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The
information in this preliminary prospectus supplement and the
accompanying prospectus is not complete and may be changed. This
preliminary prospectus supplement and the accompanying
prospectus are not an offer to sell these securities and are not
soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
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Filed pursuant to Rule 424(b)(5)
Registration
No. 333-128783
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT
(To prospectus dated October 24, 2005)
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GLADSTONE COMMERCIAL CORPORATION |
1,000,000 Shares
%
Series B Cumulative Redeemable Preferred Stock
(Liquidation Preference $25 Per Share)
Dividends on the % Series B
Cumulative Redeemable Preferred Stock, par value $0.001 per
share (“Series B Preferred Stock”), will be
cumulative from (but excluding) the date of original issue and
payable monthly in arrears, beginning on November 30, 2006,
at the rate of % of the
liquidation preference per annum, or
$ per
share of Series B Preferred Stock.
The shares of Series B Preferred Stock are not redeemable
until October 31, 2011, after which we may redeem the
shares at a redemption price of $25 per share of
Series B Preferred Stock, plus any accumulated and unpaid
dividends to and including the date of redemption. The shares of
Series B Preferred Stock have no maturity date and will
remain outstanding indefinitely unless we elect to redeem the
shares.
We intend to file an application to list the Series B
Preferred Stock on the Nasdaq Global Market under the symbol
“GOODO.”
You should consider the risks that we have described in
“Additional Risk Factors” beginning on page S-6
and in “Risk Factors” in the accompanying prospectus
beginning on page 3 before buying shares of our
Series B Preferred Stock.
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Public Offering Price
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Underwriting discount(1)
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Proceeds, before expenses, to us
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See “Underwriting” on page S-15. |
The underwriters may purchase up to an additional
150,000 shares of Series B Preferred Stock from us at
the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus supplement
to cover over-allotments, if any. If the option is exercised in
full, the total public offering price will be
$ ,
the total underwriting discount will be
$ and
the total proceeds, before expenses, to us will be
$ .
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement or the
accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of Series B
Preferred Stock to purchasers on or before
October , 2006.
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| Ferris, Baker Watts |
Robert W. Baird & Co. |
Incorporated
J.J.B. Hilliard, W.L. Lyons, Inc.
Incorporated
The date of this prospectus supplement is
October , 2006.
TABLE OF CONTENTS
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Prospectus Supplement |
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Prospectus |
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You should rely on the information contained or incorporated by
reference in this prospectus supplement and the accompanying
prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different
information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in
this prospectus supplement, the accompanying prospectus and the
documents incorporated by reference is accurate only as of their
respective dates or on other dates which are specified in those
documents. Our business, financial condition, results of
operations and prospects may have changed since those dates.
PROSPECTUS SUPPLEMENT SUMMARY
This summary may not contain all of the information that is
important to you. You should carefully read this entire
prospectus supplement and the accompanying prospectus. You
should also read the documents we have referred you to in
“Incorporation of Certain Information by Reference”
beginning on page S-16.
As used in this prospectus supplement, 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, GCLP
Business Trust I, GCLP Business Trust II and Gladstone
Lending LLC. References to the “Operating Partnership”
are to Gladstone Commercial Limited Partnership, a Delaware
limited partnership, which we control through our ownership of
GCLP Business Trust II, 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 extended by the Operating Partnership. Unless
otherwise indicated, the information presented in this
prospectus supplement assumes that the underwriters do not
exercise their over-allotment option.
Our Company
Gladstone Commercial Corporation is a real estate investment
trust, or REIT, that seeks to invest in and own net leased
industrial and commercial real property and selectively make
long-term industrial and commercial mortgage loans. As of the
date of this prospectus supplement, we own 38 properties
totaling approximately 4,629,612 square feet, located in
17 states. These properties consist primarily of office,
warehouse, industrial, commercial and manufacturing facilities.
Our principal investment objectives are to generate income from
rental properties and, to a lesser extent, mortgage loans, which
we will use to fund our continuing operations and to pay out
monthly cash distributions to our stockholders. We will seek to
grow the distribution to stockholders over time, and to increase
the value of our common stock. Our primary strategy to achieve
our investment objectives is to invest in and own a diversified
portfolio of leased industrial and commercial real estate that
we believe will produce stable cash flow and increase in value.
We expect to sell some of our real estate assets from time to
time when our Adviser determines that doing so would be
advantageous to us and our stockholders. We also expect to
occasionally make mortgage loans secured by income-producing
commercial or industrial real estate, which loans may have some
form of equity participation. Additionally, we may purchase
mortgage-backed securities, including mortgage pass-through
certificates, collateralized mortgage obligations and other
securities representing interests in or obligations backed by
pools of mortgage loans.
We were incorporated under the General Corporation Law of the
State of Maryland on February 14, 2003, and completed our
initial public offering in August 2003. We are externally
managed by our Adviser, whose principal offices are located at
1521 Westbranch Drive, McLean, Virginia 22102. Our Adviser
also has offices in New York, New York, Pittsburgh,
Pennsylvania, Chicago, Illinois, Morristown, New Jersey,
Lexington, Kentucky and Dallas, Texas. Our web site is
www.gladstonecommercial.com. The information on our website is
not a part of, and is not incorporated by reference into, this
prospectus supplement or the accompanying prospectus.
Recent Developments
On July 12, 2006, our board of directors accelerated in
full the vesting of all outstanding options under our 2003
Equity Incentive Plan, as amended (the “Plan”). Also
on July 12, 2006, we filed a Schedule TO and related
documentation with the Securities and Exchange Commission, which
described our offer to our executive officers and directors and
the employees of our Adviser who held stock options to
accelerate the expiration date of all of their outstanding
options under the Plan to December 31, 2006
S-1
(as amended, the “Offer”). The Offer was conditional
upon its acceptance by all optionholders on or before its
expiration on August 31, 2006, and all optionholders
accepted the Offer prior to that date. As of the date of this
prospectus supplement, all outstanding options under the Plan
were amended to expire on December 31, 2006, and we intend
to terminate the Plan on December 31, 2006. Following the
expiration of any unexercised options and the termination of the
Plan, we intend to implement, effective January 1, 2007, an
amended and restated investment advisory agreement with our
Adviser (the “Amended Advisory Agreement”), and a
separate administration agreement (the “Administration
Agreement”) with our Adviser’s wholly-owned
subsidiary, Gladstone Administration, LLC (the
“Administrator”), each of which were approved by our
stockholders on May 24, 2006. Under Statement of Financial
Accounting Standards No. 123(R), “Share –
Based Payment,” we will be required to record a one-time,
non-cash expense as a result of the amendment of these options
during the quarter ended September 30, 2006. While we have
not yet completed all of the analysis necessary to determine,
with certainty, the precise amount of this charge, we currently
estimate that the charge will be between $300,000 and $325,000.
As previously disclosed, Mayco Property Holdings, LLC, the
borrower on our mortgage secured by the property in Sterling
Heights, Michigan, defaulted under the mortgage. The borrower
was leasing the property to its affiliate Mayco Plastics, Inc.,
which filed for bankruptcy protection in September 2006. While
the borrower did not file for bankruptcy protection, the
guarantors of the loan, Mayco Plastics, Inc. and another
affiliate of the borrower, have filed for bankruptcy protection.
In August 2006, we ceased accruing revenues on the loan and
began pursuing our remedies under Michigan law. In August 2006,
we instituted foreclosure proceedings on the property, and at
the foreclosure sale on September 22, 2006, we were the
successful bidder based on a credit bid of $11.375 million,
which was sufficient to cover the outstanding principal balance
and accrued, non default interest under the mortgage at that
time. Under Michigan law, the borrower has six months from the
date of foreclosure to redeem ownership of the property in
exchange for payment of the bid amount plus certain other
expenditures. If the borrower does not redeem the property
during the redemption period, we will remain the owner of the
property. We are currently pursuing claims in the bankruptcy
proceedings for all unpaid amounts due under the lease, in
addition to all other remedies available to us under bankruptcy
and state law.
