Filed Pursuant to Rule 424(b)(5)
Registration No. 333-56237
PROSPECTUS SUPPLEMENT
(to Prospectus Dated February 9, 1999)
2,000,000 Shares
Brandywine Realty Trust
Common Shares of Beneficial Interest
---------------------------
We are selling 2,000,000 common shares in this offering. We have
granted the underwriter an option to purchase up to 300,000 additional common
shares to cover over-allotments.
Our common shares are traded on the New York Stock Exchange under the
symbol "BDN." The last reported sale price on June 12, 2003 was $24.84 per
share.
Investing in our common shares involves risks, including those referred
to in the "Risk Factors" section beginning on page S-3 of this prospectus
supplement.
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 to which it relates is
truthful or complete. Any representation to the contrary is a criminal offense.
---------------------------
Per Share Total
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Public offering price $24.70 $49,400,000
Underwriting discount $ 1.10 $ 2,200,000
Proceeds to us (before expenses) $23.60 $47,200,000
The underwriter expects to deliver the shares on or about June 18,
2003.
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Citigroup
June 13, 2003
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You should rely only on the information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not, and the underwriter has not, authorized anyone to provide you with
different or additional information. If anyone provides you with different or
additional information, you should not rely on it. We are not making an offer of
these securities in any jurisdiction where the offer is not permitted. You
should not assume that the information provided by this prospectus supplement or
the accompanying prospectus is accurate as of any date other than the respective
dates on the front of this prospectus supplement or the accompanying prospectus.
Our business, financial condition, results of operations and prospects may have
changed since those dates.
TABLE OF CONTENTS
Page
----
Prospectus Supplement
About this Prospectus Supplement............................................S-3
Forward-Looking Statements..................................................S-3
Risk Factors................................................................S-3
The Company.................................................................S-3
Use of Proceeds.............................................................S-4
Selected Financial Data.....................................................S-4
Description of Shares of Beneficial Interest................................S-6
Provisions of Maryland Law and of our Declaration of Trust and Bylaws......S-11
Federal Income Tax Considerations..........................................S-15
Underwriting...............................................................S-15
Note Regarding Our Independent Auditors....................................S-16
Legal Matters..............................................................S-17
Where You Can Find More Information........................................S-17
Prospectus
About this Prospectus......................................................2
Where You Can Find More Information........................................2
Summary....................................................................3
Risk Factors...............................................................4
Ratios of Earnings to Combined Fixed Charges and
Preferred Share Distributions....................................11
Use of Proceeds...........................................................12
Description of Shares of Beneficial Interest..............................12
Description of Depositary Shares..........................................17
Description of Warrants...................................................20
Certain Provisions of Maryland Law and of the Company's
Declaration of Trust and Bylaws..................................20
Policies with Respect to Certain Activities...............................24
Federal Income Tax Considerations.........................................27
Plan of Distribution......................................................39
Experts...................................................................40
Legal Matters.............................................................40
Tax Matters...............................................................40
----------------------
The terms "Company," "we," "our" and "us" refer to Brandywine Realty Trust and
its consolidated subsidiaries, unless the context suggests otherwise. The term
"you" refers to a prospective investor.
S-2
ABOUT THIS PROSPECTUS SUPPLEMENT
We are providing information to you about this offering of our common
shares in two parts. The first part is this prospectus supplement, which
provides the specific details regarding this offering. The second part is the
accompanying base prospectus, which provides general information. Generally,
when we refer to this "prospectus," we are referring to both documents combined.
Some of the information in the base prospectus may not apply to this offering.
If information in this prospectus supplement is inconsistent with the
accompanying base prospectus, you should rely on this prospectus supplement.
FORWARD-LOOKING STATEMENTS
Some of the information included or incorporated by reference in this
prospectus supplement and the accompanying base prospectus contains
forward-looking statements, including statements that are not historical or
factual. We intend these forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995 and we are including this paragraph for
purposes of complying with these safe harbor provisions. The forward-looking
statements include statements regarding our intent, belief or expectations. You
can identify these statements by the use of terminology such as "may," "will",
"expect," "believe," "intend," "plan," "estimate," "should" and other comparable
terms. In addition, we, through our senior management, from time to time make
forward-looking oral and written public statements concerning our expected
future operations and other developments.
Although forward-looking statements reflect our good faith beliefs and
best judgment based upon current information, they are not guarantees of future
performance and are subject to known and unknown risks and uncertainties. Actual
results may differ materially from the expectations contained in the
forward-looking statements as a result of various factors. Such factors include,
but are not limited to, the risks identified under the caption "Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2002.
RISK FACTORS
You should carefully consider the "Risk Factors" in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2002 before deciding to
invest in our Common Shares. These Risk Factors update and replace the Risk
Factors identified in the accompanying base prospectus under the caption "Risk
Factors."
THE COMPANY
We are a self-administered and self-managed real estate investment
trust ("REIT") active in acquiring, developing, redeveloping, leasing and
managing office and industrial properties. As of March 31, 2003, we owned 212
office properties, 27 industrial facilities and one mixed-use property
containing an aggregate of approximately 16.3 million net rentable square feet.
We were also performing management and leasing services for 43 properties owned
by third parties and containing an aggregate of 3.1 million net rentable square
feet. In addition, as of March 31, 2003, we held economic interests in ten
unconsolidated real estate ventures that were formed with third parties to
develop commercial properties. The real estate ventures own eight office
buildings that contain approximately 800,000 net rentable square feet. As of
March 31, 2003, we had an aggregate investment in the real estate ventures of
approximately $14.9 million (net of returns of investment received by us). As of
March 31, 2003, we also owned approximately 298 acres of undeveloped land and
held options to purchase approximately 63 additional acres. Our properties are
located in the office and industrial markets in and surrounding Philadelphia,
Pennsylvania, New Jersey and Richmond, Virginia.
