage payments
when it experiences adverse events, such as the failure to meet
its business plan, a downturn in its industry or negative
economic conditions. |
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Small and medium-sized businesses typically have narrower
product lines and smaller market shares than large
businesses. Because our target tenants and borrowers are
smaller businesses, they will tend to be more vulnerable to
competitors’ actions and market conditions, as well as
general economic downturns. In addition, our target tenants and
borrowers may face intense competition, including competition
from companies with greater financial resources, more extensive
development, manufacturing, marketing and other capabilities and
a larger number of qualified managerial and technical personnel. |
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There is generally little or no publicly available
information about our target tenants and borrowers. Many of
our tenants and borrowers are likely to be privately owned
businesses, about which there is generally little or no publicly
available operating and financial information. As a result, we
will rely on our Adviser to perform due diligence investigations
of these tenants and borrowers, their operations and their
prospects. We may not learn all of the material information we
need to know regarding these businesses through our
investigations. |
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Small and medium-sized businesses generally have less
predictable operating results. We expect that many of our
tenants and borrowers may experience significant fluctuations in
their operating results, may from time to time be parties to
litigation, may be engaged in rapidly changing businesses with
products subject to a substantial risk of obsolescence, may
require substantial additional capital to support their
operations, to finance expansion or to maintain their
competitive positions, may otherwise have a weak financial
position or may be adversely affected by changes in the business
cycle. Our tenants and borrowers may not meet net income, cash
flow and other coverage tests typically imposed by their senior
lenders. The failure of a tenant or borrower to satisfy
financial or operating covenants imposed by senior lenders could
lead to defaults and, potentially, foreclosure on credit
facilities, which could additionally trigger cross-defaults in
other agreements. If this were to occur, it is possible that the
ability of the tenant or borrower to make required payments to
us would be jeopardized. |
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Small and medium-sized businesses are more likely to be
dependent on one or two persons. Typically, the success of a
small or medium-sized business also depends on the management
talents and efforts of one or two persons or a small group of
persons. The death, disability or resignation of one or more of
these persons could have a material adverse impact on our tenant
or borrower and, in turn, on us. |
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Small and medium-sized businesses may have limited operating
histories. While we intend to target as tenants and
borrowers stable companies with proven track records, we may
lease properties or lend money to new companies that meet our
other investment criteria. Tenants or borrowers with limited
operating histories will be exposed to all of the operating
risks that new businesses face and |
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may be particularly susceptible to, among other risks, market
downturns, competitive pressures and the departure of key
executive officers. |
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Because we must distribute a substantial portion of our
net income to qualify as a REIT, we will be largely dependent on
third-party sources of capital to fund our future capital
needs. |
To qualify as a REIT, we generally must distribute to our
stockholders at least 90% of our taxable income each year,
excluding capital gains. Because of this distribution
requirement, it is not likely that we will be able to fund a
significant portion of our future capital needs, including
property acquisitions, from retained earnings. Therefore, we
will likely rely on public and private debt and equity capital
to fund our business. This capital may not be available on
favorable terms or at all. Our access to additional capital
depends on a number of things, including the market’s
perception of our growth potential and our current and potential
future earnings. Moreover, additional debt financings may
substantially increase our leverage.
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Our real estate portfolio will be concentrated in a
limited number of properties, which subjects us to an increased
risk of significant loss if any property declines in value or if
we are unable to lease a property. |
At June 30, 2005, we owned eighteen properties and held two
mortgage loans. To the extent we are able to leverage such
investments, we will acquire additional properties with the
proceeds of borrowings, subject to our debt policy. A
consequence of a limited number of investments is that the
aggregate returns we realize may be substantially adversely
affected by the unfavorable performance of a small number of
leases or mortgage loans or a significant decline in the value
of any property. In addition, while we do not intend to invest
20% or more of our total assets in a particular property at the
time of investment, it is possible that, as the values of our
properties change, one property may comprise in excess of 20% of
the value of our total assets. Lack of diversification will
increase the potential that a single under-performing investment
could have a material adverse effect on our cash flow and the
price we could realize from the sale of our properties.
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Liability for uninsured losses could adversely affect our
financial condition. |
Losses from disaster-type occurrences (such as wars or
earthquakes) may be either uninsurable or not insurable on
economically viable terms. Should an uninsured loss occur, we
could lose our capital investment or anticipated profits and
cash flow from one or more properties.
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Potential liability for environmental matters could
adversely affect our financial condition. |
Our purchase of industrial and commercial properties subjects us
to the risk of liabilities under federal, state and local
environmental laws. Some of these laws could subject us to:
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responsibility and liability for the cost of removal or
remediation of hazardous substances released on our properties,
generally without regard top our knowledge of or responsibility
for the presence of the contaminants; |
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liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for
the disposal or treatment of these substances; and |
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potential liability for common law claims by third parties for
damages resulting from environmental contaminants. |
We generally include provisions in our leases making tenants
responsible for all environmental liabilities and for compliance
with environmental regulations, and requiring tenants to
reimburse us for damages or costs for which we have been found
liable. However, these provisions will not eliminate our
statutory liability or preclude third party claims against us.
Even if we were to have a legal claim against a tenant to enable
us to recover any amounts we are required to pay, we may not be
able to collect any money from the tenant. Our costs of
investigation, remediation or removal of hazardous substances
may be substantial. In addition, the presence of hazardous
substances on one of our properties, or the failure to properly
remediate a contaminated property, could adversely affect our
ability to sell or lease the property or to borrow using the
property as collateral.
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We generally obtain Phase I environmental site assessments
(ESAs) on our properties at the time of acquisition. The ESAs
are intended to identify potential environmental contamination.
The ESAs include a historical review of the property, a review
of certain public records, a preliminary investigation of the
site and surrounding properties, screening for the presence of
hazardous substances and underground storage tanks, and the
preparation and issuance of a written report. The ESAs that we
have obtained have not included invasive procedures, such as
soil sampling or ground water analysis.
The ESAs that we have obtained have not revealed any
environmental liability or compliance concerns that we believe
would have a material adverse effect on our business, assets,
results of operations or liquidity, nor are we aware of any such
liability. Nevertheless, it is possible that these ESAs do not
reveal all environmental liabilities or that there are material
environmental liabilities or compliance concerns that we are not
aware of. Moreover, future laws, ordinances or regulations could
impose material environmental liability, and the current
environmental condition of a property could be affected by the
condition of properties in the vicinity of the property (such as
the presence of leaking underground storage tanks) or by third
parties unrelated to us.
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Our potential participation in joint ventures creates
additional risk. |
We may participate in joint ventures or purchase properties
jointly with other unaffiliated entities. There are additional
risks involved in these types of transactions. These risks
include the potential of our joint venture partner becoming
bankrupt or our economic or business interests diverging. These
diverging interests could, among other things, expose us to
liabilities of the joint venture in excess of our proportionate
share of these liabilities. The partition rights of each owner
in a jointly owned property could reduce the value of each
portion of the divided property.
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Net leases may not result in fair market lease rates over
time. |
A large portion of our rental income has come, and we expect a
large portion of our rental income to continue to come, from net
leases and, net leases frequently provide the tenant greater
discretion in using the leased property than ordinary property
leases, such as the right to freely sublease the property, to
make alterations in the leased premises and to terminate the
lease prior to its expiration under specified circumstances.
Further, net leases are typically for longer lease terms and,
thus, there is an increased risk that contractual rental
increases in future years will fail to result in fair market
rental rates during those years. As a result, our income and
distributions to our stockholders could be lower than if we did
not engage in net leases.
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Failure to hedge effectively against interest rate changes
may adversely affect our results of operations. |
We may experience interest rate volatility in connection with
mortgage loans on our properties and borrowings under our
revolving credit facility or other variable-rate debt that we
may obtain from time to time. We may seek to mitigate our
exposure to changing interest rates by using interest rate
hedging arrangements such as interest rate swaps and caps. These
derivative instruments involve risk and may not be effective in
reducing our exposure to interest rate changes. Risks inherent
in derivative instruments include the risk that counter-parties
to derivative contracts may be unable to perform their
obligations, the risk that interest rates move in a direction
contrary to, or move slower than the period contemplated by, the
direction or time period that the derivative instrument is
designed to cover, and the risk that the terms of such
instrument will not be legally enforceable. While we intend to
design our hedging strategies to protect against movements in
interest rates, derivative instruments that we are likely to use
may also involve immediate costs, which could reduce our cash
available for distribution to our stockholders. Likewise,
ineffective hedges, as well as the occurrence of any of the
risks inherent in derivatives, could adversely affect our
reported operating results or reduce your overall investment
returns. Our Adviser and our board of directors will review each
of our derivative contracts and periodically evaluate their
effectiveness against their stated purposes.
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Our success depends on the performance of our Adviser and
if our Adviser makes inadvisable investment or management
decisions, our operations could be materially adversely
impacted. |
Our ability to achieve our investment objectives and to pay
distributions to our stockholders is dependent upon the
performance of our Adviser in evaluating potential investments,
selecting and negotiating property purchases and dispositions
and mortgage loans, selecting tenants and borrowers, setting
lease or mortgage loan terms and determining financing
arrangements. Our stockholders have no opportunity to evaluate
the terms of transactions or other economic or financial data
concerning our investments and must rely entirely on the
analytical and management abilities of our Adviser and the
oversight of our board of directors. If our Adviser or our board
of directors makes inadvisable investment or management
decisions, our operations could be materially adversely impacted.
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We may have conflicts of interest with our Adviser and
other affiliates. |
Our Adviser manages our business and locates, evaluates,
recommends and negotiates the acquisition of our real estate
investments. At the same time, our advisory agreement permits
our Adviser to conduct other commercial activities and provide
management and advisory services to other entities, including
Gladstone Capital Corporation, Gladstone Investment Corporation
and Gladstone Land Corporation, an entity affiliated with our
chairman David Gladstone. Moreover, all of our officers and
directors are also officers and directors of Gladstone Capital
Corporation, which actively makes loans to and invests in small
and medium-sized companies and Gladstone Investment Corporation,
an entity that finances buyout and other change of control
transactions involving small and medium-sized businesses. As a
result, we may from time to time have conflicts of interest with
our Adviser in its management of our business and with Gladstone
Capital, Gladstone Investment or Gladstone Land, which may arise
primarily from the involvement of our Adviser, Gladstone
Capital, Gladstone Investment or Gladstone Land and their
affiliates in other activities that may conflict with our
business. Examples of these potential conflicts include:
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Our Adviser may realize substantial compensation on account of
its activities on our behalf; |
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We may experience competition with our affiliates for financing
transactions; |
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Our Adviser may earn fee income from our borrowers or
tenants; and |
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Our Adviser and other affiliates such as Gladstone Capital,
Gladstone Investment and Gladstone Land could compete for the
time and services of our officers and directors. |
These and other conflicts of interest between us and our Adviser
and other affiliates could have a material adverse effect on the
operation of our business and the selection or management of our
real estate investments.
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Our financial condition and results of operations depend
on our Adviser’s ability to effectively manage our future
growth. |
Our ability to achieve our investment objectives depends on our
ability to sustain continued growth, which, in turn, depends on
our Adviser’s ability to find, select and negotiate
property purchases, net leases and mortgage loans that meet our
investment criteria. Accomplishing this result on a
cost-effective basis is largely a function of our Adviser’s
marketing capabilities, management of the investment process,
ability to provide competent, attentive and efficient services
and our access to financing sources on acceptable terms. As we
grow, our Adviser may be required to hire, train, supervise and
manage new employees. Our Adviser’s failure to effectively
manage our future growth could have a material adverse effect on
our business, financial condition and results of operations.
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We are dependent upon our key management personnel for our
future success, particularly David Gladstone, Terry Lee Brubaker
and George Stelljes III. |
We are dependent on our senior management and other key
management members to carry out our business and investment
strategies. Our future success depends to a significant extent
on the continued service and coordination of our senior
management team, particularly David Gladstone, our chairman and
chief executive officer, Terry Lee Brubaker, our vice chairman
and George Stelljes III, our president and
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chief investment officer. The departure of any of our executive
officers or key employees could have a material adverse effect
on our ability to implement our business strategy and to achieve
our investment objectives.
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The limit on the number of shares of common stock a person
may own may discourage a takeover. |
Primarily to facilitate maintenance of our qualification as a
REIT, our articles of incorporation prohibit ownership of more
than 9.8% of the outstanding shares of our common stock by one
person. This restriction may discourage a change of control and
may deter individuals or entities from making tender offers for
our common stock, which offers might otherwise be financially
attractive to our stockholders or which might cause a change in
our management.
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Certain provisions of Maryland law could restrict a change
in control. |
Certain provisions of Maryland law applicable to us prohibit
business combinations with:
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any person who beneficially owns 10% or more of the voting power
of our common stock, referred to as an “interested
stockholder;” |
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an affiliate of ours who, at any time within the two-year period
prior to the date in question, was an interested
stockholder; or |
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an affiliate of an interested stockholder. |
These prohibitions last for five years after the most recent
date on which the interested stockholder became an interested
stockholder. Thereafter, any business combination with the
interested stockholder must be recommended by our board of
directors and approved by the affirmative vote of at least 80%
of the votes entitled to be cast by holders of our outstanding
shares of common stock and two-thirds of the votes entitled to
be cast by holders of our common stock other than shares held by
the interested stockholder. These requirements could have the
effect of inhibiting a change in control even if a change in
control were in our stockholders’ interest. These
provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by our board of
directors prior to the time that someone becomes an interested
stockholder.
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Our staggered director terms could deter takeover attempts
and adversely impact the price of our common stock. |
Our board of directors is divided into three classes, with the
term of the directors in each class expiring every third year.
At each annual meeting of stockholders, the successors to the
class of directors whose term expires at such meeting will be
elected to hold office for a term expiring at the annual meeting
of stockholders held in the third year following the year of
their election. After election, a director may only be removed
by our stockholders for cause. Election of directors for
staggered terms with limited rights to remove directors makes it
more difficult for a hostile bidder to acquire control of us.
The existence of this provision may negatively impact the price
of our common stock and may discourage third-party bids to
acquire our common stock. This provision may reduce any premiums
paid to stockholders in a change in control transaction.
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We may not qualify as a REIT for federal income tax
purposes, which would subject us to federal income tax on our
taxable income at regular corporate rates, thereby reducing the
amount of funds available for paying distributions to
stockholders. |
We have historically operated and intend to continue to operate
in a manner that will allow us to qualify as a REIT for federal
income tax purposes. Our qualification as a REIT depends on our
ability to meet various requirements set forth in the Internal
Revenue Code concerning, among other things, the ownership of
our outstanding common stock, the nature of our assets, the
sources of our income and the amount of our distributions to our
stockholders. The REIT qualification requirements are extremely
complex, and interpretations of the federal income tax laws
governing qualification as a REIT are limited. Accordingly, we
cannot be certain that we will be successful in operating so as
to qualify as a REIT. At any time new laws, interpretations or
court decisions may change the federal tax laws relating to, or
the
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federal income tax consequences of, qualification as a REIT. It
is possible that future economic, market, legal, tax or other
considerations may cause our board of directors to revoke our
REIT election, which it may do without stockholder approval.