S-2
THE OFFERING
The following is a brief summary of certain terms of this
offering. For a more complete description of the terms of the
Series B Preferred Stock, see “Description of the
Series B Preferred Stock” beginning on page S-9
in this prospectus supplement.
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Issuer |
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Gladstone Commercial Corporation |
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Securities Offered |
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1,000,000 shares of %
Series B Cumulative Redeemable Preferred Stock, par value
$0.001 per share (the “Series B Preferred
Stock”). The underwriters have the option to purchase up to
150,000 additional shares of Series B Preferred Stock from
us to cover over-allotments, if any. |
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Dividends |
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Investors will be entitled to receive preferential cumulative
cash dividends on the Series B Preferred Stock at a rate
of % per
annum of the $25.00 per share liquidation preference
(equivalent to
$ per
annum per share). Beginning on the date of issuance, dividends
on the Series B Preferred Stock will be payable monthly in
arrears. The first dividend will be payable on November 30,
2006. Dividends on the Series B Preferred Stock will be
cumulative from (but excluding) the date of original issuance,
which is expected to be
October , 2006. |
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Maturity |
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The Series B Preferred Stock does not have any maturity
date, and we are not required to redeem the Series B
Preferred Stock. In addition, we are not required to set aside
funds to redeem the Series B Preferred Stock. Accordingly,
the shares of Series B Preferred Stock will remain
outstanding indefinitely unless we decide in our sole discretion
to redeem them. |
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Optional Redemption |
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We may not redeem the Series B Preferred Stock prior to
October 31, 2011, except in limited circumstances relating
to our continuing qualification as a REIT. On and after
October 31, 2011, we may, at our option, redeem the
Series B Preferred Stock, in whole or in part, at any time
or from time to time, by payment of $25.00 per share, plus
any accumulated and unpaid dividends to and including the date
of redemption. |
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Liquidation Preference |
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If we liquidate, dissolve or wind up, holders of the
Series B Preferred Stock will have the right to receive the
$25.00 per share liquidation preference, plus any
accumulated and unpaid dividends to and including the date of
payment, but without interest, before any payment is made to the
holders of our common stock, par value $0.001 per share
(the “Common Stock”) or any other class or series of
our capital stock ranking junior to the Series B Preferred
Stock. |
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With respect to the payment of dividends and amounts upon
liquidation, dissolution or winding up, the Series B
Preferred Stock will be equal in rank with our 7.75%
Series A Cumulative Redeemable Preferred Stock, par value
$0.001 per share (the “Series A Preferred
Stock”) and all other equity securities we issue, the terms
of which specifically provide that such equity securities rank
on a parity with the Series B Preferred Stock with respect
to dividend rights or rights upon our liquidation, |
S-3
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dissolution or winding up; senior to our Common Stock; and
junior to all our existing and future indebtedness. |
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Holders of Series B Preferred Stock generally have no
voting rights. However, if dividends on any shares of the
Series B Preferred Stock are in arrears for 18 or more
consecutive months, holders of the Series B Preferred Stock
(voting together as a single class with holders of shares of any
series of our preferred stock equal in rank with the
Series B Preferred Stock upon which like voting rights have
been conferred) will have the right to elect two additional
directors to serve on our Board of Directors until such dividend
arrearage is eliminated. In addition, we may not change the
designations, rights, preferences, privileges or limitations in
respect of the Series B Preferred Stock in a manner that
would be materially adverse to the rights of holders of the
Series B Preferred Stock without the affirmative vote of at
least two-thirds of the shares of Series B Preferred Stock
then outstanding. |
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Restrictions on Ownership and Transfer |
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Our articles of incorporation state that no person, directly or
indirectly, may own more than 9.8% in value of our outstanding
capital stock. Shares of Series B Preferred Stock acquired
or transferred in breach of this limitation will be
automatically deemed held in trust for the exclusive benefit of
the transferees to whom that capital stock may be transferred
without violating the 9.8% ownership limitation. In such event
the purchaser-transferee shall not be entitled to vote or to
participate in dividends or other distributions with respect to
such stock. The Series B Preferred Stock is subject to the
general restrictions on ownership and transferability described
under “Certain Provisions of Maryland Law and of our
Articles of Incorporation and Bylaws — Restrictions on
Ownership of Shares” on page 19 in the accompanying
prospectus. |
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Shares of Series B Preferred Stock are not convertible into
or exchangeable for any other securities or property. |
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Use of Proceeds |
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We estimate that our net proceeds from the offering will be
approximately
$ million
(approximately
$ million
if the underwriters’ over-allotment option is exercised in
full). We intend to contribute all of the net proceeds from the
offering of the Series B Preferred Stock to the Operating
Partnership in exchange
for %
Series B Cumulative Redeemable Preferred Units of the
Operating Partnership. We intend to use the net proceeds from
the offering of Series B Preferred Stock to repay
outstanding indebtedness on our line of credit. |
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Listing |
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We intend to file an application to list the Series B
Preferred Stock on the Nasdaq Global Market (“Nasdaq”)
under the symbol “GOODO.” If the application is
approved, trading of the Series B Preferred Stock on Nasdaq
is expected to begin within 30 days after the date of
initial delivery of the Series B Preferred Stock. |
S-4
ADDITIONAL RISK FACTORS
Before you invest in the Series B Preferred Stock, you
should consider carefully the risk factors listed below together
with all of the other information included or incorporated by
reference in this prospectus supplement and the accompanying
prospectus, including the “Risk Factors” beginning on
page 3 in the accompanying prospectus.
Our issuance of additional preferred stock equal in rank with
or senior to the Series B Preferred Stock could dilute the
interests of the holders of the Series B Preferred
Stock.
Our articles of incorporation currently authorize the issuance
of up to 20,000,000 shares of capital stock, of
which shares
of common stock, 1,000,000 shares of Series A
Preferred Stock and up to 1,150,000 shares of Series B
Preferred Stock will be outstanding immediately following the
completion of this offering (presuming the underwriters exercise
their overallotment option in full). An additional
150,000 shares of Series A Preferred Stock have been
classified by our Board of Directors but are unissued.
Our Board of Directors may classify the remaining shares of
unissued capital stock by setting or changing the preferences,
conversion or other rights, voting powers restrictions,
limitations as to dividends, qualifications and terms and
conditions of redemption of such stock, subject to the rights of
the holders of the Series B Preferred Stock to consent to
any such classification that would materially and adversely
affect any right, preference, privilege or voting power of the
Series B Preferred Stock. As of the date of this prospectus
supplement, shares of the Series A Preferred Stock are
equal in rank with the Series B Preferred Stock with
respect to the payment of dividends and amounts on liquidation,
dissolution and winding up. The issuance of additional shares of
other series of preferred stock equal in rank with or senior to
the Series B Preferred Stock could have the effect of
diluting the interests of holders of the Series B Preferred
Stock. None of the provisions of our articles of incorporation
relating to the Series B Preferred Stock afford the holders
of the Series B Preferred Stock protection in the event of
a highly leveraged or other transaction, including a merger or
the sale, lease or conveyance of all or substantially all of our
property or business, that might adversely affect the holders of
the Series B Preferred Stock.
The market value of the Series B Preferred Stock could
be substantially affected by various factors.