S-3
We were organized and commenced operations in 1986 as a Maryland real
estate investment trust. We own our assets and conduct our operations through
Brandywine Operating Partnership, L.P., a Delaware limited partnership, and
subsidiaries of our operating partnership. As of March 31, 2003, our ownership
interest in our operating partnership entitled us to approximately 95.2% of the
operating partnership's distributions after distributions by the operating
partnership to holders of its preferred units.
Our executive offices are located at 401 Plymouth Road, Suite 500,
Plymouth Meeting, Pennsylvania 19462 and our telephone number is (610) 325-5600.
We have an internet website at www.brandywinerealty.com.
USE OF PROCEEDS
We intend to contribute to our operating partnership the net proceeds
from the sale of the common shares, expected to be approximately $47,050,000
(approximately $54,130,000 if the underwriter exercises its over-allotment
option in full) after deducting the underwriting discount and estimated
expenses. Our operating partnership intends to use all of the net proceeds to
repay secured indebtedness that bears interest at 6.804% and that is scheduled
to mature in December 2003 (the "Specified Secured Indebtedness"). Pending
application of the net proceeds of the offering, we will apply the net proceeds
to reduce the outstanding balance under our revolving credit facility. We will
repay the Specified Secured Indebtedness at or prior to maturity by accessing
our revolving credit facility. Following repayment of the Specified Secured
Indebtedness, we will have increased borrowing capacity under our revolving
credit facility which we expect to utilize to fund additional property
acquisitions (although no definitive agreements to acquire any such properties
have been entered into).
Borrowings under our revolving credit facility bear interest at a
variable rate equal to LIBOR plus 1.50% (2.68% as of June 12, 2003). Our
revolving credit facility matures in June 2004, subject to our right to extend
the maturity date for one year upon payment of a fee equal to .25% of the amount
of the facility at the time of the extension.
SELECTED FINANCIAL DATA
The historical selected financial data presented below for the fiscal
year ended December 31, 2002 are derived from, and are qualified by reference
to, the financial statements that have been audited by KPMG LLP, independent
public accountants, as indicated in their report dated February 26, 2003
incorporated by reference in this prospectus. In addition, the following table
sets forth selected financial data for the Company as of March 31, 2003 and for
the three months ended March 31, 2003 and 2002, which information is derived
from the unaudited financial statements of the Company. Certain amounts for the
year ended December 31, 2002 have been reclassified to conform with the
presentation for the three months ended March 31, 2003 and 2002. This is a
direct result of two additional properties that
S-4
were identified as held for sale or sold during the three month period ended
March 31, 2003 and, as a result, their operations have been reclassified to
discontinued operations from continuing operations for all periods presented.
Year Ended
December 31, Three Months Ended March 31,
----------------- -----------------------------------
2002 2003 2002
---- ---- ----
Operating Results
Total revenue $296,129 $76,555 $70,295
Income from continuing operations 49,919 13,160 11,893
Net income 62,984 13,917 23,469
Income allocated to Common Shares 51,078 10,940 20,492
Income from continuing operations per common share
Basic $1.03 $.28 $.24
Diluted $1.02 $.28 $.23
Earnings per Common Share
Basic $1.40 $.30 $.56
Diluted $1.39 $.30 $.55
Cash distributions declared per Common Share $1.76 $.44 $.44
Balance Sheet Data
Real estate investments, net of
accumulated depreciation $1,745,981 $1,736,373 $1,691,280
Total assets 1,919,288 1,892,875 1,939,581
Total indebtedness 1,004,729 986,597 994,380
Total liabilities 1,097,793 1,074,188 1,079,405
Minority interest 135,052 134,869 143,413
Beneficiaries' equity 686,443 683,818 716,763
Other Data
Cash flows from:
Operating activities 118,684 25,339 23,499
Investing activities 5,038 (6,601) 17,531
Financing activities (110,380) (36,996) (24,039)
S-5
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following paragraphs summarize provisions of our shares of
beneficial interest. This is a summary, and does not completely describe our
shares of beneficial interest. For a complete description, we refer you to our
Declaration of Trust and Bylaws. This summary replaces the summary under the
caption "Description of Shares of Beneficial Interest" in the accompanying base
prospectus.
General
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Our Declaration of Trust provides that we are authorized to issue up to
110,000,000 shares of beneficial interest, referred to in this prospectus
supplement as Shares, consisting of 100,000,000 common shares and 10,000,000
preferred shares, par value $.01 per share. Of the preferred shares, 750,000
have been designated as 7.25% Series A Cumulative Convertible Preferred Shares
and are referred to in this prospectus supplement as the Series A Preferred
Shares. An additional 4,375,000 preferred shares have been designated as 8.75%
Series B Senior Cumulative Convertible Preferred Shares and are referred to in
this prospectus supplement as the Series B Preferred Shares. Our Declaration of
Trust may generally be amended by our Board of Trustees, without shareholder
approval, to increase or decrease the aggregate number of authorized Shares of
any class except for the Series A Preferred Shares and Series B Preferred
Shares. The authorized common shares and undesignated preferred shares are
generally available for future issuance without further action by our
shareholders, unless such action is required by applicable law, the rules of any
stock exchange or automated quotation system on which our securities may be
listed or traded or pursuant to the preferential rights of the Series A
Preferred Shares or Series B Preferred Shares. Holders of Series A Preferred
Shares and Series B Preferred Shares have the right to approve certain
additional issuances of preferred shares, such as shares that would rank senior
to the Series A or Series B Preferred Shares as to dividends or liquidation
preference.