If we lose or revoke our REIT status, we will face serious tax
consequences that will substantially reduce the funds available
for distribution to you because:
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we would not be allowed a deduction for distributions to
stockholders in computing our taxable income, we would be
subject to federal income tax at regular corporate rates and we
might need to borrow money or sell assets in order to pay any
such tax; |
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we also could be subject to the federal alternative minimum tax
and possibly increased state and local taxes; and |
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unless we are entitled to relief under statutory provisions, we
would be disqualified from taxation as a REIT for the four
taxable years following the year during which we ceased to
qualify. |
In addition, if we fail to qualify as a REIT, all distributions
to stockholders would be subject to tax to the extent of our
current and accumulated earnings and profits, provided that the
rate of tax on the taxable portion of such distributions would
likely be limited to 15% through 2008. If we were taxed as a
regular corporation, we would not be required to make
distributions to stockholders and corporate distributees might
be eligible for the dividends received deduction.
On October 22, 2004, the President signed into law the
American Jobs Creation Act, which amended certain rules relating
to REITs. The American Jobs Creation Act revised the following
REIT rules:
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If we fail to satisfy the 95% gross income test after our 2004
taxable year, as described under “Failure to make required
distributions would subject us to tax,” but nonetheless
continue to qualify as a REIT because we meet other
requirements, we will be subject to a 100% tax on the excess of
95% (rather than 90%) of our gross income over our qualifying
income. |
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For purposes of the 10% value test (i.e., the requirement that
we not own more than 10% of the value of the securities of any
issuer other than a Taxable REIT Subsidiary (“TRS”) or
another REIT), the exception for certain “straight
debt” securities includes 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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In addition to straight debt securities, loans to individuals
and estates, securities issued by REITs, and accrued obligations
to pay rent will not be considered securities for purposes of
the 10% value test. |
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For purposes of the 10% value test, holding a de minimis amount
of an issuer’s securities that do not qualify for the
straight debt safe harbor (either directly or through a TRS)
will not prevent straight debt of a partnership or corporation
from qualifying for the safe harbor. Specifically, we or a
controlled TRS in which we own more than 50% of the voting power
or value of the stock could hold such non-straight debt
securities with a value of up to 1% of a partnership’s or
corporation’s outstanding securities. There is no
limitation on the amount of an issuer’s securities that a
non-controlled TRS can own. |
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In the event that, at the end of a calendar quarter after our
2004 taxable year, more than 5% of our assets are represented by
the securities of one issuer, or we own more than 10% of the
voting power or value of the securities of any issuer, we will
not lose our REIT status if (i) the failure is de minimis
(up to the lesser of 1% of our assets or $10 million) and
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otherwise comply with the asset tests within six months after
the last day of the quarter in which we identify such failure. |
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In the event of a more than de minimis failure of any of the
asset tests after our 2004 taxable year, as long as the failure
is due to reasonable cause and not to willful neglect, we will
not lose our REIT status if we (i) dispose of assets or
otherwise comply with the asset tests within six months after
the last day of the quarter in which we identify such failure
and (ii) 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. |
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In the event that we fail to satisfy a REIT requirement after
our 2004 taxable year, other than a gross income or asset test,
we will not lose our REIT status but will incur a penalty of
$50,000 for each reasonable cause failure to satisfy such a
requirement. |
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After our 2004 taxable year, “hedging transaction”
will mean any transaction entered into in the normal course of
our trade or business primarily to manage the risk of interest
rate, 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
will be required to clearly identify any such hedging
transaction before the close of the day on which it was
acquired, originated or entered into. 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). Income and gain from hedging transactions will
continue to be nonqualifying income for purposes of the 75%
gross income test. |
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For non-United States shareholders of our publicly traded
shares, capital gain distributions occurring after our 2004
taxable year that are attributable to our sale of real property
will be treated as ordinary dividends rather than as gain from
the sale of a United States real property interest, as long as
the non-United States shareholder does not own more than 5% of
that class of our shares during the taxable year. |
The provisions described above relating to the expansion of the
“straight debt” safe harbor, the addition of
securities that would be exempt from the 10% value test and the
treatment of rent paid by a TRS apply to taxable years beginning
after December 31, 2000. All other provisions apply for
taxable years beginning after our 2004 taxable year.
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We have not sought a ruling from the Internal Revenue
Service that we qualify as a REIT, nor do we intend to do so in
the future. |
An IRS determination that we do not qualify as a REIT would
deprive our stockholders of the tax benefits of our REIT status
only if the IRS determination is upheld in court or otherwise
becomes final. To the extent that we challenge an IRS
determination that we do not qualify as a REIT, we may incur
legal expenses that would reduce our funds available for
distribution to stockholders.
As a result of all these factors, our failure to qualify as a
REIT could impair our ability to expand our business and raise
capital, and would adversely affect the value of our common
stock.
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Failure to make required distributions would subject us to
tax. |
In order to qualify as a REIT, each year we must distribute to
our stockholders at least 90% of our taxable income, other than
any net capital gains. To the extent that we satisfy the
distribution requirement but distribute less than 100% of our
taxable income, we will be subject to federal corporate income
tax on our undistributed income. In addition, we will incur a 4%
nondeductible excise tax on the amount, if any, by which our
distributions in any year are less than the sum of:
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85% of our ordinary income for that year; |
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95% of our capital gain net income for that year; and |
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100% of our undistributed taxable income from prior years. |
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We intend to pay out our income to our stockholders in a manner
intended to satisfy the distribution requirement applicable to
REITs and to avoid corporate income tax and the 4% excise tax.
Differences in timing between the recognition of income and the
related cash receipts or the effect of required debt
amortization payments could require us to borrow money or sell
assets to pay out enough of our taxable income to satisfy the
distribution requirement and to avoid corporate income tax and
the 4% excise tax in a particular year. In the future, we may
borrow funds to pay distributions to our stockholders and the
limited partners of our Operating Partnership. Any funds that we
borrow would subject us to interest rate and other market risks.
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The IRS may treat sale-leaseback transactions as loans,
which could jeopardize our REIT status. |
The IRS may take the position that specific sale-leaseback
transactions we may treat as true leases are not true leases for
federal income tax purposes but are, instead, financing
arrangements or loans. If a sale-leaseback transaction were so
recharacterized, we might fail to satisfy the asset or income
tests required for REIT qualification and consequently lose our
REIT status effective with the year of recharacterization.
Alternatively, the amount of our REIT taxable income could be
recalculated which could cause us to fail the distribution test
for REIT qualification.
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There are special considerations for pension or
profit-sharing trusts, Keogh Plans or individual retirement
accounts whose assets are being invested in our common
stock. |
If you are investing the assets of a pension, profit sharing,
401(k), Keogh or other retirement plan, IRA or benefit plan in
our common stock, you should consider:
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whether your investment is consistent with the applicable
provisions of the Employee Retirement Income Security Act
(ERISA) or the Internal Revenue Code; |
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whether your investment will produce unrelated business taxable
income, referred to as UBTI, to the benefit plan; and |
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your need to value the assets of the benefit plan annually. |
We do not believe that under current ERISA law and regulations
that our assets would be treated as “plan assets” for
purposes of ERISA. However, if our assets were considered to be
plan assets, our assets would be subject to ERISA and/or
Section 4975 of the Internal Revenue Code, and some of the
transactions we have entered into with our Adviser and its
affiliates could be considered “prohibited
transactions” which could cause us, our Adviser and its
affiliates to be subject to liabilities and excise taxes. In
addition, our officers and directors, our Adviser and its
affiliates could be deemed to be fiduciaries under ERISA and
subject to other conditions, restrictions and prohibitions under
Part 4 of Title I of ERISA. Even if our assets are not
considered to be plan assets, a prohibited transaction could
occur if we or any of our affiliates is a fiduciary (within the
meaning of ERISA) with respect to a purchase by a benefit plan
and, therefore, unless an administrative or statutory exemption
applies in the event such persons are fiduciaries (within the
meaning of ERISA) with respect to your purchase, shares should
not be purchased.
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If our Operating Partnership fails to maintain its status
as a partnership for federal income tax purposes, its income may
be subject to taxation. |
We intend to maintain the status of our Operating Partnership as
a partnership for federal income tax purposes. As we currently
hold all of the ownership interests in our Operating
Partnership, it is currently disregarded for income tax
purposes. We intend that it will qualify as a partnership for
income tax purposes upon the admission of additional partners.
However, if the IRS were to successfully challenge the status of
our Operating Partnership as a partnership, it would be taxable
as a corporation. In such event, this would reduce the amount of
distributions that our Operating Partnership could make to us.
This would also result in our losing REIT status and becoming
subject to a corporate level tax on our own income. This would
substantially reduce our cash available to pay distributions and
the return on your investment. In addition, if any of the
entities through which our Operating Partnership owns its
properties, in whole or in part, loses its characterization as a
partnership for federal income tax purposes, it would be subject
to
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taxation as a corporation, thereby reducing distributions to our
Operating Partnership. Such a recharacterization of an
underlying property owner could also threaten our ability to
maintain REIT status.
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The market price and trading volume of our common stock
may be volatile. |
The market price of our common stock may be highly volatile and
subject to wide fluctuations and the trading volume in our
common stock may fluctuate and cause significant price
variations to occur. The market price of our common stock could
fluctuate or decline significantly in the future. Some of the
factors that could negatively affect our share price or result
in fluctuations in the price or trading volume of our common
stock include:
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price and volume fluctuations in the stock market from time to
time, which are often unrelated to the operating performance of
particular companies; |
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significant volatility in the market price and trading volume of
shares of REITs, real estate companies or other companies in our
sector, which is not necessarily related to the performance of
those companies; |
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price and volume fluctuations in the stock market as a result of
terrorist attacks, or speculation regarding future terrorist
attacks, in the United States or abroad; |
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price and volume fluctuations in the stock market as a result of
involvement of the United States in armed hostilities, or
uncertainty regarding United States involvement in such
activities; |
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actual or anticipated variations in our quarterly operating
results or distributions; |
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changes in our funds from operations or earnings estimates or
the publication of research reports about us or the real estate
industry generally; |
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increases in market interest rates that lead purchasers of our
shares of common stock to demand a higher yield; |
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changes in market valuations of similar companies; |
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adverse market reaction to our anticipated level of debt or any
increased indebtedness we incur in the future; |
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additions or departures of key management personnel; |
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actions by institutional stockholders; |
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speculation in the press or investment community; |
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changes in regulatory policies or tax guidelines, particularly
with respect to REITs; |
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loss of REIT status for federal income tax purposes; |
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loss of a major funding source; and |
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general market and economic conditions. |
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Shares of common stock eligible for future sale may have
adverse effects on our share price. |
We cannot predict the effect, if any, of future sales of common
stock, or the availability of shares for future sales, on the
market price of our common stock. Sales of substantial amounts
of common stock (including shares of common stock issuable upon
the conversion of units of our operating partnership that we may
issue from time to time and the issuance of up to
960,000 shares reserved for issuance upon the exercise of
options that have been or may be granted under our 2003 Equity
Incentive Plan), or the perception that these sales could occur,
may adversely affect prevailing market prices for our common
stock.
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An increase in market interest rates may have an adverse
effect on the market price of our common stock. |
One of the factors that investors may consider in deciding
whether to buy or sell our common stock is our distribution rate
as a percentage of our share price, relative to market interest
rates. If market interest
14
rates increase, prospective investors may desire a higher
distribution yield on our common stock or seek securities paying
higher dividends or interest. The market price of our common
stock likely will be based primarily on the earnings that we
derive from rental income with respect to our properties,
interest earned on our mortgage loans and our related
distributions to stockholders, and not from the underlying
appraised value of the properties themselves. As a result,
interest rate fluctuations and capital market conditions are
likely to affect the market price of our common stock, and such
effects could be significant. For instance, if interest rates
rise without an increase in our distribution rate, the market
price of our common stock could decrease because potential
investors may require a higher distribution yield on our common
stock as market rates on interest-bearing securities, such as
bonds, rise.
USE OF PROCEEDS
Unless otherwise described in the applicable prospectus
supplement, we intend to use the net proceeds from the sale of
the offered securities to:
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pay down our revolving line of credit; |
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acquire and develop commercial and industrial real estate for
lease to tenants as suitable opportunities arise; |
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make industrial and commercial mortgage loans as suitable
opportunities arise; |
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reimburse our Adviser for the expenses and fees it incurs in
connection with our business; |
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repay any outstanding indebtedness at the time it is
due; and |
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fund general business purposes. |
Pending their use, we may invest the net proceeds from the sale
of the offered securities in REIT-qualified money market
instruments, short-term repurchase agreements or other cash
equivalents that are expected to provide a lower net return than
we hope to achieve from our intended real estate investments. We
may also temporarily invest in securities that qualify as
“real estate assets” under the REIT provisions of the
Internal Revenue Code, such as mortgage-backed securities. We
may not be able to achieve our targeted investment pace.
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
The following table sets forth the ratio of earnings to fixed
charges and preferred dividends for the periods indicated below.
“Earnings” consist of income (loss) from continuing
operations before income taxes and fixed charges. “Fixed
charges” consist of interest expense and the portion of
operating lease expense that represents interest. We do not
currently have any outstanding preference equity securities or
dividends on such securities.
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| Period from |
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| February 14, 2003 |
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Year Ended | |
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Six Months Ended | |
| December 31, 2003 |
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December 31, 2004 | |
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June 30, 2005 | |
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—(1)
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64.52 |
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6.40 |
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For the period from our inception to December 31, 2003, our
earnings were insufficient to cover fixed charges by $240,871. |
DESCRIPTION OF OUR CAPITAL STOCK
General
Our authorized capital stock consists of 20,000,000 shares
of capital stock, $0.001 par value per share, all of which
is designated as common stock. Under our articles of
incorporation, our board of directors is authorized to classify
and reclassify any unissued shares of capital stock by setting
or changing in any one or more respects, from time to time
before issuance of such stock, the preferences, conversion or
other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of
15
redemption of such stock. As of September 30, 2005, there
were 7,672,000 shares of common stock issued and
outstanding and no shares of preferred stock issued and
outstanding. The following summary description of our capital
stock is not necessarily complete and is qualified in its
entirety by reference to our articles of incorporation and
bylaws, each of which has been filed with the Securities and
Exchange Commission, as well as applicable provisions of
Maryland law.