The shares of Series B Preferred Stock are a new issue of
securities with no established trading market. Although we
intend to file an application to list the Series B
Preferred Stock on Nasdaq, an active trading market on Nasdaq
may not develop or last, in which case the trading price of the
Series B Preferred Stock could be adversely affected. If an
active trading market does develop on Nasdaq, the Series B
Preferred Stock may trade at prices higher or lower than their
initial offering price. The trading price of our Series B
Preferred Stock would depend on many factors, including
prevailing interest rates, the market for similar securities,
general economic conditions, and our financial condition,
results of operations and prospects.
At the beginning of the 2007 fiscal year, our amended and
restated advisory agreement with Gladstone Management
Corporation and our administration agreement with Gladstone
Administration LLC will become effective and this could
adversely impact our results of operations.
On May 24, 2006, our stockholders approved a proposal to
enter into the Amended Advisory Agreement with our Adviser and
the Administration Agreement with the Administrator. We expect
to implement these new agreements effective January 1,
2007. Under the Amended Advisory Agreement, we will pay our
Adviser a base management fee of 2.0% of our total
stockholders’ equity (less the recorded value of any
preferred stock, and adjusted to exclude the effect of any
unrealized gains, losses or other items that do not affect
realized net income). The Amended Advisory Agreement also
includes incentive fees which will reward our Adviser if our
quarterly pre-incentive fee funds from operations
(“FFO”) exceeds 1.75% of our total stockholders’
equity. FFO is calculated after taking into account all
operating expenses for the quarter, including the base
management fee (less any rebate of fees received by the
S-5
Adviser), expenses payable under the Administration Agreement
and any interest expense (but excluding the incentive fee) and
any other operating expenses. Pre-incentive fee FFO includes, in
the case of investments with a deferred interest feature (such
as original issue discount, debt instruments with payment in
kind interest and zero coupon securities), accrued income and
rents that we have not yet received in cash. Pre-incentive FFO
will also include any realized capital gains and realized
capital losses, less any dividend paid on any issued and
outstanding preferred stock, but will not include any unrealized
gains or losses. Under the Amended Advisory Agreement, we will
pay our Adviser 100% of our pre-incentive fee FFO with respect
to that portion of such FFO, if any, that exceeds the hurdle
rate but is less than 2.1875% in any calendar quarter (8.75%
annualized), and 20% of the amount of our pre-incentive fee FFO,
if any, that exceeds 2.1875% in any calendar quarter (8.75%
annualized).
Under the Administration Agreement, we will pay separately for
administrative services, which payments will be equal to our
allocable portion of the Administrator’s overhead expenses
in performing its obligations under the Administration
Agreement, including, but not limited to, rent for the space
occupied by the Administrator, and our allocable portion of the
salaries and benefits expenses of our chief financial officer,
treasurer, chief compliance officer and controller and their
respective staffs. As a result of the implementation of the
Amended Advisory Agreement and the Administration Agreement, our
operating expenses may be materially higher than those payable
under our current investment advisory agreement with our
Adviser, which could have a material adverse effect on our
results of operations, our ability to make dividend payments on
the Series B Preferred Stock and the trading price of the
Series B Preferred Stock.
The Amended Advisory Agreement may induce our Adviser to make
certain investments, including speculative investments.
If the Amended Advisory Agreement becomes effective as
anticipated on January 1, 2007, we will implement a
management compensation structure that may cause our Adviser to
invest in high risk investments or take other risks. In addition
to its base management fee, our Adviser will be entitled under
the Amended Advisory Agreement to receive incentive compensation
based, in part, upon our achievement of specified levels of FFO.
In evaluating investments and other management strategies, the
opportunity to earn incentive compensation based on net income
may lead our Adviser to place undue emphasis on the maximization
of FFO at the expense of other criteria, such as preservation of
capital, maintaining sufficient liquidity, or management of
credit risk or market risk, in order to achieve higher incentive
compensation. Investments with higher yield potential are
generally riskier or more speculative. This could result in
increased risk to the value of our investment portfolio.
We may be obligated to pay our Adviser incentive compensation
even if we incur a loss.
If the Amended Advisory Agreement becomes effective as
anticipated on January 1, 2007, our Adviser will become
entitled to incentive compensation based on our FFO, which would
reward the Adviser if our quarterly FFO (before giving effect to
any incentive fee) exceeds 1.75% of our total stockholders’
equity (less the recorded value of any preferred stock). Our
pre-incentive fee FFO for incentive compensation purposes
excludes the effect of any unrealized gains, losses or other
items that do not affect realized net income that we may incur
in the fiscal quarter, even if such losses result in a net loss
on our statement of operations for that quarter. Thus, we may be
required to pay our Adviser incentive compensation for a fiscal
quarter even if we incur a net loss for that quarter.
Because we recently foreclosed on our mortgage on the
Sterling Heights, Michigan property, any future revenues
realized from the property will be based only on our status as
owner and assignee of the lease. This could affect our ability
to fully recoup our total loan amount on the property.
As previously disclosed, Mayco Property Holdings, LLC, the
borrower on our mortgage secured by the property in Sterling
Heights, Michigan, defaulted under the mortgage. The borrower
was leasing the property to its affiliate Mayco Plastics, Inc.,
which filed for bankruptcy protection in September 2006. While
the borrower did not file for bankruptcy protection, the
guarantors of the loan, Mayco Plastics, Inc.
S-6
and another affiliate of the borrower, have filed for bankruptcy
protection. In August 2006, we ceased accruing revenues on the
loan and began pursuing our remedies under Michigan law. Prior
to such time, the mortgage payments under this loan were
contributing approximately $1.7 million annually to our
revenues, operating income and funds from operations and, unless
the tenant remains and pays rent or a replacement tenant is
found, we cannot guarantee that we will receive any revenue from
the property in the foreseeable future.
In August 2006, we instituted foreclosure proceedings on the
property, and at the foreclosure sale on September 22,
2006, we were the successful bidder based on a credit bid of
$11.375 million, which was sufficient to cover the
outstanding principal balance and accrued, non default interest
under the mortgage at that time. Under Michigan law, the
borrower has six months from the date of foreclosure to redeem
ownership of the property in exchange for payment of the bid
amount plus certain other expenditures. If the borrower does not
redeem the property during the redemption period, we will remain
the owner of the property. We are currently pursuing claims in
the bankruptcy proceedings for all unpaid amounts due under the
lease in addition to all other remedies available to us under
bankruptcy and state law.
If we do maintain ownership of the property after the expiration
of the redemption period, we may seek to either sell or lease
the property. We cannot guarantee that we will be able to sell
the property for an amount exceeding our foreclosure bid plus
any other outstanding obligations due with respect to the
property, nor can we guarantee that we will be successful in
pursuing any claims in the bankruptcy proceedings for unpaid
amounts under the lease or any other remedies. Moreover, we may
not be able to find a new tenant for the property in a timely
fashion or on terms that we find satisfactory. The property is
customized to the operations of the current tenant, thus we may
be required to undertake significant improvements in the
property before we could either sell or lease the property.
Moreover, we may not be able to pass the costs of any such
improvements on to the buyer or tenant. As a result of all of
these factors, the recent default on the Mayco Property Holdings
mortgage may have a material adverse impact on our results of
operations, including our revenues, earnings, and funds from
operations.
We are currently not in compliance with a covenant of our
credit facility and, if we don’t receive a waiver or
refinance the credit facility before December 31, 2006, we
may be in default on our credit facility, which would likely
have a material adverse impact on our liquidity and financial
condition.