Both Maryland statutory law governing real estate investment trusts
organized under Maryland law (the "Maryland REIT Law") and our Declaration of
Trust provide that none of our shareholders will be personally liable, by reason
of status as a shareholder, for any of our obligations. Our Bylaws further
provide that we will indemnify any shareholder or former shareholder against any
claim or liability to which such shareholder may become subject by reason of
being or having been a shareholder, and that we shall reimburse each shareholder
who has been successful, on the merits or otherwise, in the defense of a
proceeding to which the shareholder has been made a party by reason of status as
such for all reasonable expenses incurred by the shareholder in connection with
any such claim or liability.
Our Declaration of Trust provides that, subject to the provisions of
any class or series of preferred shares then outstanding and to the mandatory
provisions of applicable law, our shareholders are entitled to vote only on the
following matters: (i) election or removal of trustees; (ii) amendment of the
Declaration of Trust (other than an amendment to increase or decrease the
aggregate number of authorized Shares of any class); (iii) a determination by
the Trust to invest in commodities contracts (other than interest rate futures
intended to hedge us against interest rate risk), engage in securities trading
(as compared to investment) activities or hold properties primarily for sale to
customers in the ordinary course of business; and (iv) our merger with another
entity. Except with respect to these matters, no action taken by our
shareholders at any meeting shall in any way bind our Board of Trustees.
Shares
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Common Shares of Beneficial Interest
Each outstanding common share entitles the holder to one vote on all
matters submitted to a vote of shareholders, including the election of trustees.
There is no cumulative voting in the election of trustees. Subject to (i) the
S-6
preferential rights of the Series A Preferred Shares and Series B Preferred
Shares and (ii) such preferential rights as may be granted by our Board of
Trustees in future issuances of additional series of preferred shares, holders
of common shares are entitled to such distributions as may be authorized and
declared from time to time by our Board of Trustees out of funds legally
available therefor.
Holders of common shares have no conversion, exchange or redemption
rights or preemptive rights to subscribe to any of our securities. All
outstanding common shares are fully paid and nonassessable. In the event of any
liquidation, dissolution or winding-up of our affairs, subject to (i) the
preferential rights of the Series A Preferred Shares and Series B Preferred
Shares and (ii) such preferential rights as may be granted by our Board of
Trustees in connection with the future issuances of additional series of
preferred shares, holders of common shares will be entitled to share ratably in
any of our assets remaining after provision for payment of liabilities to
creditors. All common shares have equal dividend, distribution, liquidation and
other rights.
The transfer agent and registrar for the common shares is currently
EquiServe.
Preferred Shares of Beneficial Interest
The preferred shares authorized by our Declaration of Trust may be
issued from time to time in one or more series. Prior to the issuance of
preferred shares of each such series, our Board of Trustees is required by the
Maryland REIT Law and our Declaration of Trust to set for each series the terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms or conditions of
redemption, as are permitted by the Maryland REIT Law. These rights, powers,
restrictions and limitations could include the right to receive specified
distributions and payments on liquidation prior to any such payments being made
to the holders of common shares. Under certain circumstances, the issuance of
preferred shares could have the effect of delaying, deferring or preventing a
change of control of the Company and may adversely affect the voting and other
rights of the holders of common shares. See "Provisions of Maryland Law and of
Our Declaration of Trust and Bylaws - Control Share Acquisitions."
Our Declaration of Trust authorizes the trustees to classify or
reclassify, in one or more series, any unissued preferred shares by setting or
changing the number of preferred shares constituting such series and the
designation, preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications or terms or
conditions of redemption of such preferred shares.
Series A Preferred Shares. We currently have 750,000 Series A Preferred
Shares issued and outstanding. Each Series A Preferred Share has a stated value
(the "Stated Value") of $50.00 and is convertible into common shares at the
option of the holder at a conversion price (the "Conversion Price") of $28.00.
The Conversion Price will be reduced to $26.50 if the average closing price of
the Common Shares during the 60-trading day period ending on December 31, 2003
is $23.00 or lower. At any time that the average market price of the common
shares is equal to or greater than 120% of the Conversion Price for 60
consecutive trading days, we have the right to redeem all or any part of the
outstanding Series A Preferred Shares for an amount in cash equal to the
aggregate Stated Value of the Series A Preferred Shares to be redeemed (plus
accrued and unpaid distributions) or for a number of common shares equal to the
aggregate Stated Value of the Series A Preferred Shares to be redeemed divided
by the Conversion Price (plus accrued and unpaid distributions). In addition, at
any time on or after January 2, 2004, we have the right to redeem all or any
part of the outstanding Series A Preferred Shares for an amount in cash equal to
the aggregate Stated Value of the Series A Preferred Shares to be redeemed (plus
accrued and unpaid distributions) or, in the event that the average closing
price of the common shares is equal to or greater than 110% of the Conversion
Price for 60 consecutive trading days, for a number of common shares equal to
S-7
the aggregate Stated Value of the Series A Preferred Shares to be redeemed
divided by the Conversion Price (plus accrued and unpaid distributions). Each
Series A Preferred Share accrues distributions, payable in cash and prior to the
payment of any distribution on the common shares, in an amount equal to the
greater of (i) $0.9063 per quarter (equivalent to $3.625 per annum) or (ii) the
cash distributions paid or payable for the most recent quarter on the number of
common shares into which a Series A Preferred Share is convertible. The holders
of Series A Preferred Shares have no voting rights except (i) with respect to
actions which would have a material and adverse effect on the rights of such
holders and (ii) in the event quarterly distributions on the Series A Preferred
Shares are in arrears for six or more quarters. In the event the quarterly
distributions are so in arrears, the holders of the Series A Preferred Shares
have the right, voting together as a single class with any other class of our
preferred shares ranking on a parity with the Series A Preferred Shares, to
elect two additional members to our Board of Trustees. In the event of any
liquidation, dissolution or winding-up of our affairs, the holders of the Series
A Preferred Shares are entitled to receive from our assets remaining after
provision for payment of liabilities to creditors an amount equal to the
aggregate Stated Value of the Series A Preferred Shares then outstanding
together with any accrued and unpaid distributions thereon prior to the
distribution of any such assets to the holders of the common shares.