Voting Rights of Common Stock
Subject to the provisions of our articles of incorporation
regarding restrictions on 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 (of which there currently is none), the holders of the
common stock possess the exclusive voting power. There is no
cumulative voting in the election of directors, which means that
the holders of a majority of the outstanding common stock,
voting as a single class, can elect all of the directors then
standing for election and the holders of the remaining shares
are not able to elect any directors.
Dividends, Liquidations and Other Rights
All shares of common stock offered by this prospectus will be
duly authorized, fully paid and nonassessable. Holders of our
common stock are entitled to receive dividends when declared by
our board of directors out of assets legally available for the
payment of dividends. 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 shares
(of which there currently is none) and to the provisions of our
articles of incorporation regarding restrictions on transfer of
our shares.
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 shares contained in
our articles of incorporation, all shares of common stock have
equal dividend, liquidation and other rights.
Certificates
We will not issue certificates. Shares will be held in
“uncertificated” form which will eliminate the
physical handling and safekeeping responsibilities inherent in
owning transferable stock certificates and eliminate the need to
return a duly executed stock certificate to the transfer agent
to effect a transfer. Transfers can be effected simply by
mailing to us a duly executed transfer form. Upon the issuance
of our shares, we will send to each stockholder a written
statement which will include all information that is required to
be written upon stock certificates under Maryland law.
Meetings and Special Voting Requirements
An annual meeting of the stockholders will be held each year for
the purpose of electing the class of directors whose term is up
for election and to conduct other business that may be before
the stockholders. Special meetings of stockholders may be called
only upon the request of a majority of our directors, a majority
of our independent directors, our chairman, our president or
upon the written request of stockholders entitled to cast at
least 20% of all the votes entitled to be cast at a meeting. In
general, the presence in person or by proxy of a majority of the
outstanding shares, exclusive of excess shares (described in
“Certain Provisions of Maryland Law and of Our Articles of
Incorporation and Bylaws — Restrictions on Ownership
of Shares” below), shall constitute a quorum. Generally,
the affirmative vote of a majority of the votes entitled to be
voted at a meeting at which a quorum is present is necessary to
take stockholder action, except that a plurality of all votes
cast at such a meeting is sufficient to elect a director.
A proposal by our board of directors to amend our articles of
incorporation or to dissolve us requires the approval at a duly
held meeting of our stockholders holding at least a majority of
the shares entitled to
16
vote. Stockholders may, by the affirmative vote of two-thirds of
the shares entitled to vote on such matter, elect to remove a
director for cause. Stockholders do not have the ability to vote
to replace our Adviser or to select a new adviser.
The affirmative vote of a majority of all shares entitled to
vote is required to approve any merger or sale of substantially
all of our assets other than in the ordinary course of business.
The term “substantially all” as used in this context
is a term used in the Maryland General Corporate Law. The
Maryland General Corporation Law does not include a definition
of “substantially all” and Maryland case law suggests
that the term be interpreted on a case-by-case basis. The effect
for investors of the Maryland law’s lack of definition is
that we cannot provide investors with a definition for
“substantially all” and therefore stockholders will
not know whether a sale of assets will constitute a sale of
substantially all of the assets and, therefore, whether they
will have the right to approve any particular sale.
Information Rights
Any stockholder may, during normal business hours and for any
lawful and proper purpose, inspect and copy our bylaws, minutes
of the proceedings of our stockholders, our annual financial
statements and any voting trust agreement that is on file at our
principal office. In addition, one or more stockholders who
together are, and for at least six months have been, record or
beneficial holders of 5% of our common stock are entitled to
inspect a copy of our stockholder list upon written request. The
list will include the name and address of, and the number of
shares owned by, each stockholder and will be available at our
principal office within 20 days of the stockholder’s
request.
The rights of stockholders described above are in addition to,
and do not adversely affect rights provided to investors under,
Rule 14a-7 promulgated under the Securities Exchange Act of
1934, which provides that, upon request of investors and the
payment of the expenses of the distribution, we are required to
distribute specific materials to stockholders in the context of
the solicitation of proxies for voting on matters presented to
stockholders, or, at our option, provide requesting stockholders
with a copy of the list of stockholders so that the requesting
stockholders may make the distribution themselves.
Distributions
Distributions will be paid to investors who are stockholders as
of the record date selected by our board of directors.
Distributions will be paid on a quarterly basis regardless of
the frequency with which such distributions are declared. We are
required to make distributions sufficient to satisfy the REIT
requirements. Generally, income distributed as distributions
will not be taxable to us under federal income tax laws unless
we fail to comply with the REIT requirements.
Distributions will be paid at the discretion of our board of
directors based on our earnings, cash flow and general financial
condition. The directors’ discretion will be governed, in
substantial part, by their obligation to cause us to comply with
the REIT requirements. Because we may receive income from
interest or rents at various times during our fiscal year,
distributions may not reflect our income earned in that
particular distribution period but may be made in anticipation
of cash flow which we expect to receive during a later period of
the year and may be made in advance of actual receipt in an
attempt to make distributions relatively uniform. We may borrow
to make distributions if the borrowing is necessary to maintain
our REIT status, or if the borrowing is part of a liquidation
strategy whereby the borrowing is done in anticipation of the
sale of properties and the proceeds will be used to repay the
loan.
Repurchases of Excess Shares
We have the authority to redeem “excess shares” (as
defined in our articles of incorporation) immediately upon
becoming aware of the existence of excess shares or after giving
the holder of the excess shares 30 days to transfer the
excess shares to a person whose ownership of such shares would
not exceed the ownership limit and, therefore such shares would
no longer be considered excess shares. The price paid upon
redemption by us shall be the lesser of the price paid for such
excess shares by the stockholder holding the excess shares or
the fair market value of the excess shares. We may purchase
excess shares or otherwise repurchase shares if the repurchase
does not impair our capital or operations. For additional
17
information regarding excess shares, see “Certain
Provisions of Maryland Law and of our Articles of Incorporation
and Bylaws — Restrictions on Ownership of Shares.”
Other Matters
The transfer agent and registrar for our common stock is The
Bank of New York. The principal business address of The Bank of
New York is 100 Church Street, 14th Floor, New York, New
York 10286.
DESCRIPTION OF PREFERRED STOCK
General
Subject to limitations prescribed by Maryland law and our
articles of incorporation, our board of directors is authorized
to issue, from the authorized but unissued shares of stock,
shares of preferred stock in series and to establish from time
to time the number of shares of preferred stock to be included
in the series and to fix the designation and any preferences,
conversion and other rights, voting powers, restrictions,
limitations as to dividends and other distributions,
qualifications and terms and conditions of redemption of the
shares of each series, and any other subjects or matters as may
be fixed by resolution of our board of directors or one of its
duly authorized committees.
If we offer preferred stock pursuant to this prospectus, the
applicable prospectus supplement will describe the specific
terms of the series of shares of preferred stock being offered,
including:
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the title and stated value of the series of shares of preferred
stock and the number of shares constituting that series; |
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the number of shares of the series of shares of preferred stock
offered, the liquidation preference per share and the offering
price of the shares of preferred stock; |
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the dividend rate(s), period(s) and/or payment date(s) or the
method(s) of calculation for those values relating to the shares
of preferred stock of the series; |
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the date from which dividends on shares of preferred stock of
the series shall cumulate, if applicable; |
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the procedures for any auction and remarketing, if any, for
shares of preferred stock of the series; |
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the provision for a sinking fund, if any, for shares of
preferred stock of the series; |
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the provision for redemption or repurchase, if applicable, of
shares of preferred stock of the series, and any restriction on
our ability to exercise those redemption and repurchase rights; |
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any listing of the series of shares of preferred stock on any
securities exchange or market; |
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the terms and conditions, if applicable, upon which shares of
preferred stock of the series will be convertible into shares of
preferred stock of another series or common stock, including the
conversion price, or manner of calculating the conversion price,
and the conversion period; |
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whether the preferred stock will be exchangeable into debt
securities, and, if applicable, the exchange price, or how it
will be calculated, and the exchange period; |
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voting rights, if any, of the shares of preferred stock of the
series; |
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preemption rights, if any; |
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whether interests in shares of preferred stock of the series
will be represented by global securities; |
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a discussion of U.S. Federal income tax considerations
applicable to shares of preferred stock of the series; |
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the relative ranking and preferences of shares of preferred
stock of the series as to dividend rights and rights upon
liquidation, dissolution or winding up of our affairs; |
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any limitations on issuance of any series of shares of preferred
stock ranking senior to or on a parity with the series of shares
of preferred stock as to dividend rights and rights upon
liquidation, dissolution or winding up of our affairs; and |
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any limitations on direct or beneficial ownership and
restrictions on transfer of shares of preferred stock of the
series, in each case as may be appropriate to preserve our
status as a REIT under the Code; |
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the registrar and transfer agent for the shares of preferred
stock; and |
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any other specific terms, preferences, rights, limitations or
restrictions of the series of shares of preferred stock; |
If we issue shares of preferred stock under this prospectus, the
shares will be fully paid and non-assessable and will not have,
or be subject to, any preemptive or similar rights.
The issuance of preferred stock could adversely affect the
voting power, conversion or other rights of holders of common
stock. Preferred stock could be issued quickly with terms
designed to delay or prevent a change in control of our company
or make removal of management more difficult. Additionally, the
issuance of preferred stock may have the effect of decreasing
the market price of our common stock.
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF OUR ARTICLES OF INCORPORATION AND BYLAWS
The following description of certain provisions of Maryland
law and of our articles of incorporation and bylaws is only a
summary. For a complete description, we refer you to the
Maryland General Corporation Law, our articles of incorporation
and our bylaws. We have filed our articles of incorporation and
bylaws as exhibits to the registration statement of which this
prospectus is a part.
Classification of our Board of Directors
Pursuant to our bylaws our board of directors is comprised of
eight members and is divided into three classes of directors.
Directors of each class are elected for a three-year term, and
each year one class of directors will be elected by the
stockholders. The current terms of the Class III,
Class I and Class II directors will expire in 2006,
2007 and 2008, respectively, and when their respective
successors are duly elected and qualify. Any director elected to
fill a vacancy shall serve for the remainder of the full term of
the class in which the vacancy occurred and until a successor is
elected and qualifies. We believe that classification of our
board of directors helps to assure the continuity and stability
of our business strategies and policies as determined by our
directors. Holders of shares of our capital stock have no right
to cumulative voting in the election of directors. Consequently,
at each annual meeting of stockholders, the holders of a
majority of the capital stock are able to elect all of the
successors of the class of directors whose terms expire at that
meeting.
Our classified board could have the effect of making the
replacement of incumbent directors more time consuming and
difficult. At least two annual meetings of stockholders, instead
of one, will generally be required to effect a change in a
majority of our board of directors. Thus, our classified board
could increase the likelihood that incumbent directors will
retain their positions. The staggered terms of directors may
delay, defer or prevent a tender offer or an attempt to change
control of us or another transaction that might involve a
premium price for our common stock that might be in the best
interest of our stockholders.
Removal of Directors
Any director may be removed only for cause by the stockholders
upon the affirmative vote of at least two-thirds of all the
votes entitled to be cast at a meeting called for the purpose of
the proposed removal. The notice of the meeting shall indicate
that the purpose, or one of the purposes, of the meeting is to
determine if the director shall be removed.
Restrictions on Ownership of Shares
In order for us to qualify as a REIT, not more than 50% of our
outstanding shares may be owned by any five or fewer individuals
(including some tax-exempt entities) during the last half of
each taxable year, and the outstanding shares must be owned by
100 or more persons independent of us and each other during at
least 335 days of a 12-month taxable year or during a
proportionate part of a shorter taxable year
19
for which an election to be treated as a REIT is made. We may
prohibit certain acquisitions and transfers of shares so as to
facilitate our continued qualification as a REIT under the
Internal Revenue Code. However, this prohibition may not be
effective.
Our articles of incorporation, in order to assist our board of
directors in preserving our status as a REIT, contain an
ownership limit which prohibits any person or group of persons
from acquiring, directly or indirectly, beneficial ownership of
more than 9.8% of our outstanding shares of capital stock.
Shares owned by a person or a group of persons in excess of the
ownership limit are deemed “excess shares.” Shares
owned by a person who individually owns of record less than 9.8%
of outstanding shares may nevertheless be excess shares if the
person is deemed part of a group for purposes of this
restriction.
Our articles of incorporation stipulate that any purported
issuance or transfer of shares shall be valid only with respect
to those shares that do not result in the transferee-stockholder
owning shares in excess of the ownership limit. If the
transferee-stockholder acquires excess shares, the person is
considered to have acted as our agent and holds the excess
shares on behalf of the ultimate stockholder.
The ownership limit does not apply to offerors which, in
accordance with applicable federal and state securities laws,
make a cash tender offer, where at least 90% of the outstanding
shares of our common stock (not including shares or subsequently
issued securities convertible into common stock which are held
by the tender offeror and any “affiliates” or
“associates” thereof within the meaning of the
Securities Exchange Act of 1934) are duly tendered and accepted
pursuant to the cash tender offer. The ownership limit also does
not apply to the underwriter in a public offering of our shares.
The ownership limit also does not apply to a person or persons
which our directors so exempt from the ownership limit upon
appropriate assurances that our qualification as a REIT is not
jeopardized.
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 circumstances specified in
the statute, an asset transfer or issuance 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 shares; 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 shares. |
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 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 capital stock; and |
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two-thirds of the votes entitled to be cast by holders of our
voting shares other than shares held by (a) the interested
stockholder with whom or with whose affiliate the business
combination is to be effected and (b) shares held by an
affiliate or associate of the interested stockholder. |
These super-majority vote requirements do not apply if our
common stockholders receive a minimum price, as defined under
Maryland law, for their shares in the form of cash or other
consideration in the same form as previously paid by the
interested stockholder for its shares. The statute permits
various exemptions from its provisions, including business
combinations that are exempted by our board of directors before
the time that the interested stockholder becomes an interested
stockholder. The business combination statute may discourage
others from trying to acquire control of us and increase the
difficulty of consummating any offer.
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Merger; Amendment of Articles of Incorporation
Under Maryland law, we will not be able to amend our articles of
incorporation or merge with another entity unless approved by
the affirmative vote of stockholders holding at least a majority
of the shares entitled to vote on the matter. As permitted by
Maryland law, our articles of incorporation contain a provision
permitting our directors, without any action by our
stockholders, to amend the articles of incorporation to increase
or decrease the aggregate number of shares of stock or the
number of shares of any class of stock that we have authority to
issue.
Operations
We generally are prohibited from engaging in certain activities,
including acquiring or holding property or engaging in any
activity that would cause us to fail to qualify as a REIT.