Under our existing credit facility, beginning with the quarter
ended September 30, 2006, we are required to pay out, on a
quarterly basis, no more than 95% of our funds from operations
as dividends to our stockholders. For the quarter ended
September 30, 2006, our dividend payout exceeded this
threshold, although our lenders waived compliance with this
requirement with respect to the quarter ended September 30,
2006. We anticipate that we will likely again exceed this
threshold for the quarter ending December 31, 2006. If we
are not in compliance with this covenant as of December 31,
2006, we will likely seek another waiver of such compliance from
our lenders or seek to refinance the credit facility. In such
case, if our lenders are unwilling to grant us a waiver on terms
we believe are reasonable or at all, and if we are unable to
secure an alternative credit facility, we may be in default on
our credit facility as of December 31, 2006, which would
likely have a material adverse impact on our liquidity and
financial condition.
S-7
USE OF PROCEEDS
We estimate the net proceeds from the sale of the Series B
Preferred Stock to be approximately
$ million
after deducting underwriting discounts and paying offering
expenses of approximately $222,000 (approximately
$ million
if the underwriters’ over-allotment option is exercised in
full). We intend to contribute all of the net proceeds from the
offering of the Series B Preferred Stock to the Operating
Partnership in exchange for %
Series B Cumulative Redeemable Preferred Units of the
Operating Partnership. We intend to use all of the net proceeds
to repay outstanding indebtedness under our line of credit. Our
line of credit matures on February 28, 2008. The interest
rate charged on the advances under the line of credit is based
on LIBOR, the prime rate or the federal funds rate, depending on
market conditions, and adjusts periodically. The current rate
under the line of credit is 7.64% (based on LIBOR). The
principal amount under our credit line to be paid with the net
proceeds of this offering was borrowed within the past twelve
months for the purpose of funding the acquisition of additional
commercial properties.
S-8
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
DIVIDENDS
The following table sets forth the ratio of earnings to combined
fixed charges and preferred dividends for the periods indicated
below. “Earnings” consist of income (loss) from
continuing operations before fixed charges. “Fixed
charges” consist of interest expense, amortization of
deferred financing fees and the portion of operating lease
expense that represents interest.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Period | |
|
|
|
|
|
|
| |
|
February 14, 2003 | |
|
|
|
|
|
|
| |
|
(inception) | |
|
For the Year | |
|
For the Year | |
|
For the Six Months | |
| |
|
through | |
|
Ended | |
|
Ended | |
|
Ended | |
| |
|
December 31, 2003 | |
|
December 31, 2004 | |
|
December 31, 2005 | |
|
June 30, 2006 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Income (loss) from continuing operations
|
|
$ |
(240,871 |
) |
|
$ |
1,529,254 |
(2) |
|
$ |
3,510,958 |
(2) |
|
$ |
1,790,284 |
|
|
Add fixed charges
|
|
|
7,830 |
|
|
|
25,565 |
|
|
|
2,379,937 |
|
|
|
3,802,460 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
$ |
(233,041 |
) |
|
$ |
1,554,819 |
|
|
$ |
5,890,895 |
|
|
$ |
5,592,744 |
|
|
Fixed Charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest expense from continuing operations
|
|
|
— |
|
|
|
— |
|
|
|
2,079,475 |
|
|
|
3,492,725 |
|
| |
Amortization of deferred financing fees from continuing
operations
|
|
|
— |
|
|
|
— |
|
|
|
253,901 |
|
|
|
281,811 |
|
| |
Estimated interest component of rent
|
|
|
7,830 |
|
|
|
25,565 |
|
|
|
46,561 |
|
|
|
27,924 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed charges
|
|
|
7,830 |
|
|
|
25,565 |
|
|
|
2,379,937 |
|
|
|
3,802,460 |
|
|
Total preferred dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
828,819 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed charges and preferred dividends
|
|
|
7,830 |
|
|
|
25,565 |
|
|
|
2,379,937 |
|
|
|
4,631,279 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to combined fixed charges and preferred
dividends
|
|
|
— |
(1) |
|
|
60.8 |
x |
|
|
2.5 |
x |
|
|
1.2x |
|
|
|
| (1) |
Due to the Company’s loss for the period February 14,
2003 through December 31, 2003 the ratio coverage was less
than 1:1. The Company would have had to generate additional
earnings of $240,871 to achieve a coverage of 1:1. |
| |
| (2) |
The Company has not restated its consolidated financial
statements as of December 31, 2005 and 2004, which are
incorporated by reference to this report, to reflect the sale of
the Canadian properties as a discontinued operation in
accordance with Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of
Long-lived Assets.” Income from continuing operations in
the table above is presented as if the financial statements had
been restated for the sale of the Canadian properties. |
S-9
CAPITALIZATION
The following table sets forth our capitalization on
June 30, 2006, and as adjusted to give effect to the
issuance of the Series B Preferred Stock and the
application of the net proceeds therefrom to repay outstanding
indebtedness under our line of credit. The information set forth
in the following table should be read in connection with, and is
qualified in its entirety by reference to, the financial
statements and notes thereto incorporated by reference in this
prospectus supplement and the accompanying prospectus. The
information set forth in the table below does not reflect
additional borrowings under notes payable or our line of credit
that occurred after June 30, 2006.
| |
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2006 | |
| |
|
| |
| |
|
Historical | |
|
As Adjusted | |
| |
|
| |
|
| |
| |
|
(Unaudited) | |
|
Notes Payable
|
|
$ |
118,690,395 |
|
|
$ |
118,690,395 |
|
|
Notes Payable related to assets held for sale
|
|
|
4,797,876 |
|
|
|
4,797,876 |
|
|
Borrowings under line of credit
|
|
|
29,660,000 |
|
|
|
5,880,000 |
|
|
Minority Interest
|
|
|
— |
|
|
|
— |
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value:
1,150,000 shares of 7.75% Series A Cumulative
Redeemable Preferred Stock, Liquidation Preference $25 per
share, authorized, 1,000,000 shares issued and outstanding
|
|
|
1,000 |
|
|
|
1,000 |
|
| |
No shares of % Series B Cumulative Redeemable
Preferred stock, Liquidation Preference $25 per share,
authorized, issued and outstanding, actual;
1,150,000 shares authorized, 1,000,000 shares, issued
and outstanding, as adjusted
|
|
|
— |
|
|
|
1,000 |
|
|
Common stock, $0.001 par value per share,
18,850,000 shares authorized, 7,816,972 shares issued
and outstanding, actual; 17,700,000 shares authorized,
7,816,972 shares issued and outstanding, as adjusted
|
|
|
7,817 |
|
|
|
7,817 |
|
|
Additional paid-in capital
|
|
|
131,590,977 |
|
|
|
155,369,977 |
|
|
Notes Receivable — employees
|
|
|
(2,259,036 |
) |
|
|
(2,259,036 |
) |
|
Accumulated distributions in excess of net income
|
|
|
(10,820,512 |
) |
|
|
(10,820,512 |
) |
| |
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
118,520,246 |
|
|
|
142,300,246 |
|
| |
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
271,668,517 |
|
|
$ |
271,668,517 |
|
| |
|
|
|
|
|
|
DESCRIPTION OF THE SERIES B PREFERRED STOCK
This description of the Series B Preferred Stock
supplements the description of the general terms and provisions
of our securities, including preferred stock, in the
accompanying prospectus. You should consult that general
description, beginning on page 18 of the accompanying
prospectus, for further information.
General
We are authorized under our articles of incorporation to issue
up to 20,000,000 shares of capital
stock. shares
of common stock, 1,000,000 shares of Series A
Preferred Stock and 1,000,000 shares (or
1,150,000 shares if the underwriters exercise their
over-allotment option in full) of Series B Preferred Stock
will be outstanding, immediately following the completion of
this offering. Our Board of Directors may classify the
remaining shares
of unissued capital stock by setting or changing the
preferences, conversion or other rights, voting powers
restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption of such stock without
stockholder approval.