Series B Preferred Shares. We currently have 4,375,000 Series B
Preferred Shares issued and outstanding. Distributions on the Series B Preferred
Shares are cumulative from the date of issuance and are payable quarterly at the
greater of (i) $0.525 per share and (ii) the amount of the quarterly
distribution payable on the number of common shares into which a Series B
Preferred Share is convertible. The Series B Preferred Shares rank pari passu as
to distributions with the Series A Preferred Shares. We may not pay
distributions on the common shares, or other shares that rank junior to the
Series B Preferred Shares as to distributions, until we have paid distributions
on the Series B Preferred Shares. A holder of a Series B Preferred Share may
convert the share into one common share at a conversion price of $24.00 per
common share. The liquidation value of each Series B Preferred Share equals
$24.00 plus accrued and unpaid distributions. The Series B Preferred Shares rank
pari passu upon liquidation with the Series A Preferred Shares. At any time on
or after April 19, 2004, we may require the conversion of the Series B Preferred
Shares into common shares if the common shares have traded, during any
consecutive 90-day period following such date, at a price in excess of 130% of
the conversion price and the common shares to be issued are freely transferable
and listed on the New York Stock Exchange. We may redeem all of the outstanding
Series B Preferred Shares at any time on or after April 19, 2007 for $24 per
share plus accrued and unpaid distributions. If we experience a change of
control, become closely-held or a pension-held REIT, or fail to qualify as a
REIT, other than through action of Five Arrows Realty Securities III L.L.C.,
Five Arrows may require us to purchase the outstanding Series B Preferred Shares
for $24.48 per share plus accrued and unpaid distributions. Under certain
circumstances, we may, in lieu of making such payment, revise the conversion
ratio so that, based on the then-current market price of the common shares, each
Series B Preferred Share will thereafter be convertible into that number of
common shares having an aggregate market value equal to at least $28.80. In
certain transactions involving a merger or consolidation as to which holders of
Series B Preferred Shares have a separate voting right, holders who do not vote
in favor of the transaction may require us to redeem their shares for $24.96 per
share plus accrued and unpaid distributions. Five Arrows has the right to vote
on all matters as a single class with holders of common shares, and as a
separate class on certain matters affecting the rights of the Series B Preferred
Shares. So long as Five Arrows beneficially owns at least 50% of the outstanding
Series B Preferred Shares, Five Arrows may appoint one trustee to our Board of
Trustees. If we (i) fail to pay distributions on common shares equal to at least
$0.32 for two consecutive quarters, (ii) reduce the annual distribution on our
common shares to below $1.28 per share, (iii) fail to pay timely distributions
on the Series B Preferred Shares, (iv) are in material default of our credit
facility or (v) fail to maintain a debt service coverage ratio of at least 1.25
or a debt to market capitalization ratio no higher .70, then Five Arrows will
have the right to appoint a second trustee to our Board.
S-8
Restrictions on Transfer
------------------------
For us to qualify as a REIT under the Internal Revenue Code, not more
than 50% in value of our outstanding Shares may be owned, directly or
indirectly, by five or fewer individuals (defined in the Internal Revenue Code
to include certain entities such as qualified pension plans) during the last
half of a taxable year and Shares must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of twelve months (or during a
proportionate part of a shorter taxable year).
Because our Board of Trustees believes it is at present important for
us to continue to qualify as a REIT, our Declaration of Trust, subject to
certain exceptions, contains provisions that restrict the number of Shares that
a person may own and that are designed to safeguard us against an inadvertent
loss of REIT status. In order to prevent any shareholder from owning Shares in
an amount that would cause more than 50% in value of the outstanding Shares to
be held by five or fewer individuals, our Board of Trustees, pursuant to
authority granted in our Declaration of Trust, has passed a resolution that,
subject to certain exceptions, provides that no person may own, or be deemed to
own by virtue of the attribution provisions of the Internal Revenue Code, more
than 9.8% in value of the outstanding Shares. This limitation is referred to in
this prospectus as the Ownership Limit. Our Board of Trustees, subject to
limitations, retains the authority to effect additional increases to, or
establish exemptions from, the Ownership Limit. Our Board of Trustees, pursuant
to authority granted in our Declaration of Trust, has passed resolutions that
exempt the initial holders of the Series A Preferred Shares and Series B
Preferred Shares and Cohen & Steers Capital Management, Inc. and related persons
from the Ownership Limit, on the condition that, and for so long as, such
holders comply with certain representations, warranties and agreements intended
to ensure that no direct or indirect owner of any of such holders owns more than
9.8% in value of the outstanding Shares.
In addition, pursuant to our Declaration of Trust, no purported
transfer of Shares may be given effect if it would result in ownership of all of
the outstanding Shares by fewer than 100 persons (determined without any
reference to the rules of attribution) or result in our being "closely held"
within the meaning of Section 856(h) of the Internal Revenue Code. These
restrictions are referred to in this prospectus as the Ownership Restrictions.
In the event of a purported transfer or other event that would, if effective,
result in the ownership of Shares in violation of the Ownership Limit or the
Ownership Restrictions, such transfer would be deemed void and such Shares
automatically would be exchanged for "Excess Shares" authorized by our
Declaration of Trust, according to rules set forth in our Declaration of Trust,
to the extent necessary to ensure that the purported transfer or other event
does not result in the ownership of Shares in violation of the Ownership Limit
or the Ownership Restrictions.