Term and Termination
Our articles of incorporation provide for us to have a perpetual
existence. Pursuant to our articles of incorporation, and
subject to the provisions of any of our classes or series of
stock then outstanding and the 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 persons 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 our board of directors; or |
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by a stockholder who was 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 has complied with the
advance notice procedures set forth in our bylaws. |
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 persons
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 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
was 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 has complied with the advance notice provisions
set forth in our bylaws. |
Power to Issue Additional Shares
We currently do not intend to issue any securities other than
the shares described in this prospectus and the shares issuable
under our stock option plan, although we may do so at any time,
including upon the redemption of limited partnership interests
that we may issue in connection with acquisitions of real
property. We believe that the power to issue additional shares
of stock and to classify or reclassify unissued shares of common
stock or preferred stock and thereafter to issue the classified
or reclassified shares 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 any stock exchange
or automated quotation system on which our securities may be
listed or traded. Although we have no present intention of doing
so, we could issue a class or series of shares that could delay,
defer or prevent a transaction or a
21
change in control that might involve a premium price for holders
of common stock or otherwise be in their best interest.
Control Share Acquisitions
Maryland law provides that “control shares” of a
corporation acquired in a “control share acquisition”
have no voting rights unless the corporation’s stockholders
approve such voting rights by a vote of two-thirds of the votes
entitled to be cast on the matter. Shares owned by the acquiror,
or by officers or directors of the corporation who are also
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 of all voting power; |
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one-third or more but less than a majority of all voting
power; or |
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a majority or more of all voting power. |
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 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 providing a statement to us
detailing, among other things, the acquiring person’s
identity and stock ownership and an undertaking to pay the
expenses of the meeting. 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
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, at the fair market value of such
shares. 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 articles of
incorporation or bylaws.
Possible Anti-Takeover Effect of Certain Provisions of
Maryland Law and of Our Articles of Incorporation and Bylaws
The business combination provisions and the control share
acquisition provisions of Maryland law, the provisions of our
bylaws regarding the classification of our board of directors
and the restrictions on the transfer of stock and the advance
notice provisions of our bylaws could have the effect of
delaying, deferring or preventing a transaction or a change in
the control that might involve a premium price for holders of
common stock or otherwise be in their best interest.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following discussion summarizes our taxation and the
material U.S. Federal income tax consequences to
stockholders of their ownership of our stock. The tax treatment
of stockholders will vary depending upon the stockholder’s
particular situation, and this discussion addresses only
stockholders that hold our stock as a capital asset and does not
deal with all aspects of taxation that may be relevant to
particular stockholders in light of their personal investment or
tax circumstances. This section also does not deal with all
aspects of taxation that may be relevant to certain types of
stockholders to which special provisions of the
U.S. Federal income tax laws apply, including:
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dealers in securities or currencies; |
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traders in securities that elect to use a mark-to-market method
of accounting for their securities holdings; |
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banks; |
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tax-exempt organizations; |
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certain insurance companies; |
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persons liable for the alternative minimum tax; |
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persons that hold our stock as a hedge against interest rate or
currency risks or as part of a straddle or conversion
transaction; and |
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stockholders whose functional currency is not the
U.S. dollar. |
This summary is based on the Code, its legislative history,
existing and proposed regulations under the Code, published
rulings and court decisions. This summary describes the
provisions of these sources of law only as they are currently in
effect. All of these sources of law may change at any time, and
any change in the law may apply retroactively.
We urge you to consult with your own tax advisor regarding
the tax consequences to you of acquiring, owning and selling our
stock including the U.S. Federal, state, local and foreign
tax consequences of acquiring, owning and selling our stock in
your particular circumstances and potential changes in
applicable laws.
Taxation of the Company as a REIT
In the opinion of Cooley Godward LLP, commencing with our
taxable year ending December 31, 2004, we have been
organized in conformity with the requirements for qualification
and taxation as a REIT under the Code, and our proposed method
of operation will enable us to continue to meet the requirements
for qualification and taxation as a REIT under the Code. You
should be aware, however, that opinions of counsel are not
binding upon the IRS or any court.
In providing its opinion, Cooley Godward LLP is relying as to
certain factual matters upon the statements and representations
contained in certificates provided to Cooley Godward LLP by us.
Commencing with our taxable year ending December 31, 2004,
we have been organized in conformity with the requirements for
qualification and taxation as a REIT under the Code, and our
proposed method of operation will enable us to continue to meet
the requirements for qualification and taxation as a REIT under
the Code.
Our qualification as a REIT will depend upon our continuing
satisfaction of the requirements of the Code relating to
qualification for REIT status. Some of these requirements depend
upon actual operating results, distribution levels, diversity of
stock ownership, asset composition, source of income and record
keeping. Accordingly, while we intend to continue to qualify to
be taxed as a REIT, the actual results of our operations for any
particular year might not satisfy these requirements.
The sections of the Code applicable to REITs are highly
technical and complex. The following discussion summarizes the
material aspects of relevant sections of the Code.
As a REIT, we generally will not have to pay U.S. Federal
corporate income taxes on net income that we currently
distribute to our stockholders. This treatment substantially
eliminates the “double taxation” at the corporate and
stockholder levels that generally results from investment in a
regular corporation. Our dividends, however, will generally not
be eligible for (i) the reduced tax rates applicable to
dividends received by individuals or (ii) the corporate
dividends received deduction. In addition, our domestic taxable
REIT subsidiary will be subject to U.S. Federal, state and
local corporate income tax.
Certain of our subsidiaries will be required to indemnify
certain of their members if such members are not allocated a
certain minimum level of debt for U.S. Federal income tax
purposes. Although we expect to maintain a sufficient amount of
debt to allocate to such members so as to not trigger such
indemnification obligation, it is possible that an indemnity
payment will have to be made by us to members of such
subsidiaries if the amount of debt allocated to such members is
reduced beyond a certain minimum amount.
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Even if we qualify for taxation as a REIT, we may be subject to
U.S. Federal income tax as follows:
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First, we will have to pay tax at regular corporate rates on any
undistributed real estate investment trust taxable income,
including undistributed net capital gains. |
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Second, under certain circumstances, we may have to pay the
alternative minimum tax on items of tax preference, if any. |
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Third, if we have (a) net income from the sale or other
disposition of “foreclosure property,” as defined in
the Code, which is held primarily for sale to customers in the
ordinary course of business or (b) other non-qualifying net
income from foreclosure property, we will have to pay tax at the
highest corporate rate on that income. |
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Fourth, if we have net income from “prohibited
transactions,” as defined in the Code, we will have to pay
a 100% tax on that income. Prohibited transactions are, in
general, certain sales or other dispositions of property, other
than foreclosure property, held primarily for sale to customers
in the ordinary course of business. Under current law, unless a
sale of real property qualifies for a safe harbor, the question
of whether the sale of a property constitutes the sale of
property held primarily for sale to customers is generally a
question of the facts and circumstances regarding a particular
transaction. We and our subsidiaries intend to hold the
interests in our properties for investment with a view to
long-term appreciation and to make occasional sales as are
consistent with our investment objectives. We do not intend to
engage in prohibited transactions. We cannot assure you,
however, that we will only make sales that satisfy the
requirements of the safe harbors or that the IRS will not
successfully assert that one or more of such sales are
prohibited transactions. |
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Fifth, if we should fail to satisfy the 75% gross income test or
the 95% gross income test, as discussed below under
“— Income Tests,” but we have nonetheless
maintained our qualification as a REIT because we have satisfied
other requirements necessary to maintain REIT qualification, we
will have to pay a 100% tax on an amount equal to (a) the
gross income attributable to the greater of (i) 75% of our
gross income over the amount of gross income that is qualifying
income for purposes of the 75% test, and (ii) 95% of our
gross income over the amount of gross income that is qualifying
income for purposes of the 95% test, multiplied by (b) a
fraction intended to reflect our profitability. |
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Sixth, if we should fail to distribute during each calendar year
at least the sum of (1) 85% of our real estate investment
trust ordinary income for that year, (2) 95% of our real
estate investment trust capital gain net income for that year
and (3) any undistributed taxable income from prior
periods, we would have to pay a non-deductible 4% excise tax on
the excess of that required distribution over the amounts
actually distributed. |
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Seventh, if we acquire any asset from a C corporation in certain
transactions in which we must adopt the basis of the asset or
any other property in the hands of the C corporation as our
basis of the asset in our hands, and we subsequently recognize
gain on the disposition of that asset during the 10-year period
beginning on the date on which we acquired that asset, then we
will have to pay tax on the built-in gain at the highest regular
corporate rate. A “C corporation” means generally a
corporation that has to pay full corporate-level tax. |
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Eighth, if we receive non-arm’s length income from one of
our taxable REIT subsidiaries (as defined under
“— Asset Tests”), we will be subject to a
100% tax on the amount of our non-arm’s length income. |
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Ninth, if we should fail to satisfy the asset test (as discussed
below) but nonetheless maintain our qualification as a REIT
because certain other requirements have been met, we may be
subject to a tax that would be the greater of (a) $50,000;
or (b) an amount determined by multiplying the highest rate
of tax for corporations by the net income generated by the
assets for the period beginning on the first date of the failure
and ending on the day we dispose of the assets (or otherwise
satisfy the requirements for maintaining REIT qualification). |
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Tenth, if we should fail to satisfy one or more requirements for
REIT qualification, other than the 95% and 75% gross income
tests and other than the asset test, but nonetheless maintain
our qualification as a REIT because certain other requirements
have been met, we may be subject to a $50,000 penalty for each
failure. |
Requirements for Qualification as a REIT
The Code defines a REIT as a corporation, trust or association
that is:
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managed by one or more trustees or directors; |
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the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest; |
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that would otherwise be taxable as a domestic corporation, but
for Sections 856 through 859 of the Code; |
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that is neither a financial institution nor an insurance company
to which certain provisions of the Code apply; |
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the beneficial ownership of which is held by 100 or more persons; |
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that, during the last half of each taxable year, has no more
than 50% in value of its outstanding stock owned, directly or
constructively, by five or fewer individuals, as defined in the
Code to include certain entities; and |
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that meets certain other tests, described below, regarding the
nature of its income and assets. |
The Code provides that the conditions described in the first
through fourth bullet points above must be met during the entire
taxable year and that the condition described in the fifth
bullet point above must be met during at least 335 days of
a taxable year of 12 months, or during a proportionate part
of a taxable year of less than 12 months. Under applicable
Treasury regulations, we must maintain certain records and
request certain information from our stockholders designed to
disclose the actual ownership of our stock.
We expect that we will satisfy the conditions described in the
first through sixth bullet points of the second preceding
paragraph. In addition, our articles of incorporation provide
for restrictions regarding the ownership and transfer of our
stock. These restrictions are intended to assist us in
continuing to satisfy the share ownership requirements described
in the fifth and sixth bullet points of the second preceding
paragraph. The ownership and transfer restrictions pertaining to
our stock are described in this prospectus under the heading
“Certain Provisions of Maryland Law and of our Articles of
Incorporation and Bylaws — Restrictions on Ownership
and Transfer.” Our board of directors will require an IRS
ruling or an opinion of counsel before granting any request for
an exemption from such ownership limitations in circumstances
where it is unable to satisfy itself that the ownership
limitations would not be violated.
We own indirect interests in a number of corporate subsidiaries.
Code Section 856(i) provides that unless a REIT makes an
election to treat the corporation as a taxable REIT subsidiary
(as defined below), a wholly owned corporate subsidiary of a
REIT which is a “qualified REIT subsidiary,” as
defined in the Code, will not be treated as a separate
corporation, and all assets, liabilities and items of income,
deduction and credit of a qualified REIT subsidiary will be
treated as assets, liabilities and items of these kinds of the
REIT. Thus, in applying the requirements described in this
section, our qualified REIT subsidiaries, if any, will be
ignored, and all assets, liabilities and items of income,
deduction and credit of these subsidiaries will be treated as
assets, liabilities and items of these kinds of ours.
Taxable REIT Subsidiaries
A taxable REIT subsidiary, or TRS, is any corporation in which a
REIT directly or indirectly owns stock, provided that the REIT
and that corporation make a joint election to treat that
corporation as a TRS. The election can be revoked at any time as
long as the REIT and the TRS revoke such election jointly. In
addition, if a TRS holds directly or indirectly, more than 35%
of the securities of any other corporation (by vote or by
value), then that other corporation is also treated as a TRS. A
corporation can be a TRS with respect to more than one REIT.
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A TRS is subject to U.S. Federal income tax at regular
corporate rates (currently a maximum rate of 35%), and may also
be subject to state and local taxation.
Any dividends paid or deemed paid by any one of our TRSs will
also be subject to tax, either (i) to us if we do not pay
the dividends received to our stockholders as dividends, or
(ii) to our stockholders if we do pay out the dividends
received to our stockholders. We may hold more than 10% of the
stock of a TRS without jeopardizing our qualification as a REIT
notwithstanding the rule described below under
“— Asset Tests” that generally precludes
ownership of more than 10% of any issuer’s securities.
However, as noted below, in order for us to qualify as a REIT,
the securities of all of the TRSs in which we have invested
either directly or indirectly may not represent more than 20% of
the total value of our assets. Although we expect that the
aggregate value of all of our interests in TRSs will represent
less than 20% of the total value of our assets, we cannot assure
that this will always be true. Other than certain activities
related to operating or managing a lodging or health care
facility as more fully described below in the section entitled
“— Income Tests,” a TRS may generally engage
in any business including the provision of customary or
non-customary services to tenants of the parent REIT.
Income Tests
In order to maintain our qualification as a REIT, we annually
must satisfy two gross income requirements:
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First, we must derive at least 75% of our gross income,
excluding gross income from prohibited transactions, for each
taxable year directly or indirectly from investments relating to
real property or mortgages on real property, including
“rents from real property,” as defined in the Code, or
from certain types of temporary investments. Rents from real
property generally include our expenses that are paid or
reimbursed by tenants. |
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Second, at least 95% of our gross income, excluding gross income
from prohibited transactions, for each taxable year must be
derived from real property investments as described in the
preceding bullet point, dividends (including dividends from a
TRS), interest and gain from the sale or disposition of stock or
securities that do not constitute dealer property, or from any
combination of these types of sources. |
For taxable years beginning on or after January 1, 2005,
the American Jobs Creation Act of 2004, signed into law on
October 22, 2004, or the 2004 Act, clarifies the types of
transactions that are hedging transactions for purposes of the
95% gross income test and states that any income from a hedging
transaction that is clearly and timely identified and hedges
indebtedness incurred or to be incurred to acquire or carry real
estate assets will not constitute gross income, rather than
being treated as qualifying or nonqualifying income, for
purposes of the 95% gross income test.