S-10
Our Board of Directors has classified 1,150,000 shares of
preferred stock as Series B Preferred Stock, all of which
may be issued in this offering (including 150,000 shares
that may be issued upon exercise of the underwriters’
over-allotment option).
The following summary of the terms and provisions of the
Series B Preferred Stock does not purport to be complete
and is qualified in its entirety by reference to the pertinent
sections of our articles of incorporation and the articles
supplementary, which supplement our articles of incorporation by
creating the Series B Preferred Stock. You may obtain a
complete copy of the articles supplementary by contacting us.
Our preferred stock may be issued without stockholder approval,
with such voting powers (full or limited), designations,
preferences and relative, participating, optional or other
special rights, and qualifications, limitations, or restrictions
thereof as shall be established by our Board of Directors. Thus,
without stockholder approval, we could issue preferred stock
with voting, conversion and other rights that could dilute the
voting power and other rights of the holders of Series B
Preferred Stock.
Our Board of Directors has authorized our classification and
issuance of the Series B Preferred Stock and approved the
form of the articles supplementary for the Series B
Preferred Stock. Prior to completing this offering, we will
adopt and file articles supplementary for the Series B
Preferred Stock.
When issued, the Series B Preferred Stock will be validly
issued, fully paid and non-assessable. The holders of the
Series B Preferred Stock will have no preemptive rights
with respect to any shares of our capital stock or any other of
our securities convertible into or carrying rights or options to
purchase any such shares. The Series B Preferred Stock will
not be subject to any sinking fund or other obligation to redeem
or retire the Series B Preferred Stock. Unless redeemed by
us on or after October 31, 2011, the Series B
Preferred Stock will have a perpetual term, with no maturity. We
intend to file an application to list the Series B
Preferred Stock on Nasdaq under the symbol “GOODO.”
Trading of Series B Preferred Stock on Nasdaq is expected
to commence within the
30-day period after the
initial delivery of the Series B Preferred Stock.
Dividends
Holders of shares of the Series B Preferred Stock will be
entitled to receive, when and as declared by our Board of
Directors (or a duly authorized committee of the Board), out of
funds legally available for the payment of dividends,
preferential cumulative cash dividends at the rate
of % per annum of the
liquidation preference of $25.00 per share (equivalent to a
fixed annual amount of
$ per
share).
Dividends on the Series B Preferred Stock will be
cumulative from (but excluding) the date of original issue,
which is expected to be
October , 2006 and will be
payable monthly in arrears. The first dividend will be payable
on November 30, 2006. Dividends will be payable to holders
of record as they appear in our stock records at the close of
business on the applicable record date. The record date for each
dividend will be designated by our Board of Directors that is
not more than 20 nor less than 7 days prior to such
dividend payment date.
Our Board of Directors will not authorize, declare, pay or set
apart for payment any dividends on shares of Series B
Preferred Stock at any time that the terms and provisions of any
of our agreements, including any agreement relating to our
indebtedness, prohibits that action or provides that the
authorization, declaration, payment or setting apart for payment
of those dividends would constitute a breach of or a default
under any such agreement, or if such action is restricted or
prohibited by law.
Notwithstanding the foregoing, dividends on the Series B
Preferred Stock will accumulate whether or not restrictions
exist in respect thereof, whether or not we have earnings,
whether or not there are funds legally available for the payment
of such dividends and whether or not we declare such dividends.
Accumulated but unpaid dividends on the Series B Preferred
Stock will not bear interest, and holders of the Series B
Preferred Stock will not be entitled to any distributions in
excess of full cumulative dividends described above. Except as
stated in the following sentence, no dividends will be declared
or paid or set apart for payment on any of our common stock or
any other series of preferred stock ranking equal with
S-11
the Series B Preferred Stock or any series or class of
equity securities ranking junior to the Series B Preferred
Stock (other than a dividend in shares of our common stock or in
shares of any other class of stock ranking junior to the
Series B Preferred Stock as to dividends and upon
liquidation) for any period unless full cumulative dividends
have been or contemporaneously are declared and paid (or
declared and a sum sufficient for the payment of those dividends
is set apart for such payment) on the Series B Preferred
Stock for all past dividend periods and the then current
dividend period.
If we do not declare and either pay or set aside for payment the
full cumulative dividends on the Series B Preferred Stock
and all shares of capital stock that are equal in rank with
Series B Preferred Stock, the amount which we have declared
will be allocated ratably to the Series B Preferred Stock
and to each series of shares of capital stock equal in rank so
that the amount declared for each share of Series B
Preferred Stock and for each share of each series of capital
stock equal in rank is proportionate to the accrued and unpaid
dividends on those shares.
Except as provided in the immediately preceding paragraph,
unless full cumulative dividends on the Series B Preferred
Stock have been or contemporaneously are declared and paid (or
declared and a sum sufficient for the payment is set apart for
payment) for all past dividend periods and the then current
dividend period, no dividends (other than in shares of common
stock or other shares of capital stock ranking junior to the
Series B Preferred Stock as to dividends and upon
liquidation) shall be declared or paid or set aside for payment
nor shall any other distribution be declared or made upon our
common stock, or any of our other capital stock ranking junior
to or equal with the Series B Preferred Stock as to
dividends or upon liquidation, nor shall we redeem, purchase, or
otherwise acquire for any consideration (or pay or make any
monies available for a sinking fund for the redemption of any
such shares) any shares of our common stock, or any other shares
of our capital stock ranking junior to or equal with the
Series B Preferred Stock as to dividends or upon
liquidation (except by conversion into or exchange for any of
our capital stock ranking junior to the Series B Preferred
Stock as to dividends and upon liquidation or redemption for the
purpose of preserving our qualification as a REIT). Holders of
shares of the Series B Preferred Stock shall not be
entitled to any dividend, whether payable in cash, property or
stock, in excess of full cumulative dividends on the
Series B Preferred Stock. Any dividend payment made on
shares of the Series B Preferred Stock shall first be
credited against the earliest accumulated but unpaid dividend
due.
Maturity
The Series B Preferred Stock will have no stated maturity
and will not be subject to any sinking fund or mandatory
redemption. In addition, we will not be required to set aside
funds to redeem the Series B Preferred Stock. Accordingly,
the shares of Series B Preferred Stock will remain
outstanding indefinitely unless we decide in our sole discretion
to redeem them.
Optional Redemption
The Series B Preferred Stock will not be redeemable prior
to October 31, 2011. However, in order to ensure that we
will continue to meet the requirements for qualification as a
REIT, the Series B Preferred Stock will be subject to
provisions in our articles of incorporation pursuant to which
shares of our capital stock owned by a stockholder in excess of
9.8% in value of the outstanding shares of our capital stock
will be deemed “excess shares,” and we will have the
right to purchase those excess shares from the holder.
On and after October 31, 2011, at our sole option upon not
less than 30 nor more than 60 days’ written notice, we
may redeem shares of the Series B Preferred Stock, in whole
or in part, at any time or from time to time, for cash at a
redemption price of $25.00 per share, plus all accumulated
and unpaid dividends thereon to the date fixed for redemption
(except with respect to excess shares), without interest.
Holders of Series B Preferred Stock to be redeemed must
then surrender such Series B Preferred Stock at the place
designated in the notice. Upon surrender of the Series B
Preferred Stock, the holders will be entitled to the redemption
price and any accumulated and unpaid dividends payable upon such
redemption. If notice of redemption of any shares of
Series B Preferred Stock has been given and if we have set
aside the funds necessary for such redemption in trust for the
benefit of the holders of any of the shares of
S-12
Series B Preferred Stock to be redeemed, then from and
after the redemption date dividends will cease to accumulate on
those shares of Series B Preferred Stock, those shares of
Series B Preferred Stock will no longer be deemed
outstanding and all rights of the holders of such shares will
terminate, except the right to receive the redemption price. If
less than all of the outstanding Series B Preferred Stock
is to be redeemed, the Series B Preferred Stock to be
redeemed shall be selected ratably (as nearly as may be
practicable without creating fractional shares) or by any other
equitable method that we may choose.