Holders of Excess Shares are not entitled to voting rights (except to
the extent required by law), dividends or distributions. If, after the purported
transfer or other event resulting in an exchange of Shares for Excess Shares and
prior to the discovery by us of such exchange, dividends or distributions are
paid with respect to Shares that were exchanged for Excess Shares, then such
dividends or distributions would be repayable to us upon demand. While
outstanding, Excess Shares would be held in trust by us for the benefit of the
ultimate transferee of an interest in such trust, as described below. While
Excess Shares are held in trust, an interest in that trust may be transferred by
the purported transferee or other purported holder with respect to such Excess
Shares only to a person whose ownership of the Shares would not violate the
Ownership Limit or the Ownership Restrictions, at which time the Excess Shares
would be exchanged automatically for Shares of the same type and class as the
Shares for which the Excess Shares were originally exchanged. Our Declaration of
Trust contains provisions that are designed to ensure that the purported
transferee or other purported holder of the Excess Shares may not receive in
return for such a transfer an amount that reflects any appreciation in the
Shares for which such Excess Shares were exchanged during the period that such
Excess Shares were outstanding. Any amount received by a purported transferee or
other purported holder in excess of the amount permitted to be received would be
required to be turned over to us.
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Our Declaration of Trust also provides that Excess Shares shall be
deemed to have been offered for sale to us, or our designee, which shall have
the right to accept such offer for a period of 90 days after the later of: (i)
the date of the purported transfer or event which resulted in an exchange of
Shares for such Excess Shares; and (ii) the date our Board of Trustees
determines that a purported transfer or other event resulting in an exchange of
Shares for such Excess Shares has occurred if we do not receive notice of any
such transfer. The price at which we may purchase such Excess Shares would be
equal to the lesser of: (i) in the case of Excess Shares resulting from a
purported transfer for value, the price per share in the purported transfer that
caused the automatic exchange for such Excess Shares or, in the case of Excess
Shares resulting from some other event, the market price of such Shares on the
date of the automatic exchange for Excess Shares; or (ii) the market price of
such Shares on the date that we accept the Excess Shares. Any dividend or
distribution paid to a proposed transferee on Excess Shares prior to the
discovery by us that such Shares have been transferred in violation of the
provisions of our Declaration of Trust shall be repaid to us upon our demand. If
the foregoing restrictions are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then the intended transferee or
holder of any Excess Shares may be deemed, at our option, to have acted as our
agent and on our behalf in acquiring or holding such Excess Shares and to hold
such Excess Shares on our behalf.
Our trustees may waive the Ownership Restrictions if evidence
satisfactory to the trustees and our tax counsel or tax accountants is presented
showing that such waiver will not jeopardize our status as a REIT under the
Internal Revenue Code. As a condition of such waiver, our trustees may require
that an intended transferee give written notice to us, furnish such
undertakings, agreements and information as may be required by our trustees
and/or an undertaking from the applicant with respect to preserving our status.
Any transfer of Shares or any security convertible into Shares that would create
a direct or indirect ownership of Shares in excess of the Ownership Limit or
result in the violation of the Ownership Restrictions will be void with respect
to the intended transferee and will result in Excess Shares as described above.
Neither the Ownership Restrictions nor the Ownership Limit will be
removed automatically even if the REIT provisions of the Internal Revenue Code
are changed so as no longer to contain any ownership concentration limitation or
if the ownership concentration limitation is increased. Except as described
above, any change in the Ownership Restrictions would require an amendment to
our Declaration of the Trust. Amendments to our Declaration of Trust generally
require the affirmative vote of holders owning not less than a majority of the
outstanding Shares entitled to vote thereon. In addition to preserving our
status as a REIT, the Ownership Restrictions and the Ownership Limit may have
the effect of precluding an acquisition of control of us without the approval of
our Board of Trustees.
All persons who own, directly or by virtue of the applicable
attribution provisions of the Internal Revenue Code, more than 4.0% of the value
of any class of outstanding Shares, must file an affidavit with us containing
the information specified in our Declaration of Trust by January 31 of each
year. In addition, each shareholder shall upon demand be required to disclose to
us in writing such information with respect to the direct, indirect and
constructive ownership of Shares as our trustees deem necessary to comply with
the provisions of the Internal Revenue Code applicable to REITs, to comply with
the requirements of any taxing authority or governmental agency or to determine
any such compliance.
The Ownership Limit could have the effect of delaying, deferring or
preventing a transaction or a change in our control that might involve a premium
price for the common shares or otherwise be in the best interest of our
shareholders.
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All certificates representing Shares that are hereafter issued will
bear a legend referring to the restrictions and limitations described above.
PROVISIONS OF MARYLAND LAW AND OF
OUR DECLARATION OF TRUST AND BYLAWS
The following paragraphs summarize provisions of Maryland law, our
Declaration of Trust and our Bylaws. These paragraphs are a summary, and do not
completely describe Maryland law, our Declaration of Trust or our Bylaws. For a
complete description, we refer you to the Maryland statutes applicable to REITs,
our Declaration of Trust and our Bylaws. This summary replaces the summary under
the caption "Provisions of Maryland Law and of the Company's Declaration of
Trust and Bylaws" in the accompanying base prospectus.
Duration
--------
Under our Declaration of Trust, we have a perpetual term of existence
and will continue perpetually subject to the authority of our Board of Trustees
to terminate our existence and liquidate our assets and subject to termination
pursuant to the Maryland REIT Law.
Board of Trustees
-----------------
Our Declaration of Trust provides that the number of our trustees shall
not be less than three nor more than 15. Any vacancy, including a vacancy
created by an increase in the number of trustees, may be filled by a majority of
our trustees.
Our trustees generally will each serve for a one-year term. We have
granted to the initial purchaser of Series A Preferred Shares a right to
designate an individual for election to the Board. We have also granted to the
holder of Series B Preferred Shares a right to elect a trustee as well as the
right to elect an additional trustee if we fail to comply with certain
agreements. See "Description of Shares of Beneficial Interest - Preferred Shares
of Beneficial Interest - Series B Preferred Shares."