Rents that we receive or are deemed to have received will
qualify as rents from real property in satisfying the gross
income requirements for a REIT described above only if the rents
satisfy several conditions:
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First, the amount of rent must not be based in whole or in part
on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from rents
from real property solely because it is based on a fixed
percentage or percentages of receipts or sales. |
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Second, the Code provides that rents received from a tenant will
not qualify as rents from real property in satisfying the gross
income tests if the REIT, or a direct or indirect owner of 10%
or more of the REIT, directly or under the applicable
attribution rules, owns a 10% or greater interest in that
tenant; except that rents received from a TRS under certain
circumstances qualify as rents from real property even if we own
more than a 10% interest in the subsidiary. We refer to a tenant
in which we own a 10% or greater interest as a “related
party tenant.” |
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Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15% of
the total rent received under the lease, then the portion of
rent attributable to the personal property will not qualify as
rents from real property. |
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Finally, for rents received to qualify as rents from real
property, the REIT generally must not operate or manage the
property or furnish or render services to the tenants of the
property, other than through an independent contractor from whom
the REIT derives no revenue and who is adequately compensated or
through a TRS. However, we may directly perform certain services
that landlords usually or customarily render when renting space
for occupancy only or that are not considered rendered to the
occupant of the property. |
We do not expect to perform any services for our tenants. If we
were to provide services to a tenant that are other than those
landlords usually or customarily provide when renting space for
occupancy only, amounts received or accrued by us for any of
these services will not be treated as rents from real property
for purposes of the REIT gross income tests. However, the
amounts received or accrued for these services will not cause
other amounts received with respect to the property to fail to
be treated as rents from real property unless the amounts
treated as received in respect of the services, together with
amounts received for certain management services, exceed 1% of
all amounts received or accrued by us during the taxable year
with respect to the property. For purposes of the 1% threshold,
the amount treated as received for any service may not be less
than 150% of the direct cost incurred in furnishing or rendering
the service. If the sum of the amounts received in respect of
the services to tenants and management services described in the
preceding sentence exceeds the 1% threshold, then all amounts
received or accrued by us with respect to the property will not
qualify as rents from real property, even if we provide the
impermissible services to some, but not all, of the tenants of
the property.
For purposes of the gross income tests, the term
“interest” generally does not include any amount
received or accrued, directly or indirectly, if the
determination of that amount depends in whole or in part on the
income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term interest
solely because it is based on a fixed percentage or percentages
of receipts or sales.
If we fail to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, we may nevertheless qualify
as a REIT for that year if we satisfy the requirements of other
provisions of the Code that allow relief from disqualification
as a REIT. These relief provisions, as modified by the 2004 Act,
will generally be available if:
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our failure to meet the income tests was due to reasonable cause
and not due to willful neglect; and |
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following our identification of the failure, we file with the
IRS a schedule describing each item of our qualifying gross
income for the taxable year of the failure. |
We might not be entitled to the benefit of these relief
provisions, however. As discussed in the fifth bullet point
under the section “— Taxation of the Company as a
REIT,” even if these relief provisions apply, we would have
to pay a tax on the excess income.
Asset Tests
At the close of each quarter of our taxable year, we must also
satisfy three tests relating to the nature of our assets:
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First, at least 75% of the value of our total assets must be
represented by real estate assets, including (a) real
estate assets held by our qualified REIT subsidiaries, our
allocable share of real estate assets held by partnerships in
which we own an interest and stock issued by another REIT,
(b) for a period of one year from the date of our receipt
of proceeds of an offering of its shares of beneficial interest
or publicly offered debt with a term of at least five years,
stock or debt instruments purchased with these proceeds and
(c) cash, cash items and government securities. |
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Second, not more than 25% of our total assets may be represented
by securities other than those in the 75% asset class. |
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Third, not more than 20% of our total assets may constitute
securities issued by one or more TRSs and of the investments
included in the 25% asset class, the value of any one
issuer’s securities, other than securities issued by
another REIT or by a TRS may not exceed 5% of the value
(“5% test”) of our total assets, and we may not own
more than 10% of the vote (“10% voting test”) or |
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value (“10% value test”) of any one issuer’s
outstanding securities, except in the case of a TRS as described
above. As a consequence, if the IRS would successfully challenge
the partnership status of any of the partnerships in which we
maintain an interest, and the partnership is reclassified as a
corporation or a publicly traded partnership taxable as a
corporation we could lose our REIT status. |
The following assets are not treated as “securities”
held by us for purposes of the 10% value test
(i) “straight debt” meeting certain requirements,
unless we hold (either directly or through our
“controlled” taxable REIT subsidiaries) certain other
securities of the same corporate or partnership issuer that have
an aggregate value greater than 1% of such issuer’s
outstanding securities; (ii) loans to individuals or
estates; (iii) certain rental agreements calling for
deferred rents or increasing rents that are subject to
Section 467 of the Code, other than with certain related
persons; (iv) obligations to pay us amounts qualifying as
“rents from real property” under the 75% and 95% gross
income tests; (v) securities issued by a state or any
political subdivision of a state, the District of Columbia, a
foreign government, any political subdivision of a foreign
government, or the Commonwealth of Puerto Rico, but only if the
determination of any payment received or accrued under the
security does not depend in whole or in part on the profits of
any person not described in this category, or payments on any
obligation issued by such an entity; (vi) securities issued
by another qualifying REIT; and (vii) other arrangements
identified in Treasury regulations (which have not yet been
issued or proposed). In addition, any debt instrument issued by
a partnership will not be treated as a “security”
under the 10% value test if at least 75% of the
partnership’s gross income (excluding gross income from
prohibited transactions) is derived from sources meeting the
requirements of the 75% gross income test. If the partnership
fails to meet the 75% gross income test, then the debt
instrument issued by the partnership nevertheless will not be
treated as a “security” to the extent of our interest
as a partner in the partnership. Also, in looking through any
partnership to determine our allocable share of any securities
owned by the partnership, our share of the assets of the
partnership, solely for purposes of applying the 10% value test
in taxable years beginning on or after January 1, 2005,
will correspond not only to our interest as a partner in the
partnership but also to our proportionate interest in certain
debt securities issued by the partnership.
If we fail to meet the 5% test, the 10% value test or the 10%
voting test described in the third bullet point of the second
paragraph above at the end of any quarter and such failure is
not cured within 30 days thereafter, we would fail to
qualify as a REIT. Under the 2004 Act, after the 30 day
cure period, we could dispose of sufficient assets to cure such
a violation that does not exceed the lesser of 1% of our assets
at the end of the relevant quarter or $10,000,000 if the
disposition occurs within six months after the last day of the
calendar quarter in which we identify the violation. For
violations of these tests that are larger than this amount and
for violations of the other asset tests described in the
preceding paragraph, where such violations are due to reasonable
cause and not willful neglect, the 2004 Act permits us to avoid
disqualification as a REIT, after the 30 day cure period,
by taking steps including the disposition of sufficient assets
to meet the asset tests (within six months after the last day of
the calendar quarter in which we identify the violation) and
paying a tax equal to the greater of $50,000 or the highest
corporate tax rate multiplied by our net income generated by the
non-qualifying assets during the period beginning on the first
date of the failure and ending on the date we dispose of the
asset (or otherwise cure the asset test failure).
Annual Distribution Requirement
We are required to distribute dividends, other than capital gain
dividends, to our stockholders in an amount at least equal to
(1) the sum of (a) 90% of our “real estate
investment trust taxable income,” computed without regard
to the dividends paid deduction, and our net capital gain, and
(b) 90% of the net after-tax income, if any, from
foreclosure property minus (2) the sum of certain items of
non-cash income.
These distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before
we timely file our tax return for the year to which they relate
and if paid on or before the first regular dividend payment
after the declaration.
To the extent that we do not distribute all of our net capital
gain or distribute at least 90%, but less than 100% of our real
estate investment trust taxable income, as adjusted, we will
have to pay tax on those
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amounts at regular ordinary and capital gain corporate tax
rates, as the case may be. If we so choose, we may retain,
rather than distribute, our net long-term capital gains and pay
the tax on those gains. In this case, our stockholders would
include their proportionate share of the undistributed long-term
capital gains in income. However, our stockholders would then be
deemed to have paid their share of the tax, which would be
credited or refunded to them. In addition, our stockholders
would be able to increase their basis in our shares they hold by
the amount of the undistributed long-term capital gains, less
the amount of capital gains tax we paid, included in the
stockholders’ long-term capital gains. Furthermore, if we
fail to distribute during each calendar year at least the sum of
(a) 85% of our REIT ordinary income for that year,
(b) 95% of our REIT capital gain income for that year, and
(c) any undistributed taxable income from prior periods, we
would have to pay a 4% excise tax on the excess of the required
distribution over the amounts actually distributed. We intend to
satisfy the annual distribution requirements.
From time to time, we may not have sufficient cash or other
liquid assets to meet the 90% distribution requirement due to
timing differences between (a) when we actually receive
income and when we actually pay deductible expenses and
(b) when we include the income and deduct the expenses in
arriving at our taxable income. Further, it is possible that,
from time to time, we may be allocated a share of net capital
gain attributable to the sale of depreciated property which
exceeds our allocable share of cash attributable to that sale.
In these cases, we may have less cash available for distribution
than is necessary to meet our annual 90% distribution
requirement. To meet the 90% distribution requirement, we may
find it necessary to arrange for short-term, or possibly
long-term, borrowings or to pay dividends in the form of taxable
stock dividends.
Under certain circumstances, we may be able to rectify a failure
to meet the distribution requirement for a year by paying
“deficiency dividends” to stockholders in a later
year, which may be included in our deduction for dividends paid
for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, we will
be required to pay penalties and interest based upon the amount
of any deduction taken for deficiency dividends.
Failure to Qualify as a REIT
If we fail to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, we will have to
pay tax, including any applicable alternative minimum tax, on
our taxable income at regular corporate rates. We will not be
able to deduct distributions to stockholders in any year in
which we fail to qualify, nor will we be required to make
distributions to stockholders. In this event, to the extent of
current and accumulated earnings and profits, all distributions
to stockholders will be taxable to the stockholders as dividend
income (provided that the rate of tax for U.S. stockholders
on the taxable portion of such distributions would likely be
limited to 15% through 2008, and corporate distributees may be
eligible for the dividends received deduction if they satisfy
the relevant provisions of the Code). Unless entitled to relief
under specific statutory provisions, we will also be
disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. We might
not be entitled to the statutory relief described in this
paragraph in all circumstances.
The 2004 Act provides additional relief in the event that we
fail to satisfy one or more requirements for qualification as a
REIT, other than the 75% gross income test and the 95% gross
income test and other than the new rules provided for failures
of the asset tests described above if:
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the violation is due to reasonable cause and not willful
neglect; and |
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we pay a penalty of $50,000 for each failure to satisfy the
provision. |
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Taxation of Stockholders
As used in this section, the term
“U.S. stockholder” means a holder of our stock
who, for U.S. Federal income tax purposes, is:
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a citizen or resident of the United States; |
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a domestic corporation, partnership or other entity created or
organized in or under the laws of the United States or of any
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; |
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a trust if a United States court can exercise primary
supervision over the trust’s administration and one or more
United States persons have authority to control all substantial
decisions of the trust; or |
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a person or entity otherwise subject to U.S. Federal income
taxation on a net income basis. |
Distributions. As long as we qualify as a REIT,
distributions made by us out of our current or accumulated
earnings and profits, and not designated as capital gain
dividends, will constitute dividends taxable to our taxable
U.S. stockholders as ordinary income. Our individual
U.S. stockholders will generally not be entitled to the
lower tax rate applicable to certain types of dividends under
law enacted in 2003 except that individual
U.S. stockholders may be eligible for the lower tax rate
with respect to the portion of any distribution (a) that
represents income from dividends we received from a corporation
in which we own shares (but only if such dividends would be
eligible for the lower rate on dividends if paid by the
corporation to its individual stockholders) or (b) that is
equal to our real estate investment trust taxable income (taking
into account the dividends paid deduction available to us) and
less any taxes paid by us on these items during our previous
taxable year. Individual U.S. stockholders should consult
their own tax advisors to determine the impact of this
legislation. Distributions of this kind will not be eligible for
the dividends received deduction in the case of
U.S. stockholders that are corporations. Distributions made
by us that we properly designate as capital gain dividends will
be taxable to U.S. stockholders as gain from the sale of a
capital asset held for more than one year, to the extent that
they do not exceed our actual net capital gain for the taxable
year, without regard to the period for which a
U.S. stockholder has held his stock. Thus, with certain
limitations, capital gain dividends received by an individual
U.S. stockholder may be eligible for preferential rates of
taxation. U.S. stockholders that are corporations may,
however, be required to treat up to 20% of certain capital gain
dividends as ordinary income. In addition, net capital gains
attributable to the sale of depreciable real property held for
more than twelve months are subject to a 25% maximum
U.S. Federal income tax rate to the extent of previously
claimed real property depreciation.
To the extent that we make distributions, not designated as
capital gain dividends, in excess of our current and accumulated
earnings and profits, these distributions will be treated first
as a tax-free return of capital to each U.S. stockholder.
Thus, these distributions will reduce the adjusted basis which
the U.S. stockholder has in his stock for tax purposes by
the amount of the distribution, but not below zero.
Distributions in excess of a U.S. stockholder’s
adjusted basis in his stock will be taxable as capital gains,
provided that the stock has been held as a capital asset.
Dividends authorized by us in October, November or December of
any year and payable to a stockholder of record on a specified
date in any of these months will be treated as both paid by us
and received by the stockholder on December 31 of that
year, provided that we actually pay the dividend on or before
January 31 of the following calendar year. Stockholders may not
include in their own income tax returns any of our net operating
losses or capital losses.
U.S. stockholders holding our stock at the close of our
taxable year will be required to include, in computing their
long-term capital gains for the taxable year in which the last
day of our taxable year falls, the amount that we designate in a
written notice mailed to our stockholders. We may not designate
amounts in excess of our undistributed net capital gain for the
taxable year. Each U.S. stockholder required to include the
designated amount in determining the stockholder’s
long-term capital gains will be deemed to have paid, in the
taxable year of the inclusion, the tax paid by us in respect of
the undistributed
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net capital gains. U.S. stockholders to whom these rules
apply will be allowed a credit or a refund, as the case may be,
for the tax they are deemed to have paid. U.S. stockholders
will increase their basis in their stock by the difference
between the amount of the includible gains and the tax deemed
paid by the stockholder in respect of these gains.
Distributions made by us and arising from a
U.S. stockholder’s sale or exchange of our stock will
not be treated as passive activity income. As a result,
U.S. stockholders generally will not be able to apply any
passive losses against that income or gain.
Our dividends, to the extent they do not constitute a return of
capital, will generally be treated as investment income for
purposes of the investment interest limitation under
Section 163 of the Code. Net capital gain from the
disposition of our stock and capital gains generally will be
eliminated from investment income unless the taxpayer elects to
have the gain taxed at ordinary income rates.