Unless full cumulative dividends on all shares of Series B
Preferred Stock have been or contemporaneously are declared and
paid (or declared and a sum sufficient for payment set apart for
payment for all past dividend periods and the then current
dividend period), no shares of Series B Preferred Stock
will be redeemed unless all outstanding shares of Series B
Preferred Stock are simultaneously redeemed. In such event, we
also will not purchase or otherwise acquire directly or
indirectly any shares of Series B Preferred Stock (except
by exchange for our capital stock ranking junior to the
Series B Preferred Stock as to dividends and upon
liquidation). However, the foregoing shall not prevent us from
purchasing excess shares in order to ensure that we continue to
meet the requirements for qualification as a REIT, or from
acquiring shares of Series B Preferred Stock pursuant to a
purchase or exchange offer made on the same terms to holders of
all outstanding shares of Series B Preferred Stock. So long
as no dividends are in arrears, we will be entitled at any time
and from time to time to repurchase shares of Series B
Preferred Stock in open-market transactions duly authorized by
the Board of Directors and effected in compliance with
applicable laws.
Notice of redemption will be given by publication in a newspaper
of general circulation in the City of New York. Publication will
be made once a week for two successive weeks commencing not less
than 30 nor more than 60 days prior to the redemption date.
We will mail a similar notice, postage prepaid, not less than 30
nor more than 60 days prior to the redemption date,
addressed to the respective holders of record of the
Series B Preferred Stock to be redeemed at their respective
addresses as they appear on our stock transfer records. No
failure to give such notice or any defect in the notice or in
the mailing of the notice shall affect the validity of the
redemption of any shares of Series B Preferred Stock except
as to the holder to whom notice was defective or not given. Each
notice shall state:
|
|
|
| |
• |
the redemption date; |
| |
| |
• |
the redemption price; |
| |
| |
• |
the number of shares of Series B Preferred Stock to be
redeemed; |
| |
| |
• |
the place or places where the Series B Preferred Stock is
to be surrendered for payment of the redemption price; and |
| |
| |
• |
that dividends on the shares to be redeemed will cease to accrue
on the redemption date. |
If less than all of the Series B Preferred Stock held by
any holder is to be redeemed, the notice mailed to such holder
shall also specify the number of shares of Series B
Preferred Stock held by such holder to be redeemed.
Immediately prior to any redemption of Series B Preferred
Stock, we will pay, in cash, any accumulated and unpaid
dividends through the redemption date. If a redemption date
falls after a record date and prior to the corresponding
dividend payment date, however, each holder of Series B
Preferred Stock at the close of business on that record date
shall be entitled to the dividend payable on such shares on the
corresponding dividend payment date notwithstanding the
redemption of such shares before the dividend payment date.
The Series B Preferred Stock will have no stated maturity
and will not be subject to any sinking fund or mandatory
redemption. However, in order to ensure that we continue to meet
the requirements for qualification as a REIT, we will have the
right to purchase “excess shares” as described in the
first paragraph of this section. In addition, we may redeem
excess shares, in whole or in part, at any time when outstanding
shares of Series B Preferred Stock are being redeemed, for
cash at a redemption price of $25.00 per share, but
excluding accumulated and unpaid dividends on those excess
shares, without interest.
S-13
Such excess shares will be redeemed in the same proportion and
in accordance with the same procedures as the shares of
Series B Preferred Stock being redeemed.
Liquidation Preference
In the event of our voluntary or involuntary liquidation,
dissolution or winding up, the holders of shares of
Series B Preferred Stock will be entitled to be paid, out
of our assets legally available for distribution to our
stockholders, a liquidation preference of $25.00 per share,
plus an amount equal to any accumulated and unpaid dividends to
and including the date of payment, but without interest, before
any distribution of assets is made to holders of our common
stock or any other class or series of our capital stock that
ranks junior to the Series B Preferred Stock as to
liquidation rights. If our assets legally available for
distribution to stockholders are insufficient to pay in full the
liquidation preference on the Series B Preferred Stock and
the liquidation preference on any shares of preferred stock
equal in rank with the Series B Preferred Stock, all assets
distributed to the holders of the Series B Preferred Stock
and any other series of preferred stock equal in rank with the
Series B Preferred Stock will be distributed ratably so
that the amount of assets distributed per share of Series B
Preferred Stock and such other series of preferred stock equal
in rank with the Series B Preferred Stock shall in all
cases bear to each other the same ratio that the liquidation
preference per share on the Series B Preferred Stock and on
such other series of preferred stock bear to each other. Written
notice of any such liquidation, dissolution or winding up of the
Company, stating the payment date or dates when, and the place
or places where, the amounts distributable in such circumstances
shall be payable, shall be given by first class mail, postage
pre-paid, not less than 30 nor more than 60 days prior to
the payment date stated therein, to each record holder of the
Series B Preferred Stock at the respective addresses of
such holders as the same shall appear on the stock transfer
records of the Company. After payment of the full amount of the
liquidation preference, plus any accumulated and unpaid
dividends to which they are entitled, the holders of
Series B Preferred Stock will have no right or claim to any
of our remaining assets. If we consolidate or merge with or into
any other corporation, trust or entity, effect a statutory share
exchange or sell, lease, transfer or convey all or substantially
all of our property or business, we will not be deemed to have
liquidated, dissolved or wound up.
Rank
With respect to the payment of dividends and amounts upon our
liquidation, dissolution or winding up, the Series B
Preferred Stock will rank:
|
|
|
| |
• |
senior to all classes or series of our common stock and to all
equity securities ranking junior to the Series B Preferred
Stock with respect to dividend rights or rights upon our
liquidation, dissolution or winding up; |
| |
| |
• |
on a parity with our Series A Preferred Stock and all other
equity securities issued by the Company the terms of which
specifically provide that such equity securities rank on a
parity with the Series B Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or
winding up of the Company; and |
| |
| |
• |
junior to all our existing and future indebtedness. |
Voting Rights
Holders of the Series B Preferred Stock will not have any
voting rights, except as described below or as otherwise
required by law.
Whenever dividends on any shares of Series B Preferred
Stock are in arrears for 18 or more consecutive months, the
holders of those shares, voting separately as a class, together
with the holders of our Series A Preferred Stock and all
other series of preferred stock equal in rank with the
Series B Preferred Stock upon which like voting rights have
been conferred and are exercisable, will be entitled to vote
separately as a class for the election of a total of two
additional directors on our Board of Directors.
S-14
The election of these two directors will take place at a special
meeting called by the holders of record of at least 20% of the
Series B Preferred Stock or the holders of record of at
least 20% of any series of preferred stock equal in rank with
the Series B Preferred Stock so in arrears (unless such
request is received less than 90 days before the date fixed
for the next annual or special meeting of stockholders) or at
the next annual meeting of stockholders, and at each subsequent
annual meeting until all dividend arrearages have been paid (or
declared and a sum sufficient for payment set aside). A quorum
for any such meeting will exist if at least a majority of the
total outstanding shares of Series B Preferred Stock and
shares of preferred stock equal in rank with the Series B
Preferred Stock entitled to like voting rights are represented
in person or by proxy at that meeting. The directors elected as
described above shall be elected upon the affirmative vote of a
plurality of the shares of Series B Preferred Stock and
preferred stock equal in rank with the Series B Preferred
Stock present and voting in person or by proxy at a duly called
and held meeting at which a quorum is present, voting separately
as a single class. If and when all accumulated dividends and the
dividend for the then current dividend period on the
Series B Preferred Stock have been paid in full or declared
or set aside for payment in full, the holders of the
Series B Preferred Stock shall be divested of the right to
elect directors and, if all dividend arrearages have been paid
in full (or declared and set aside for payment in full) on all
series of preferred stock entitled to like voting rights, the
term of office of each director so elected shall terminate. Any
director so elected may be removed at any time with or without
cause by, and shall not be removed otherwise than by the vote
of, the holders of record of a majority of the outstanding
shares of the Series B Preferred Stock having the voting
rights described above (voting separately as a single class with
all series of preferred stock entitled to like voting rights).