Our Declaration of Trust generally provides that a trustee may be
removed from office only at a meeting of shareholders. However, a trustee
elected solely by holders of a series of Preferred Shares may be removed only by
the affirmative vote of a majority of the Preferred Shares of that series voting
as a single class.
Business Combinations
---------------------
Under Maryland law, as applicable to Maryland real estate investment
trusts, certain "business combinations" (including certain mergers,
consolidations, share exchanges, or, in certain circumstances, asset transfers
or issuances or reclassifications of equity securities) between a Maryland real
estate investment trust and an "interested shareholder" or an affiliate of the
interested shareholder are prohibited for five years after the most recent date
on which the interested shareholder becomes an interested shareholder. An
interested shareholder includes a person who beneficially owns, and an affiliate
or associate (as defined under Maryland law) of the trust who, at any time
during the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the trust's then outstanding voting
shares. Thereafter, any such business combination must be recommended by the
trustees of such trust and approved by the affirmative vote of at least:
o 80% of the votes entitled to be cast by holders of
outstanding voting shares of beneficial interest of
the trust, voting together as a single voting group;
and
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o two-thirds of the votes entitled to be cast by
holders of outstanding voting shares of beneficial
interest other than shares held by the interested
shareholder with whom or with whose affiliate the
business combination is to be effected or by the
interested shareholder's affiliates or associates,
voting together as a single voting group.
These super-majority voting requirements do not apply if the trust's
common shareholders receive a minimum price (as defined under Maryland law) for
their shares and the consideration is received in cash or in the same form as
previously paid by the interested shareholder for its shares. These provisions
also do not apply to business combinations that are approved or exempted by the
Board of Trustees of the trust prior to the time that the interested shareholder
becomes an interested shareholder. An amendment to a Maryland REIT's declaration
of trust electing not to be subject to the foregoing requirements must be
approved by the affirmative vote of at least 80% of the votes entitled to be
cast by holders of outstanding voting shares of beneficial interest of the
trust, voting together as a single voting group, and two-thirds of the votes
entitled to be cast by holders of outstanding voting shares of beneficial
interest other than shares of beneficial interest held by interested
shareholders. Any such amendment shall not be effective until 18 months after
the vote of shareholders and does not apply to any business combination of the
trust with an interested shareholder that has such status on the date of the
shareholder vote. Our Board of Trustees has previously exempted any business
combinations involving Safeguard Scientifics, Inc., Pennsylvania State
Employees' Retirement System, LF Strategic Realty Investors L.P., Morgan Stanley
Asset Management Inc., Five Arrows Realty Securities III L.L.C. and Gerard H.
Sweeney and their respective affiliates and associates from the business
combination provisions summarized above and, consequently, the five-year
prohibition and the super-majority vote requirements will not apply to business
combinations between us and any of them.
The business combination statute could have the effect of delaying,
deferring or preventing offers to acquire us and of increasing the difficulty of
consummating any such transaction.
Control Share Acquisitions
--------------------------
Under Maryland law, as applicable to Maryland real estate investment
trusts, "control shares" of a Maryland real estate investment trust acquired in
a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter
by shareholders, excluding shares owned by the acquiror, by officers or by
trustees who are employees of the trust in question. "Control shares" are voting
shares of beneficial interest which, if aggregated with all other shares
previously acquired by such acquiror or in respect of which the acquiror is able
to exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise the voting power in the
election of trustees within one of the following ranges of voting power:
o one-tenth or more but less than one-third,
o one-third or more but less than a majority, or
o 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 shareholder approval.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
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A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the trust's board of trustees to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the trust may itself present
the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the trust may
redeem any or all of the control shares, except those for which voting rights
have previously been approved, for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a shareholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other shareholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition,
and certain limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired
in a merger, consolidation or share exchange if the trust is a party to the
transaction, or to acquisitions approved or exempted by the declaration of trust
or bylaws of the trust. Pursuant to the statute, we have exempted any and all
acquisitions of Shares by Safeguard Scientifics, Inc., Pennsylvania State
Employees' Retirement System and Morgan Stanley Asset Management Inc., and any
of their respective current or future affiliates or associates from these
control share provisions. As a result, they will be able to possess voting power
not generally available to other persons.
The control share acquisition statute could have the effect of
delaying, deferring or preventing offers to acquire us and of increasing the
difficulty of consummating any such transaction.
Amendment to the Declaration of Trust
-------------------------------------
Our Declaration of Trust may be amended only by the affirmative vote of
the holders of not less than a majority of the Shares then outstanding and
entitled to vote thereon, except for the provisions of our Declaration of Trust
relating to (i) increases or decreases in the aggregate number of Shares of any
class (other than the Series A Preferred Shares and Series B Preferred Shares),
which may generally be made by our Board of Trustees without shareholder
approval and (ii) the Maryland General Corporation Law provisions on business
combinations, amendment of which requires the affirmative vote of the holders of
not less than 80% of the Shares then outstanding and entitled to vote. In
addition, if our Board of Trustees determines, with the advice of counsel, that
any one or more of the provisions of our Declaration of Trust conflict with the
Maryland REIT Law, the Internal Revenue Code or other applicable Federal or
state law(s), the conflicting provisions of our Declaration of Trust shall be
deemed never to have constituted a part of our Declaration of Trust, even
without any amendment thereof.
Termination of the Company and REIT Status
------------------------------------------
Subject to the rights of any outstanding Preferred Shares and to the
provisions of the Maryland REIT Law, our Declaration of Trust permits our Board
of Trustees to terminate our existence and to discontinue our election to be
taxed as a REIT.