Sales of Stock. When a U.S. stockholder sells or
otherwise disposes of our stock, the stockholder will recognize
gain or loss for U.S. Federal income tax purposes in an
amount equal to the difference between (a) the amount of
cash and the fair market value of any property received on the
sale or other disposition and (b) the holder’s
adjusted basis in the stock for tax purposes. This gain or loss
will be capital gain or loss if the U.S. stockholder has
held the stock as a capital asset. The gain or loss will be
long-term gain or loss if the U.S. stockholder has held the
stock for more than one year. Long-term capital gain of an
individual U.S. stockholder is generally taxed at
preferential rates. In general, any loss recognized by a
U.S. stockholder when the stockholder sells or otherwise
disposes of our stock that the stockholder has held for six
months or less, after applying certain holding period rules,
will be treated as a long-term capital loss, to the extent of
distributions received by the stockholder from us which were
required to be treated as long-term capital gains.
Redemption of Stock. The treatment to be accorded to any
redemption by us of the stock can only be determined on the
basis of particular facts as to each holder of our stock at the
time of redemption. In general, a preferred holder will
recognize capital gain or loss measured by the difference
between the amount realized by the holder upon the redemption
and the holder’s adjusted tax basis in the stock redeemed,
provided the stock is held as a capital asset, if the redemption
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results in a “complete termination” of the
holder’s shares interest in all classes of our stock under
Section 302(b)(3) of the Code, |
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is “substantially disproportionate” with respect to
the holder’s interest in us under Section 302(b)(2) of
the Code; or |
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is “not essentially equivalent to a dividend” with
respect to the holder of our stock under Section 302(b)(1)
of the Code. |
In determining whether any of these tests have been met, shares
considered to be owned by the holder by reason of certain
constructive ownership rules set forth in the Code, as well as
shares actually owned, must generally be taken into account.
Because the determination as to whether any of the alternative
tests of Section 302(b) of the Code will be satisfied with
respect to any particular holder of our stock depends upon the
facts and circumstances at the time when the determination must
be made, prospective investors are advised to consult their own
tax advisors to determine the tax treatment to them. Any portion
of the redemption proceeds attributable to a declared but unpaid
dividend will be treated as a distribution to the stock as
described above under “— Taxation of
Stockholders — U.S. Stockholders —
Distributions.”
A “substantially disproportionate” reduction in the
interest of a holder of our stock will have occurred if, as a
result of the redemption,
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the holder’s ownership of all of our outstanding voting
stock is reduced immediately after the redemption to less than
80% of the holder’s percentage interest in the shares
immediately before the redemption; |
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the holder’s percentage ownership of the interest of our
stock after and before the redemption meets the same 80%
requirement; and |
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the holder owns, immediately after the redemption, less than 50%
of the total combined voting power of all classes of shares
entitled to vote. |
Based upon current law, it is possible that a redemption of our
stock from a holder of our stock would be considered “not
essentially equivalent to a dividend.” However, whether a
distribution is “not essentially equivalent to a
dividend” depends on all of the facts and circumstances.
The application of these tests to a redemption of our stock is
unclear, and a holder of our stock should consult its own tax
adviser to determine their application to its particular
situation.
If the redemption does not meet any of the tests under
Section 302 of the Code, then the redemption proceeds
received from the stock will be treated as a distribution on the
stock as described above under “— Taxation of
Stockholders — U.S. Stockholders —
Distributions.” If the redemption is taxed as a dividend,
the holders’ adjusted tax basis in the stock will be
transferred to any other shareholdings of the holder in us. If,
however, the shareholder has no remaining shareholdings in us,
such basis could be transferred to a related person or it may be
lost.
Backup Withholding. We will report to our
U.S. stockholders and the IRS the amount of dividends paid
during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, backup withholding may
apply to a stockholder with respect to dividends paid unless the
holder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or
(b) provides a taxpayer identification number, certifies as
to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding
rules. The IRS may also impose penalties on a
U.S. stockholder that does not provide us with his correct
taxpayer identification number. A stockholder may credit any
amount paid as backup withholding 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.
Taxation of Tax-Exempt Stockholders. The IRS has ruled
that amounts distributed as dividends by a REIT generally do not
constitute unrelated business taxable income when received by a
tax-exempt entity. Based on that ruling, provided that a
tax-exempt stockholder (i) is not an entity described in
the next paragraph, (ii) has not held its stock as
“debt financed property” within the meaning of the
Code and (iii) does not hold its stock in a trade or
business, the dividend income received by such stockholder with
respect to the stock will not be unrelated business taxable
income to a tax-exempt stockholder. Similarly, income from the
sale of our stock will not constitute unrelated business taxable
income unless the tax-exempt stockholder has held the stock as
“debt financed property” within the meaning of the
Code or has used the stock in an unrelated trade or business.
Income from an investment in our stock will constitute unrelated
business taxable income for tax-exempt stockholders that are
social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group
legal services plans exempt from U.S. Federal income
taxation under the applicable subsections of Section 501(c)
of the Code, unless the organization is able to properly deduct
amounts set aside or placed in reserve for certain purposes so
as to offset the income generated by its stock. Prospective
investors of the types described in the preceding sentence
should consult their own tax advisors concerning these “set
aside” and reserve requirements.
Notwithstanding the foregoing, however, a portion of the
dividends paid by a “pension-held REIT” will be
treated as unrelated business taxable income to any trust which:
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is described in Section 401(a) of the Code; |
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is tax-exempt under Section 501(a) of the Code; and |
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holds more than 10% (by value) of the equity interests in the
REIT. |
Tax-exempt pension, profit-sharing and stock bonus funds that
are described in Section 401(a) of the Code are referred to
below as “qualified trusts.” A REIT is a
“pension-held REIT” if:
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it would not have qualified as a REIT but for the fact that
Section 856(h)(3) of the Code provides that stock owned by
qualified trusts will be treated, for purposes of the “not
closely held” requirement, as owned by the beneficiaries of
the trust (rather than by the trust itself); and |
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either (a) at least one qualified trust holds more than 25%
by value of the interests in the REIT or (b) one or more
qualified trusts, each of which owns more than 10% by value of
the interests in the REIT, hold in the aggregate more than 50%
by value of the interests in the REIT. |
The percentage of any REIT dividend treated as unrelated
business taxable income to a qualifying trust that owns more
than 10% of the value of the REIT’s interests is equal to
the ratio of (a) the gross income of the REIT from
unrelated trades or businesses, determined as though the REIT
were a qualified trust, less direct expenses related to this
gross income, to (b) the total gross income of the REIT,
less direct expenses related to the total gross income. A de
minimis exception applies where this percentage is less than 5%
for any year. We do not expect to be classified as a
pension-held REIT.
The rules described above under the heading
“— Taxation of Stockholders —
U.S. Stockholders — Distributions”
concerning the inclusion of our designated undistributed net
capital gains in the income of our stockholders will apply to
tax-exempt entities. Thus, tax-exempt entities will be allowed a
credit or refund of the tax deemed paid by these entities in
respect of the includible gains.
Under recently promulgated Treasury regulations, if a
stockholder recognizes a loss with respect to the stock of
$2 million or more for an individual stockholder or
$10 million or more for a corporate stockholder, the
stockholder must file with the IRS a disclosure statement on
Form 8886. The fact that a loss is reportable under these
regulations does not affect the legal determination of whether
the taxpayer’s treatment of the loss is proper.
Stockholders should consult their tax advisors to determine the
applicability of these regulations in light of their individual
circumstances.
The rules governing U.S. Federal income taxation of
nonresident alien individuals, foreign corporations, foreign
partnerships and estates or trusts that in either case are not
subject to U.S. Federal income tax on a net income basis
who own our stock, which we call
“non-U.S. stockholders,” are complex. The
following discussion is only a limited summary of these rules.
Prospective non-U.S. stockholders should consult with their
own tax advisors to determine the impact of U.S. Federal,
state and local income tax laws with regard to an investment in
the stock, including any reporting requirements.
Ordinary Dividends. Distributions, other than
distributions that are treated as attributable to gain from
sales or exchanges by us of U.S. real property interests,
as discussed below, and other than distributions designated by
us as capital gain dividends, will be treated as ordinary income
dividends to the extent that they are made out of our current or
accumulated earnings and profits. A withholding tax equal to 30%
of the gross amount of the distribution will ordinarily apply to
distributions of this kind to non-U.S. stockholders, unless
an applicable tax treaty reduces that tax. However, if income
from the investment in the stock is treated as effectively
connected with the non-U.S. stockholder’s conduct of a
U.S. trade or business or is attributable to a permanent
establishment that the non-U.S. stockholder maintains in
the United States if that is required by an applicable income
tax treaty as a condition for subjecting the
non-U.S. stockholder to U.S. taxation on a net income
basis, tax at graduated rates will generally apply to the
non-U.S. stockholder in the same manner as
U.S. stockholders are taxed with respect to dividends, and
the 30% branch profits tax may also apply if the stockholder is
a foreign corporation. U.S. tax will be withheld at the
rate of 30% on the gross amount of any dividends, other than
dividends treated as attributable to gain from sales or
exchanges of U.S. real property interests and capital gain
dividends, paid to a non-U.S. stockholder, unless
(a) a lower treaty rate applies and the required form
evidencing eligibility for that reduced rate is filed with us or
the appropriate withholding agent or (b) the
non-U.S. stockholder files an IRS Form W-8 ECI or a
successor form with us or the appropriate withholding agent
claiming that the distributions are effectively connected with
the non-U.S. stockholder’s conduct of a
U.S. trade or business.
Distributions to a non-U.S. stockholder that are designated
by us at the time of distribution as capital gain dividends
which are not attributable to or treated as attributable to the
disposition by us of a U.S. real property interest
generally will not be subject to U.S. Federal income
taxation, except as described below.
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Return of Capital. Distributions in excess of our current
and accumulated earnings and profits, which are not treated as
attributable to the gain from our disposition of a
U.S. real property interest, will not be taxable to a
non-U.S. stockholder to the extent that they do not exceed
the adjusted basis of the non-U.S. stockholder’s
stock. Distributions of this kind will instead reduce the
adjusted basis of the stock. To the extent that distributions of
this kind exceed the adjusted basis of a
non-U.S. stockholder’s stock, they will give rise to
tax liability if the non-U.S. stockholder otherwise would
have to pay tax on any gain from the sale or disposition of our
stock, as described below. If it cannot be determined at the
time a distribution is made whether the distribution will be in
excess of current and accumulated earnings and profits,
withholding will apply to the distribution at the rate
applicable to dividends. However, the non-U.S. stockholder
may seek a refund of these amounts from the IRS if it is
subsequently determined that the distribution was, in fact, in
excess of our current accumulated earnings and profits.
Capital Gain Dividends. For any year in which we qualify
as a REIT, distributions that are attributable to gain from
sales or exchanges by us of U.S. real property interests
will be taxed to a non-U.S. stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of
1980, as amended. Under this statute, these distributions are
taxed to a non-U.S. stockholder as if the gain were
effectively connected with a U.S. business. Thus,
non-U.S. stockholders will be taxed on the distributions at
the normal capital gain rates applicable to
U.S. stockholders, subject to any applicable alternative
minimum tax and special alternative minimum tax in the case of
nonresident alien individuals. Distributions subject to the
Foreign Investment in Real Property Tax Act made to
non-U.S. stockholders may also be subject to a 30% branch
profits tax in the hands of a foreign corporate stockholder that
is not entitled to a treaty exemption. The appropriate
withholding agent will be required by applicable Treasury
regulations under this statute to withhold and remit to the IRS
35% of any distribution that we could designate as a capital
gain dividend. However, if we designate as a capital gain
dividend a distribution made before the day we actually effect
the designation, then although the distribution may be taxable
to a non-U.S. stockholder, withholding does not apply to
the distribution under this statute. Rather, we must effect the
35% withholding from distributions made on and after the date of
the designation, until the distributions so withheld equal the
amount of the prior distribution designated as a capital gain
dividend. The non-U.S. stockholder may credit the amount
withheld against its U.S. tax liability.
If a class of our stock is “regularly traded,” as
defined by applicable Treasury regulations, on an established
securities market (e.g., the New York Stock Exchange), a
distribution with respect to such class of stock received by a
non-U.S. stockholder that does not own more than 5% of that
class of stock during the tax year within which the distribution
is received will not be treated as gain that is effectively
connected with a U.S. business. As such, a
non-U.S. stockholder who does not own more than 5% of the
relevant class of stock at any time during the applicable
taxable year would not be required to file a U.S. Federal
income tax return by reason of receiving such a distribution. In
this case, the distribution would be treated as a REIT dividend
to that non-U.S. stockholder and taxed as a REIT dividend
that is not a capital gain distribution as described above,
meaning that it will be subject to a 30% withholding tax (or
lesser rate as reduced by an applicable treaty) under the
circumstances described above. In addition, the branch profits
tax would not apply to such distributions. However, there can be
no assurance that a particular class of our stock will at any
time be regularly traded on an established securities market.
Sales of Stock. Gain recognized by a
non-U.S. stockholder upon a sale or exchange of our stock
generally will not be taxed under the Foreign Investment in Real
Property Tax Act if we are a “domestically controlled
REIT,” defined generally as a REIT, less than 50% in value
of whose stock is and was held directly or indirectly by foreign
persons at all times during a specified testing period. We
believe that we will be a domestically controlled REIT, and,
therefore, that taxation under this statute generally will not
apply to the sale of our stock. However, gain to which this
statute does not apply will be taxable to a
non-U.S. stockholder if investment in the stock is treated
as effectively connected with the
non-U.S. stockholder’s U.S. trade or business or
is attributable to a permanent establishment that the
non-U.S. stockholder maintains in the United States if that
is required by an applicable income tax treaty as a condition
for subjecting the non- U.S. stockholder to
U.S. taxation on a net income basis. In this case, the same
treatment will apply to the non-U.S. stockholder as to
U.S. stockholders with respect to the gain. In addition,
gain to which the Foreign Investment in Real Property Tax Act
does not apply will be
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taxable to a non-U.S. stockholder if 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, or maintains an office or a fixed place of
business in the United States to which the gain is attributable.
In this case, a 30% tax will apply to the nonresident alien
individual’s capital gains. A similar rule will apply to
capital gain dividends to which this statute does not apply.
If we do not qualify as a domestically controlled REIT, tax
under the Foreign Investment in Real Property Tax Act would
apply to a non-U.S. stockholder’s sale of our stock,
unless our stock is regularly traded on an established
securities market at the time of such sale and such
non-U.S. stockholder does not own more than 5% of our stock
at any time during a specified period. This period is generally
the shorter of the period that the non-U.S. stockholder
owned the stock sold or the five-year period ending on the date
when the stockholder disposed of the stock. If tax under this
statute applies to the gain on the sale of our stock, the same
treatment would apply to the non-U.S. stockholder as to
U.S. stockholders with respect to the gain, subject to any
applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals.