So long as a dividend arrearage continues, any vacancy in the
office of a director elected as described above may be filled by
written consent of the director elected as described above who
remains in office, or if none remains in office, by a vote of
the holders of record of a majority of the outstanding shares of
Series B Preferred Stock when they have the voting rights
described above (voting separately as a single class with all
series of preferred stock entitled to like voting rights). These
directors shall each be entitled to one vote per director on any
matter.
So long as any shares of Series B Preferred Stock remain
outstanding, we will not, without the affirmative vote or
consent of the holders of at least two-thirds of the shares of
the Series B Preferred Stock outstanding at the time, given
in person or by proxy, either in writing or at a meeting (voting
separately as a class), amend, alter or repeal the provisions of
our articles of incorporation or the articles supplementary
designating the Series B Preferred Stock, whether by
merger, consolidation or otherwise, so as to materially and
adversely affect any right, preference, privilege or voting
power of the Series B Preferred Stock or the holders
thereof. However, with respect to the occurrence of any event
listed above, so long as the Series B Preferred Stock
remains outstanding (or shares issued by a surviving entity in
substitution for the Series B Preferred Stock) with its
terms materially unchanged, taking into account that upon the
occurrence of such an event, we may not be the surviving entity,
the occurrence of any such event shall not be deemed to
materially and adversely affect such rights, preferences,
privileges or voting power of holders of the Series B
Preferred Stock. In addition (i) any increase in the amount
of authorized shares of Series B Preferred Stock,
(ii) any increase in the amount of the authorized preferred
stock or the creation or issuance of any other series of
preferred stock, or (iii) any increase in the amount of
authorized shares of such series, in each case ranking equal
with or junior to the Series B Preferred Stock with respect
to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up, will not be deemed to
materially and adversely affect such rights, preferences,
privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior
to the time when the act with respect to which such vote would
otherwise be required shall be effected, all outstanding shares
of Series B Preferred Stock shall have been redeemed or
called for redemption upon proper notice and sufficient funds
shall have been deposited in trust to effect such redemption.
S-15
Restrictions on Ownership
For us to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the “Code”), among other things, not
more than 50% in value of our outstanding capital stock may be
owned, directly or indirectly, by five or fewer individuals
(defined in the Code to include certain entities) during the
last half of a taxable year, and such capital stock must be
beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. To ensure that we
continue to meet the requirements for qualification as a REIT,
our articles of incorporation, subject to certain exceptions,
provides that no holder may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 9.8% in
value of our outstanding capital stock. Our Board of Directors
may waive this ownership limit with respect to a stockholder if
evidence satisfactory to our Board of Directors and our tax
counsel is presented that the changes in ownership will not then
or in the future jeopardize our status as a REIT. Any transfer
of capital stock or any security convertible into capital stock
that would result in a direct or indirect ownership of capital
stock by a stockholder in excess of the ownership limit or that
would result in our failure to meet the requirements for
qualification as a REIT, including any transfer that results in
the capital stock being owned by fewer than 100 persons or
results in our being “closely held” within the meaning
of section 856(h) of the Code, shall be null and void, and
the intended transferee will acquire no rights to the capital
stock. The foregoing restrictions on transferability and
ownership will not apply if our Board of Directors determines
that it is no longer in our best interests to attempt to
qualify, or to continue to qualify, as a REIT.
Capital stock owned, or deemed to be owned, or transferred to a
stockholder in excess of the 9.8% ownership limit shall be
deemed “excess shares” held by such holder as agent on
behalf of, and in trust for the exclusive benefit of the
transferees (which may include us) to whom such capital stock
may be ultimately transferred without violating the ownership
limit. While the excess shares are held in trust, the holder of
those shares will not be entitled to vote those shares, the
excess shares will not be considered issued and outstanding for
purposes of any stockholder vote or the determination of a
quorum for such vote and, except upon liquidation, will not be
entitled to participate in dividends or other distributions. Any
dividend or distribution paid to a proposed transferee of excess
shares prior to our discovery that capital stock has been
transferred in violation of the ownership limitation shall be
repaid to us upon demand.
Excess shares are further subject to transfer at the direction
of our Board of Directors. If our Board of Directors directs a
holder of excess shares to sell those shares, such holder shall
pay us out of the proceeds of such sale all expenses incurred by
us in connection with such sale plus any remaining amount of
such proceeds that exceeds the amount paid by such holder for
the excess shares.
In addition, we will have the right, for a period of six months
during the time any excess shares are held by the holder in
trust, to redeem all or any portion of the excess shares from
the holder for the lesser of the price paid for the capital
stock by the holder or the market price (as determined in the
manner set forth in the articles of incorporation) of the
capital stock on the date we give notice of our intent to redeem
those shares. The six month period begins on the date on which
we receive written notice of the transfer or other event
resulting in the classification of capital stock as excess
shares.
Each stockholder shall upon demand be required to disclose to us
in writing any information with respect to the direct, indirect
and constructive ownership of our securities as our Board of
Directors deems necessary to comply with the provisions of the
Code applicable to REITs, to comply with the requirements of any
taxing authority or governmental agency or to determine any such
compliance.
Conversion
The Series B Preferred Stock will not be convertible into
or exchangeable for any of our other property or securities.
S-16
Listing
We intend to file an application to list the Series B
Preferred Stock on Nasdaq under the symbol “GOODO.” If
the application is approved, trading of the Series B
Preferred Stock on Nasdaq is expected to begin within
30 days after the date of initial delivery of the
Series B Preferred Stock.
Transfer and Dividend Paying Agent
The Bank of New York will act as the transfer and dividend
payment agent in respect of the Series B Preferred Stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
If, for any taxable year, we elect to designate as a
“capital gain dividend” (as defined in
Section 857 of the Code) any portion (the “Capital
Gains Amount”) of the dividends paid or made available for
the year to holders of any class or series of our stock, the
portion of the Capital Gains Amount that shall be allocable to
holders of the Series B Preferred Stock shall be the amount
that the total dividends (as determined for federal income tax
purposes) paid or made available to the holders of the
Series B Preferred Stock for the year bears to the
aggregate amount of dividends (as determined for federal income
tax purposes) paid or made available to the holders of all of
our classes or series of stock for such year.
S-17
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement
dated October , 2006, the
underwriters named below, for whom Ferris, Baker Watts,
Incorporated is acting as representative, have agreed to
purchase from us the number of shares of Series B Preferred
Stock set forth opposite their names below:
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Ferris, Baker Watts, Incorporated
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Robert W. Baird & Co. Incorporated
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J.J.B. Hilliard, W.L. Lyons, Inc.
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Total
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1,000,000 |
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The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent,
including the absence of any significant negative change in our
business and the receipt of certain certificates, opinions and
letters from us and our attorneys and independent registered
public accounting firm. The nature of the underwriters’
obligation is such that they are committed to purchase all
shares of Series B Preferred Stock offered hereby if any of
the shares are purchased.