S-13
Transactions Between the Company and its Trustee or Officers
------------------------------------------------------------
Our Declaration of Trust provides that any contract or transaction
between us and one or more of our trustees, officers, employees or agents must
be approved by a majority of our trustees who have no interest in the contract
or transaction.
Limitation of Liability and Indemnification
-------------------------------------------
The Maryland REIT Law permits a Maryland real estate investment trust
to include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages.
However, a Maryland real estate investment trust may not eliminate liability
resulting from actual receipt of an improper benefit or profit in money,
property or services. Also, liability resulting from active and deliberate
dishonesty may not be eliminated if a final judgment establishes that the
dishonesty is material to the cause of action. Our Declaration of Trust contains
such a provision which eliminates such liability to the maximum extent permitted
by the Maryland REIT Law.
Our Bylaws require us to indemnify, without requiring a preliminary
determination of the ultimate entitlement to indemnification, (a) any present or
former trustee, officer or shareholder who has been successful, on the merits or
otherwise, in the defense of a proceeding to which he was made a party by reason
of such status, against reasonable expenses incurred by him in connection with
the proceeding; (b) any present or former trustee or officer against any claim
or liability to which he may become subject by reason of such status unless it
is established that (i) his act or omission was committed in bad faith or was
the result of active and deliberate dishonesty, (ii) he actually received an
improper personal benefit in money, property or services or (iii) in the case of
a criminal proceeding, he had reasonable cause to believe that his act or
omission was unlawful; and (c) each shareholder or former shareholder against
any claim or liability to which he may be subject by reason of such status as a
shareholder or former shareholder. However, under Maryland law, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that the
act or omission was material to the matter and was committed in bad faith, the
result of active and deliberate dishonesty or a personal benefit was improperly
received, or, if in a criminal proceeding, there was reasonable cause to believe
the act or omission was unlawful. In addition, our Bylaws require us to pay or
reimburse, in advance of final disposition of a proceeding, reasonable expenses
incurred by a present or former trustee, officer or shareholder made a party to
a proceeding by reason of his status as a trustee, officer or shareholder
provided that, in the case of a trustee or officer, we shall have received (i) a
written affirmation by the trustee or officer of his good faith belief that he
has met the applicable standard of conduct necessary for our indemnification as
authorized by the Bylaws and (ii) a written undertaking by him or on his behalf
to repay the amount paid or reimbursed by us if it shall ultimately be
determined that the applicable standard of conduct was not met. Our Bylaws also
(i) permit us, with the approval of our trustees, to provide indemnification and
payment or reimbursement of expenses to a present or former trustee, officer or
shareholder who served our predecessor in such capacity, and to any of our
employees or agents or our predecessors, (ii) provide that any indemnification
or payment or reimbursement of the expenses permitted by our Bylaws shall be
furnished in accordance with the procedures provided for indemnification and
payment or reimbursement of expenses under Section 2-418 of the Maryland General
Corporation Law for directors of Maryland corporations and (iii) permit us to
provide such other and further indemnification or payment or reimbursement of
expenses as may be permitted by the Maryland General Corporation Law for
directors of Maryland corporations.
The limited partnership agreement of our operating partnership also
provides for indemnification by the operating partnership of us, as general
partner, and our trustees and officers for any costs, expenses or liabilities
incurred by us or them by reason of any act performed by us or them for or on
behalf of the operating partnership or us; provided that such person's actions
were taken in good faith and in the belief that such conduct was in the best
S-14
interests of the operating partnership and that such person was not guilty of
fraud, willful misconduct or gross negligence.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our trustees and officers pursuant to the foregoing
provisions or otherwise, we have been advised that, although the validity and
scope of the governing statute has not been tested in court, in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
addition, indemnification may be limited by state securities laws.
FEDERAL INCOME TAX CONSIDERATIONS
For a discussion of the taxation of us and the tax consequences
relevant to shareholders generally, see the discussion under the heading
"Material Federal Income Tax Consequences" in our Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 12, 2003, which is
incorporated by reference into this prospectus supplement and the accompanying
base prospectus.
UNDERWRITING
Citigroup Global Markets Inc. is acting as sole underwriter of this
offering.
Subject to the terms and conditions stated in the underwriting
agreement, dated the date of this prospectus supplement, the underwriter has
agreed to purchase, and we have agreed to sell to the underwriter, 2,000,000
common shares.
The underwriting agreement provides that the obligation of the
underwriter to purchase the common shares included in this offering is subject
to approval of legal matters by counsel and to other conditions. The underwriter
is obligated to purchase all the shares (other than those covered by the
over-allotment option described below) if it purchases any of the shares.
The underwriter proposes to offer some of the shares directly to the
public at the public offering price set forth on the cover page of this
prospectus supplement and some of the shares to dealers at the public offering
price, less a concession not to exceed $.66 per share. The underwriter may
allow, and dealers may reallow, a concession not to exceed $.10 per share on the
sales to certain other dealers. If all of the shares are not sold at the initial
offering price, the underwriter may change the public offering price and the
other selling terms.
We have granted to the underwriter an option, exercisable for 30 days
after the date of this prospectus supplement, to purchase up to an aggregate of
300,000 additional common shares at the public offering price less the
underwriting discount. The underwriter may exercise the option solely for the
purpose of covering over-allotments, if any, in connection with this offering.
We and our officers and trustees have agreed that, for a period of 45
days from the date of this prospectus supplement, we and they will not, without
the prior written consent of Citigroup Global Markets Inc., dispose of or hedge
any common shares or any securities convertible into or exchangeable for common
shares, except for the exercise, including cashless exercises, of options to
purchase our common shares. Citigroup Global Markets Inc., in its sole
discretion, may release any of the securities subject to these lock-up
agreements at any time without notice.
The common shares are listed on the New York Stock Exchange under the
symbol "BDN."
S-15
The following table shows the underwriting discount and commissions
that we are to pay to the underwriter in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriter's option to purchase additional common shares.