In any event, a purchaser of our stock from a
non-U.S. stockholder will not be required under the Foreign
Investment in Real Property Tax Act to withhold on the purchase
price if the purchased class of stock is regularly traded on an
established securities market and the seller did not own more
than 5% of such class of stock at any time during the taxable
year or if we are a domestically controlled REIT. Otherwise,
under the Foreign Investment in Real Property Tax Act, the
purchaser of our stock may be required to withhold 10% of the
purchase price and remit that amount to the IRS.
Backup Withholding and Information Reporting. If you are
a non-U.S. stockholder, you are generally exempt from
backup withholding and information reporting requirements with
respect to:
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dividend payments and |
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the payment of the proceeds from the sale of our stock effected
at a U.S. office of a broker, |
as long as the income associated with these payments is
otherwise exempt from U.S. Federal income tax, and:
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the payor or broker does not have actual knowledge or reason to
know that you are a U.S. person and you have furnished to
the payor or broker: |
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a valid IRS Form W-8BEN or an acceptable substitute form
upon which you certify, under penalties of perjury, that you are
a non-U.S. person, or |
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other documentation upon which it may rely to treat the payments
as made to a non-U.S. person in accordance with
U.S. Treasury regulations, or |
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you otherwise establish an exemption. |
Payment of the proceeds from the sale of our stock effected at a
foreign office of a broker generally will not be subject to
information reporting or backup withholding. However, a sale of
our stock that is effected at a foreign office of a broker will
be subject to information reporting and backup withholding if:
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the proceeds are transferred to an account maintained by you in
the United States, |
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the payment of proceeds or the confirmation of the sale is
mailed to you at a U.S. address, or |
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the sale has some other specified connection with the United
States as provided in U.S. Treasury regulations, unless the
broker does not have actual knowledge or reason to know that you
are a U.S. person and the documentation requirements
described above are met or you otherwise establish an exemption. |
In addition, a sale of our stock will be subject to information
reporting if it is effected at a foreign office of a broker that
is:
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a U.S. person, |
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a controlled foreign corporation for U.S. tax purposes, |
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a foreign person 50% or more of whose gross income is
effectively connected with the conduct of a U.S. trade or
business for a specified three-year period, or |
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a foreign partnership, if at any time during its tax year: |
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one or more of its partners are “U.S. persons,”
as defined in U.S. Treasury regulations, who in the
aggregate hold more than 50% of the income or capital interest
in the partnership, or |
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such foreign partnership is engaged in the conduct of a
U.S. trade or business, |
unless the broker does not have actual knowledge or reason to
know that you are a U.S. person and the documentation
requirements described above are met or you otherwise establish
an exemption. Backup withholding will apply if the sale is
subject to information reporting and the broker has actual
knowledge that you are a U.S. person.
You generally may obtain a refund of any amounts withheld under
the backup withholding rules that exceed your income tax
liability by filing a refund claim with the IRS.
Tax Aspects of our Investments in our Operating
Partnership
The following discussion summarizes certain federal income tax
considerations applicable to our direct or indirect investments
in our Operating Partnership and any subsidiary partnerships or
limited liability companies that we form or acquire (each
individually a “Partnership” and, collectively, the
“Partnerships”). The discussion does not cover state
or local tax laws or any federal tax laws other than income tax
laws.
Classification as Partnerships. We will include in our
income our distributive share of each Partnership’s income
and we will deduct our distributive share of each
Partnership’s losses only if such Partnership is classified
for federal income tax purposes as a partnership (or an entity
that is disregarded for federal income tax purposes if the
entity has only one owner or member), rather than as a
corporation or an association taxable as a corporation. An
organization with at least two owners or members 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 the Treasury regulations
relating to entity classification (the “check-the-box
regulations”); and |
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is not a “publicly traded” partnership. |
Under the check-the-box regulations, an unincorporated entity
with at least two owners or 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. Each Partnership intends to be classified as a
partnership for federal income tax purposes (or an entity that
is disregarded for federal income tax purposes if the entity has
only one owner or member), and no Partnership will 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,
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
(1) 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
(2) 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 an interest in the partnership is
treated as a partner in such partnership only if
(1) 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 (2) a
principal purpose of the use of the entity is to permit the
36
partnership to satisfy the 100-partner limitation. We currently
intend that each 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 Partnerships will be
classified as partnerships for federal income tax purposes. If
for any reason a 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
“Federal Income Tax Consequences of our Status as a
REIT — Income Tests” and “— Asset
Tests.” In addition, any change in a 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 “Federal Income Tax Consequences of our
Status as a REIT — Distribution Requirements.”
Further, items of income and deduction of such Partnership would
not pass through to its partners, and its partners would be
treated as stockholders for tax purposes. Consequently, such
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
such Partnership’s taxable income.
Income Taxation of the Partnerships and Their Partners
Partners, Not the Partnerships, Subject to Tax. A
partnership is not a taxable entity for federal income tax
purposes. Rather, we are required to take into account our
allocable share of each Partnership’s income, gains,
losses, deductions, and credits for any taxable year of such
Partnership ending within or with our taxable year, without
regard to whether we have received or will receive any
distribution from such Partnership.
Partnership Allocations. Although a partnership agreement
generally will determine the allocation of income and losses
among partners, such allocations may be disregarded for tax
purposes if they do not comply with certain provisions of the
federal income tax laws governing partnership allocations. If an
allocation is not recognized for federal income tax purposes,
the item subject to the allocation will be reallocated in
accordance with the partners’ interests in the partnership,
which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the
partners with respect to such item. We expect that each
Partnership’s allocations of taxable income, gain, and loss
will be respected for U.S. federal income tax purposes.
Tax Allocations With Respect to Contributed Properties.
Income, gain, loss, and deduction attributable to appreciated or
depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated in
a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized
loss associated with the property at the time of the
contribution. The amount of such unrealized gain or unrealized
loss (“built-in gain” or “built-in loss”) is
generally equal to the difference between the fair market value
of the contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution
(a “book-tax difference”). Such allocations are solely
for federal income tax purposes and do not affect the book
capital accounts or other economic or legal arrangements among
the partners. The U.S. Treasury Department has issued
regulations requiring partnerships to use a “reasonable
method” for allocating items with respect to which there is
a book-tax difference and outlining several reasonable
allocation methods.
Under our Operating Partnership’s partnership agreement,
depreciation or amortization deductions of the operating
partnership generally will be allocated among the partners in
accordance with their respective interests in our Operating
Partnership, except to the extent that our Operating Partnership
is required under the federal income tax laws governing
partnership allocations to use a method for allocating tax
depreciation deductions attributable to contributed properties.
In addition, gain or loss on the sale of a property that has
been contributed, in whole or in part, to our Operating
Partnership will be specially allocated to the contributing
partners to the extent of any built-in gain or loss with respect
to such property for federal income tax purposes.
37
Basis in Partnership Interest. Our adjusted tax
basis in our partnership interest in our Operating Partnership
generally will be equal to:
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the amount of cash and the basis of any other property
contributed by us to our Operating Partnership; |
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increased by our allocable share of our Operating
Partnership’s income and our allocable share of
indebtedness of our Operating Partnership; and |
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reduced, but not below zero, by our allocable share of our
Operating Partnership’s loss and the amount of cash
distributed to us, and by constructive distributions resulting
from a reduction in our share of indebtedness of our Operating
Partnership. |
If the allocation of our distributive share of our Operating
Partnership’s loss would reduce the adjusted tax basis of
our partnership interest below zero, the recognition of such
loss will be deferred until such time as the recognition of such
loss would not reduce our adjusted tax basis below zero. To the
extent that our Operating Partnership’s distributions, or
any decrease in our share of the indebtedness of our Operating
Partnership, which is considered a constructive cash
distribution to the partners, reduce our adjusted tax basis
below zero, such distributions will constitute taxable income to
us. Such distributions and constructive distributions normally
will be characterized as long-term capital gain.
Depreciation Deductions Available to Our Operating
Partnership. To the extent that our Operating Partnership
acquires its properties in exchange for cash, its initial basis
in such properties for federal income tax purposes generally
will be equal to the purchase price paid by our Operating
Partnership. Our Operating Partnership generally plans to
depreciate each depreciable property for federal income tax
purposes under the alternative depreciation system of
depreciation (“ADS”). Under ADS, the Operating
Partnership generally will depreciate buildings and improvements
over a 40-year recovery period using a straight-line method and
a mid-month convention and will depreciate furnishings and
equipment over a 12-year recovery period. Our Operating
Partnership’s initial basis in properties acquired in
exchange for units in our Operating Partnership should be the
same as the transferor’s basis in such properties on the
date of acquisition by our Operating Partnership. Although the
law is not entirely clear, our Operating Partnership generally
will depreciate such property for federal income tax purposes
over the same remaining useful lives and under the same methods
used by the transferors. Our Operating Partnership’s tax
depreciation deductions will be allocated among the partners in
accordance with their respective interests in our Operating
Partnership, except to the extent that our Operating Partnership
is required under the federal income tax laws governing
partnership allocations to use a method for allocating tax
depreciation deductions attributable to contributed properties.
Sale of a Partnership’s Property
Generally, any gain realized by a Partnership on the sale of
property held by the Partnership for more than one year will be
long-term capital gain, except for any portion of such gain that
is treated as depreciation or cost recovery recapture. Any gain
or loss recognized by a Partnership on the disposition of
contributed properties will be allocated first to the partners
of the Partnership who contributed such properties to the extent
of their built-in gain or loss on those properties for federal
income tax purposes. The partners’ built-in gain or loss on
such contributed properties will equal the difference between
the partners’ proportionate share of the book value of
those properties and the partners’ tax basis allocable to
those properties at the time of the contribution. Any remaining
gain or loss recognized by the Partnership on the disposition of
the contributed properties, and any gain or loss recognized by
the Partnership on the disposition of the other properties, will
be allocated among the partners in accordance with their
respective percentage interests in the Partnership.
Our share of any gain realized by a Partnership on the sale of
any property held by the Partnership as inventory or other
property held primarily for sale to customers in the ordinary
course of the Partnership’s trade or business will be
treated as income from a prohibited transaction that is subject
to a 100% penalty tax. Such prohibited transaction income also
may have an adverse effect upon our ability to satisfy the
income tests for REIT status. See “Federal Income Tax
Consequences of our Status as a REIT — Income
Tests.” We, however, do not presently intend to acquire or
hold or to allow any Partnership to acquire or
38
hold any property that represents inventory or other property
held primarily for sale to customers in the ordinary course of
our or such Partnership’s trade or business.
State and Local Taxes
We and our stockholders may be subject to taxation by various
states and localities, including those in which we or our
stockholders transact business, own property or reside. The
state and local tax treatment may differ from the federal income
tax treatment described above. Consequently, stockholders should
consult their own tax advisers regarding the effect of state and
local tax laws upon an investment in the common shares.
PLAN OF DISTRIBUTION
We may sell the securities through underwriters or dealers,
through agents, or directly to one or more purchasers. One or
more prospectus supplements will describe the terms of the
offering of the securities, including:
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the name or names of any underwriters, if any; |
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the purchase price of the securities and the proceeds we will
receive from the sale; |
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any over-allotment options under which underwriters may purchase
additional securities from us; |
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any agency fees or underwriting discounts and other items
constituting agents’ or underwriters’ compensation; |
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any public offering price; |
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any discounts or concessions allowed or reallowed or paid to
dealers; and |
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any securities exchange or market on which the securities may be
listed. |
Each prospectus supplement filed with respect to any offered
securities, to the extent applicable, will describe the number
and terms of the securities to which such prospectus relates,
the name or names of any underwriters or agents with whom we
have entered into arrangements with respect to the sale of such
securities, the public offering or purchase price of such
securities and the net proceeds we will receive from such sale.
Only underwriters named in the prospectus supplement are
underwriters of the securities offered by the prospectus
supplement.
If underwriters are used in the sale, they will acquire the
securities for their own account and may resell them from time
to time in one or more transactions at a fixed public offering
price. The obligations of the underwriters to purchase the
securities will be subject to the conditions set forth in the
applicable underwriting agreement. We may offer the securities
to the public through underwriting syndicates represented by
managing underwriters or by underwriters without a syndicate.
Subject to certain conditions, the underwriters will be
obligated to purchase all the securities of the series offered
by the prospectus supplement. Any public offering price and any
discounts or concessions allowed or reallowed or paid to dealers
may change from time to time. We may use underwriters with whom
we have a material relationship. We will describe in the
prospectus supplement, naming the underwriter, the nature of any
such relationship.
We may sell securities directly or through agents we designate
from time to time. We will name any agent involved in the
offering and sale of securities and we will describe any
commissions we will pay the agent in the prospectus supplement.
Unless the prospectus supplement states otherwise, our agent
will act on a best-efforts basis for the period of its
appointment. However, no prospectus supplement shall
fundamentally change the terms that are set forth in this
prospectus or offer a security that is not registered and
described in this prospectus at the time of its effectiveness.
We may authorize agents or underwriters to solicit offers by
certain types of institutional investors to purchase securities
from us at the public offering price set forth in the prospectus
supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. We will
39
describe the conditions to these contracts and the commissions
we must pay for solicitation of these contracts in the
prospectus supplement.
We may enter into derivative transactions with third parties, or
sell securities not covered by this prospectus to third parties
in privately negotiated transactions. If the related prospectus
supplement so indicates, in connection with those derivatives,
the third parties may sell securities covered by this prospectus
and the related prospectus supplement, including in short sale
transactions. If so, the third party may use securities pledged
by us or borrowed from us or others to settle those sales or to
close out any related open borrowings of stock and may use
securities received from us 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 and, if
not identified in this prospectus, will be identified in the
related prospectus supplement (or a post-effective amendment).
We may provide agents and underwriters with indemnification
against certain civil liabilities, including liabilities under
the Securities Act, or contribution with respect to payments
that the agents or underwriters may make with respect to such
liabilities. Agents and underwriters may engage in transactions
with, or perform services for, us in the ordinary course of
business.
Our shares of common stock are principally traded on the Nasdaq
National Market. All securities we offer, other than common
stock and other than securities issued upon a reopening of a
previous series, will be new issues of securities with no
established trading market. Any underwriters may make a market
in these securities, but will not be obligated to do so and may
discontinue any market making at any time without notice. We
cannot guarantee the liquidity of the trading markets for any
securities.
Any underwriter may engage in overallotment, stabilizing
transactions, short covering transactions and penalty bids in
accordance with Regulation M under the Securities Exchange
Act of 1934, as amended. Overallotment involves sales in excess
of the offering size, which create a short position. Stabilizing
transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specified maximum
price. Short covering transactions involve purchases of the
securities in the open market after the distribution is
completed to cover short positions. Penalty bids permit the
underwriters to reclaim a selling concession from a dealer when
the securities originally sold by the dealer are purchased in a
covering transaction to cover short positions. Those activities
may cause the price of the securities to be higher than it would
otherwise be. If commenced, the underwriters may discontinue any
of the activities at any time.