We expect that delivery of the Series B Preferred Stock
will be made against payment therefor on or about
October , 2006, which is the
sixth business day following the date of pricing of our
Series B Preferred Stock. Pursuant to SEC
Rule 15c6-1,
trades in the secondary market generally are required to settle
in three business days, unless the parties to any such trade
expressly agree otherwise. Accordingly, purchasers who wish to
trade the shares on any day prior to the third business day
before the settlement date will be required to specify an
alternative settlement cycle at the time of any such trade to
prevent a failed settlement, and should consult their own
advisor with respect to these matters.
We expect to list the Series B Preferred Stock on Nasdaq
under the symbol “GOODO.” Trading of the Series B
Preferred Stock on Nasdaq, if listing is approved, is expected
to commence within 30 days after initial delivery of the
Series B Preferred Stock. The underwriters have advised us
that they intend to make a market in the Series B Preferred
Stock prior to the commencement of trading on Nasdaq. The
underwriters will have no obligation to make a market in the
Series B Preferred Stock, however, and may cease
market-making activities, if commenced, at any time.
We have granted the underwriters the option, exercisable for
30 days after the date of this prospectus supplement, to
purchase up to an aggregate of 150,000 additional shares of
Series B Preferred Stock at the public offering price, less
the underwriting discount set forth on the cover page of this
prospectus supplement. The underwriters may exercise this option
solely to cover over-allotment, if any, in connection with the
sale of our Series B Preferred Stock. If the underwriters
exercise this option, each underwriter will be obligated,
subject to certain conditions, to purchase a number of
additional shares of our Series B Preferred Stock
proportionate to the underwriter’s initial amount set forth
in the table above.
The following table summarizes the underwriting discounts and
commissions to be paid by us to the underwriters for each share
of our Series B Preferred Stock and in total. This
information is presented assuming either no exercise or full
exercise of the underwriters’ over-allotment option
described above.
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In no event will the maximum discount to be received by any NASD
member in connection with this offering exceed 10%. The maximum
reimbursement to any NASD member for bona fide due diligence
expenses incurred in connection with this offering will not
exceed 0.5%.
In addition to the underwriting discount described above, we
anticipate incurring approximately $222,000 in expenses relating
to the offering of our Series B Preferred Stock.
S-18
We have been advised by the representative that the underwriters
propose to offer the Series B Preferred Stock to the public
at the public offering price set forth on the cover page of this
prospectus supplement and to certain dealers at that price less
a concession not in excess of
$ per
share. The underwriters may allow, and such dealers may
re-allow, a concession not in excess of
$ per
share to certain other dealers.
Until the offering of the Series B Preferred Stock is
completed, applicable rules of the Securities and Exchange
Commission may limit the ability of the underwriters and certain
selling group members to bid for and purchase the Series B
Preferred Stock. As an exception to these rules, the
underwriters may engage in certain transactions that stabilize
the price of the Series B Preferred Stock. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number
of shares of Series B Preferred Stock than they are
required to purchase in the offering. Stabilizing transactions
consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the
Series B Preferred Stock while the offering is in progress.
The underwriters also may impose a penalty bid. This bid occurs
when a particular underwriter repays to the underwriters a
portion of the underwriting discount received by it because the
representative has repurchased shares sold by or for the account
of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or
otherwise affect the market price of the Series B Preferred
Stock. As a result, the price of the Series B Preferred
Stock may be higher than the price that otherwise might exist in
the open market. If these activities are commenced, they may be
discontinued by the underwriters without notice at any time.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of
1933, as amended, and to contribute to payments which the
underwriters may be required to make in respect thereof.
In the ordinary course of business, certain of the underwriters
and their affiliates have provided, and may in the future
provide, investment banking, financial advisory and other
services to us for which they have received, and may in the
future receive, customary fees.
LEGAL MATTERS
Certain legal matters relating to the offering will be passed
upon for us by Cooley Godward Kronish LLP, Reston, Virginia.
Certain legal matters relating to the offering will be passed
upon for the underwriters by Bass, Berry and Sims PLC, Memphis,
Tennessee.
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 supplement by reference to the Annual Report on
Form 10-K for the
year ended December 31, 2005, have been so incorporated in
reliance on the report 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 of 2525 North Woodlawn
Avenue included in Gladstone Commercial Corporation’s
Current Report on
form 8-K/A dated
July 29, 2005 has been incorporated in this prospectus
supplement by reference in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
S-19
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Securities and Exchange Commission, or SEC, allows us to
“incorporate by reference” the information we file
with them, which means that we can disclose important
information to you by referring you to those documents. The
information incorporated by reference is considered to be part
of this prospectus supplement, and information that we
subsequently file with the SEC will automatically update and
supersede this information. We incorporate by reference the
documents listed below which were filed with the SEC under the
Securities Exchange Act of 1934, as amended:
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Annual Report on
Form 10-K for the
fiscal year ended December 31, 2005, filed on
February 28, 2006; |
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Quarterly Report on
Form 10-Q for the
fiscal quarter ended March 31, 2006, filed on May 2,
2006; |
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Quarterly Report on
Form 10-Q for the
fiscal quarter ended June 30, 2006, filed on August 8,
2006; and |
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Current Reports on
Form 8-K filed
February 1, 2006, February 24, 2006, March 22,
2006, April 13, 2006, June 30, 2006, July 12,
2006 and September 1, 2006. |
We also incorporate by reference each of the following documents
that we file with the SEC after the date of this prospectus
supplement but before the end of the Series B Preferred
Stock offering:
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Reports filed under Sections 13(a) and (c) of the
Exchange Act; |
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Definitive proxy or information statements filed under
Section 14 of the Exchange Act in connection with any
subsequent annual or special stockholders’ meeting; and |
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Any reports filed under Section 15(d) of the Exchange Act. |
You may request a copy of any of the filings, at no cost, by
writing us at the following address or calling our toll-free
investor relations line at the following number:
Gladstone Commercial Corporation
1521 Westbranch Drive, Suite 200
McLean, Virginia 22102
1-866-366-5745
WHERE YOU CAN FIND MORE INFORMATION
You may read and copy any material that we file with the SEC at
the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. You may
also access our SEC filings over the Internet at the SEC’s
site at http://www.sec.gov.
FORWARD-LOOKING STATEMENTS
Statements contained in this prospectus supplement and the
accompanying prospectus, including the documents that are
incorporated by reference, that are not historical facts are
forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. Also, when we use any of the
words “believe,” “expect,”
“anticipate,” “intend,” “plan,”
“estimate,” or similar expressions, we are making
forward-looking statements. In part, we have based these
forward-looking statements on possible or assumed future results
of our operations. These are forward-looking statements and not
guaranteed. They are based on our present intentions and on our
present expectations and assumptions. These statements,
intentions, expectations and assumptions involve risks and
uncertainties, some of which are beyond our control, that could
cause actual results or events to differ materially from those
we anticipate or project. These risks include those described
under “Risk Factors” in this prospectus supplement,
the
S-20
accompanying prospectus and in our filings with the SEC,
including those in our
Form 10-K for the
year ended December 31, 2005, filed on February 28,
2006, and our
Forms 10-Q for the
quarters ended March 31, 2006 and June 30, 2006, filed
on May 2, 2006 and August 8, 2006, respectively.
Prospective purchasers should not place undue reliance on these
forward-looking statements, as events described or implied in
such statements may not occur. We undertake no obligation to
update or revise any forward-looking statements as a result of
new information, future events or otherwise.
S-21
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 October 24, 2005.
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
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
1
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.
2
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
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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
10
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
(ii) we dispose of assets or |
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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
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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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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
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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
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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
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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
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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
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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.
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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
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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
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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.
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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 |
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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. |
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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.
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