Any underwriters who are qualified market makers on The Nasdaq
National Market may engage in passive market making transactions
in the securities on The Nasdaq National Market in accordance
with Rule 103 of Regulation M under the Securities
Exchange Act of 1934, as amended, during the business day prior
to the pricing of the offering, before the commencement of
offers or sales of the securities. Passive market makers must
comply with applicable volume and price limitations and must be
identified as passive market makers. In general, a passive
market maker must display its bid at a price not in excess of
the highest independent bid for such security; if all
independent bids are lowered below the passive market
maker’s bid, however, the passive market maker’s bid
must then be lowered when certain purchase limits are exceeded.
Some of the underwriters, dealers and agents and their
affiliates may engage in transactions with or perform services
for us and our affiliates in the ordinary course of business.
Underwriters have from time to time in the past provided, and
may from time to time in the future provide, investment banking
services to us for which they have in the past received, and in
the future may receive, customary fees.
In compliance with guidelines of the National Association of
Securities Dealers, or NASD, the maximum consideration or
discount to be received by any NASD member or independent broker
dealer may not exceed 8% of the aggregate amount of the
securities offered pursuant to this prospectus and any
applicable prospectus supplement.
40
EXPERTS
The financial statements and management’s assessment of the
effectiveness of internal control over financial reporting
(which is included in Management’s Report on Internal
Control over Financial Reporting) incorporated in this
Prospectus by reference to the Annual Report on Form 10-K
for the year ended December 31, 2004 have been so
incorporated in reliance on the reports of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
The audited historical summary of revenue incorporated in this
Prospectus by reference to the Current Report on Form 8-K/A
dated July 29, 2005 has been so incorporated in reliance on
the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
The validity of the offered securities will be passed upon for
Gladstone Commercial Corporation by Cooley Godward LLP, Reston,
Virginia. Cooley Godward LLP has in the past represented and is
currently representing Gladstone Commercial Corporation and
certain of its affiliates. Legal counsel to any underwriters or
agents may pass upon legal matters for such underwriters or
agents.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith,
file reports, proxy statements and other information with the
Securities and Exchange Commission. Such reports, proxy
statements and other information can be inspected, without
charge, at the public reference facilities maintained by the
Securities and Exchange Commission at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Copies of such
material can be obtained at prescribed rates from the Public
Reference Room of the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. You
may obtain information on the operation of the Securities and
Exchange Commission’s public reference room in
Washington, D.C. by calling the Securities and Exchange
Commission at 1-800-SEC-0330. Such materials may also be
inspected on the Securities and Exchange Commission’s
website at www.sec.gov. Our outstanding shares of common stock
are listed on the Nasdaq National Market under the symbol
“GOOD.” You can also obtain information about
Gladstone Commercial Corporation at our website,
www.GladstoneCommercial.com. Information included on, or
accessible through our website is not a part of this prospectus.
This prospectus constitutes part of a registration statement on
Form S-3 filed by Gladstone Commercial Corporation with the
Securities and Exchange Commission under the Securities Act of
1933. This prospectus does not contain all of the information
set forth in the registration statement, parts of which are
omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. For further information,
reference is made to the registration statement.
INCORPORATION BY REFERENCE
There are incorporated by reference in this prospectus the
following documents previously filed by Gladstone Commercial
Corporation with the Securities and Exchange Commission.
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Annual Report on Form 10-K for the fiscal year ended
December 31, 2004, filed on March 8, 2005 (as amended
by Form 10-K/ A for the fiscal year ended December 31,
2004, filed on March 9, 2005 and Form 10-K/ A for the
fiscal year ended December 31, 2004, filed on
October 21, 2005); |
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Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 2005, filed on May 4, 2005; |
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Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2005, filed on August 2, 2005; and |
41
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Current Reports on Form 8-K filed March 1, 2005,
March 22, 2005, May 18, 2005 (as amended by
Form 8-K/ A filed on July 29, 2005), July 12,
2005, July 15, 2005 (as amended by Form 8-K/ A filed
on September 22, 2005), August 29, 2005,
September 13, 2005 and October 12, 2005; and |
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Registration Statement on Form 8-A filed on August 12,
2003. |
The Securities and Exchange Commission has assigned file number
0-50363 to reports and other information that Gladstone
Commercial Corporation files with the Securities and Exchange
Commission.
All documents subsequently filed by Gladstone Commercial
Corporation pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act of 1934 prior to the termination of the
offering of the offered securities, shall be deemed to be
incorporated by reference in this prospectus and to be a part of
this prospectus from the date of filing of such documents. Any
statement contained in this prospectus or in a document
incorporated or deemed to be incorporated by reference in this
prospectus shall be deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement
contained in this prospectus, or in any subsequently filed
document which is incorporated or deemed to be incorporated by
reference in this prospectus, modifies or supersedes such
statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
Gladstone Commercial Corporation will provide without charge to
each person, including any beneficial owner, to whom a copy of
this prospectus is delivered, upon the written or oral request
of such person, a copy of any or all of the documents
incorporated by reference in this prospectus, other than
exhibits to such documents unless such exhibits are specifically
incorporated by reference into such documents. Requests should
be addressed to:
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Kelly Sargent, Investor Relations Manager |
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Gladstone Commercial Corporation |
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1521 Westbranch Drive, Suite 200 |
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McLean, Virginia 22102 |
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(703) 287-5835 |
FORWARD-LOOKING STATEMENTS
Some of the statements contained in or incorporated by reference
in this prospectus constitute forward-looking statements under
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, including statements made with respect to possible or
assumed future results of our business, financial condition,
liquidity, results of operations, plans and objectives. When we
use the words “believe,” “expect,”
“anticipate,” “estimate” or similar
expressions, we intend to identify forward-looking statements.
You should not place undue reliance on these forward-looking
statements. Statements regarding the following subjects are
forward-looking by their nature:
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our business strategy; |
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pending transactions; |
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our projected operating results; |
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our ability to obtain future financing arrangements; |
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estimates relating to our future distributions; |
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our understanding of our competition; |
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market trends; |
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estimates of our future operating expenses, including payments
to our Adviser under the terms of our advisory agreement; |
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projected capital expenditures; and |
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use of the proceeds of our credit facilities, mortgage notes
payable, and other future capital resources, if any. |
42
These statements involve known and unknown risks, uncertainties
and other factors that may cause results, levels of activity,
growth, performance, tax consequences or achievements to be
materially different from any future results, levels of
activity, growth, performance, tax consequences or achievements
expressed or implied by such forward-looking statements.
The forward-looking statements are based on our beliefs,
assumptions and expectations of our future performance, taking
into account all information currently available to us. Although
we believe that these beliefs, assumptions and expectations are
reasonable, we cannot guarantee future results, levels of
activity, performance, growth or achievements. These beliefs,
assumptions and expectations can change as a result of many
possible events or factors, not all of which are known to us. If
a change occurs, our business, financial condition, liquidity
and results of operations may vary materially from those
expressed in or implied by our forward-looking statements. You
should carefully consider these risks before you make an
investment decision with respect to our common stock, along with
the following factors that could cause actual results to vary
from our forward-looking statements:
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the loss of any of our key employees, such as Mr. David
Gladstone, our chairman and chief executive officer,
Mr. Terry Lee Brubaker, our vice chairman, or
Mr. George Stelljes III, our president and chief
investment officer; |
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general volatility of the capital markets and the market price
of our common stock; |
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risks associated with negotiation and consummation of pending
and future transactions; |
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changes in our business strategy; |
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availability, terms and deployment of capital, including the
ability to maintain and borrow under our existing credit
facility, arrange for long-term mortgages on our properties;
secure one or more additional long-term credit facilities, and
to raise equity capital; |
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availability of qualified personnel; |
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changes in our industry, interest rates or the general
economy; and |
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the degree and nature of our competition; and |
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those factors discussed in the “Risk Factors” section
of this prospectus and those factors listed under the caption
“Risk Factors” in our most recent Form 10-K which
is incorporated herein by reference. |
We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform such
statements to actual results.
43
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GLADSTONE COMMERCIAL CORPORATION |
$75,000,000
Common Stock
Preferred Stock
PROSPECTUS
,
2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
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| Item 14. |
Other Expenses of Issuance and Distribution. |
The following table sets forth the estimated expenses in
connection with the registration and sale of the shares
registered hereby, all of which will be paid by the registrant:
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SEC registration fee
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$ |
8,828 |
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NASD filing fee*
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8,000 |
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Nasdaq additional listing fees*
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50,000 |
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Transfer agent’s fees and expenses*
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5,000 |
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Printing and duplicating expenses*
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75,000 |
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Legal fees and expenses*
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150,000 |
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Accounting fees and expenses*
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25,000 |
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Miscellaneous expenses*
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10,000 |
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Total
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$ |
331,828 |
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| * |
Estimated pursuant to instruction to Item 511 of
Regulation S-K. |
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| Item 15. |
Indemnification of Directors and Officers. |
Maryland law permits a Maryland corporation to include in its
articles of incorporation a provision limiting the liability of
its directors and officers to the corporation and its
stockholders for money damages except for liability resulting
from (a) actual receipt of an improper benefit or profit in
money, property or services or (b) active and deliberate
dishonesty which is established by a final judgment and which is
material to the cause of action. Our articles of incorporation
contain such a provision which eliminates directors’ and
officers’ liability to the maximum extent permitted by
Maryland law.
Our articles of incorporation authorize us, to the maximum
extent permitted by Maryland law, to obligate the Company to
indemnify any present or former director or officer or any
individual who, while a director or officer of the Company and
at the request of the Company, serves or has served another
corporation, real estate investment trust, limited liability
company, joint venture, trust, employee benefit plan or other
enterprise as a director, officer, member or director, from and
against any claim or liability to which that individual may
become subject or which that individual may incur by reason of
his or her service as a present or former director or officer of
the Company and to pay or reimburse his or her reasonable
expenses in advance of final disposition of a proceeding. Our
bylaws obligate us, to the maximum extent permitted by Maryland
law, to indemnify any present or former director or officer or
any individual who, while a director or officer of the Company
and at the request of the Company, serves or has served another
corporation, real estate investment trust, limited liability
company, joint venture, trust, employee benefit plan or other
enterprise as a director, officer, member or director and who is
made a party to the proceeding by reason of his service in that
capacity from and against any claim or liability to which that
individual may become subject or which that individual may incur
by reason of his or her service as a present or former director
or officer of the Company and to pay or reimburse his or her
reasonable expenses in advance of final disposition of a
proceeding. The articles of incorporation and bylaws also permit
the Company to indemnify and advance expenses to any individual
who served a predecessor of the Company in any of the capacities
described above and any employee or agent of the Company or a
predecessor of the Company.
Maryland law requires a corporation (unless its articles of
incorporation provide otherwise, which the Company’s
articles of incorporation do not) to indemnify a director or
officer who has been successful in the defense of any proceeding
to which he is made a party by reason of his service in that
capacity. Maryland law permits a corporation to indemnify its
present and former directors and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to
which they may be made a party by reason of their service in
those or other capacities unless it is established that
(a) the act or omission of the director or officer was
II-1
material to the matter giving rise to the proceeding and
(i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. However, under
Maryland law, a Maryland corporation may not indemnify for an
adverse judgment in a suit by or in the right of the corporation
or for a judgment of liability on the basis that personal
benefit was improperly received, unless in either case a court
orders indemnification and then only for expenses. In addition,
Maryland law permits a corporation to advance reasonable
expenses to a director or officer upon the corporation’s
receipt of (a) a written affirmation by the director or
officer of his or her good faith belief that he or she has met
the standard of conduct necessary for indemnification by the
corporation and (b) a written undertaking by him or her or
on his or her behalf to repay the amount paid or reimbursed by
the corporation if it is ultimately determined that the standard
of conduct was not met.
See the Exhibit Index following the signature page in this
Registration Statement, which Exhibit Index is hereby
incorporated herein by reference.
The undersigned registrant hereby undertakes:
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(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement: |
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(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933; |
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(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement;
notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the
effective Registration Statement; |
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(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement; |
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Provided, however, that paragraphs (a)(i) and (a)(ii) do
not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Securities and
Exchange Commission by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Registration Statement. |
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(b) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof. |
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(c) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering. |
The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933,
each filing of the registrant’s annual report pursuant to
section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan’s annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that
is
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incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide
offering thereof.
The undersigned registrant hereby undertakes that: (a) For
purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was
declared effective; (b) for the purposes of determining any
liability under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
provisions set forth or described in Item 15 of this
Registration Statement, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds
to believe that it meets all of the requirements for filing on
Form S-3 and has duly caused this registration statement to
be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of Fairfax, Commonwealth of Virginia,
on October 20, 2005.
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GLADSTONE COMMERCIAL CORPORATION |
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By: |
/s/ David J. Gladstone |
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David J. Gladstone |
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Chairman of the Board of Directors and |
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Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
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By: |
/s/ David J. Gladstone |
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David J. Gladstone |
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Chairman of the Board of Directors and |
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Chief Executive Officer |
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(principal executive officer) |
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Terry Lee Brubaker |
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President, Secretary, Chief Operating Officer and Director |
II-4
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Harry Brill |
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Chief Financial Officer and Treasurer |
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(principal financial and accounting officer) |
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David A.R. Dullum |
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Director |
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Anthony W. Parker |
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Director |
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Michela A. English |
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Director |
Each dated: October 20, 2005
David Gladstone
Attorney-in-Fact
II-5
EXHIBIT INDEX
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| Exhibit |
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Description |
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3 |
.1 |
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Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to the Registration Statement on
Form S-11 (File No. 333-106024), filed June 11, 2003. |
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3 |
.2 |
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Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File
No. 333-106024), filed June 11, 2003. |
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4 |
.1 |
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Specimen Certificate of Common Stock, incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-11
(File No. 333-106024), filed June 11, 2003. |
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5 |
.1† |
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Opinion of Cooley Godward LLP as to the validity of the shares
being offered. |
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8 |
.1† |
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Opinion of Cooley Godward LLP as to certain tax matters. |
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12 |
.1† |
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Statement of Computation of Ratio of Earnings to Fixed Charges
and Preferred Dividends. |
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23 |
.1 |
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Consent of PricewaterhouseCoopers LLP. |
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23 |
.2† |
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Consent of Cooley Godward LLP (included in the opinions filed as
Exhibits 5.1 and 8.1 to this registration statement) |
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24 |
.1† |
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Power of Attorney (included on the signature page of this
registration statement) |
† Previously filed and incorporated by reference.