NO EXERCISE FULL EXERCISE
----------- -------------
Per Share................................. $ 1.10 $ 1.10
Total..................................... $ 2,200,000 $ 2,530,000
In connection with the offering, Citigroup Global Markets Inc., may
purchase and sell common shares in the open market. These transactions may
include short sales, syndicate covering transactions and stabilizing
transactions. Short sales involve syndicate sales of common shares in excess of
the number of shares to be purchased by the underwriter in this offering, which
creates a syndicate short position. "Covered" short sales are sales of shares
made in an amount up to the number of shares represented by the underwriter's
over-allotment option. In determining the source of shares to close out the
covered syndicate short position, the underwriter will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which it may purchase shares through the over-allotment
option. Transactions to close out the covered syndicate short position involve
either purchases in the open market after the distribution has been completed or
the exercise of the over-allotment option. The underwriter may also make "naked"
short sales of shares in excess of the over-allotment option. The underwriter
must close out any naked short position by purchasing common shares in the open
market. A naked short position is more likely to be created if the underwriter
is concerned that there may be downward pressure on the price of the shares in
the open market after pricing that could adversely affect investors who purchase
in this offering. Stabilizing transactions consist of bids for or purchases of
shares in the open market while the offering is in progress.
Any of these activities may have the effect of preventing or retarding
a decline in the market price of the common shares. They may also cause the
price of the common shares to be higher than the price that would otherwise
exist in the open market in the absence of these transactions. The underwriter
may conduct these transactions on the New York Stock Exchange or in the
over-the-counter market, or otherwise. If the underwriter commences any of these
transactions, it may discontinue them at any time.
We estimate that our portion of the total expenses of this offering
will be approximately $150,000.
The underwriter has performed investment banking and advisory services
to us from time to time for which it has received customary fees and expenses.
The underwriter may, from time to time, engage in transactions with and perform
services for us in the ordinary course of business. An affiliate of the
underwriter is one of the lenders under our $500 million unsecured credit
facility.
We have agreed to indemnify the underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments the underwriter may be required to make because of any of
those liabilities.
NOTE REGARDING OUR INDEPENDENT AUDITORS
Arthur Andersen LLP was our previous independent auditors. On June 15,
2002, Arthur Andersen LLP was convicted of obstruction of justice by a federal
jury in Houston, Texas. On September 15, 2002, a federal judge upheld this
conviction. Arthur Andersen LLP ceased its audit practice before the SEC on
August 31, 2002. Effective May 23, 2002, we terminated the engagement of Arthur
S-16
Andersen LLP as our independent auditors and engaged KPMG LLP to serve as our
independent auditors.
Following our engagement of KPMG LLP as our independent auditors we
engaged KPMG LLP to audit our consolidated financial statements for the period
ending December 31, 2000 and December 31, 2001. KPMG LLP has provided its
written consent to the incorporation by reference of its report dated February
26, 2003 with respect to the audited financials in the registration statement of
which this prospectus supplement and the accompanying prospectus are a part,
which includes our consolidated balance sheets as of December 31, 2002 and 2001,
and the related consolidated statements of operations, beneficiaries' equity and
comprehensive income and cash flows for each of the years in the three year
period ended December 31, 2002, and related financial statement schedules.
LEGAL MATTERS
The validity of the common shares offered hereby, as well as certain
legal matters relating to us, will be passed upon for us by Pepper Hamilton LLP,
Philadelphia, Pennsylvania. Certain legal matters related to the offering will
be passed upon for the underwriter by Proskauer Rose LLP.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports and other information
with the SEC. You may read and copy materials that we have filed with the SEC,
including the registration statement, at the following locations:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 233 Broadway Citicorp Center
Room 1024 New York, NY 10279 500 West Madison Street
Washington, D.C. 20549 Suite 1400
Chicago, IL 60661-2511
You may obtain information on the operation of the SEC's Public
Reference Rooms by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet web site that contains reports,
proxy statements and other information regarding issuers, including Brandywine
Realty Trust, that file electronically with the SEC. The address of that site is
http://www.sec.gov. Further, you may inspect reports, proxy statements and other
information concerning us at the offices of the New York Stock Exchange, which
are located at 20 Broad Street, New York, New York 10005.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered to be part of this prospectus, and
information we file later with the SEC will be deemed to automatically update
and supersede this information. We incorporate by reference the documents listed
below, which we have previously filed with the SEC and which are considered part
of this prospectus, and any future filings made with the SEC prior to completion
of this offering under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934. These filings contain important information about us.
S-17
Report Filed Date of Filing
------------ --------------
File No. 1-9106:
Annual Report on Form 10-K for the year Filed on March 27, 2003
ended December 31, 2002
Quarterly Report on Form 10-Q for the Filed on May 14, 2003
quarter ended March 31, 2003
Current Report on Form 8-K Filed on February 28, 2003
Current Report on Form 8-K Filed on April 25, 2003
Current Report of Form 8-K Filed on June 12, 2003
Form 8-A Filed on October 14, 1997
You can obtain copies of any of the documents incorporated by reference
in this prospectus from us or through the SEC or the SEC's web site described
above. Documents incorporated by reference are available from us, without
charge, excluding all exhibits unless specifically incorporated by reference as
an exhibit to this prospectus. You may obtain documents incorporated by
reference in this prospectus by writing us at the following address or calling
us at the telephone number listed below:
BRANDYWINE REALTY TRUST
401 Plymouth Road
Suite 500
Plymouth Meeting, PA 19462
Attention: General Counsel
Telephone: (610) 325-5600
S-18
================================================================================
BRANDYWINE REALTY TRUST
$663,129,026
Preferred Shares, Common Shares, Depositary Shares and Warrants
================================================================================
We will provide specific terms of these securities in supplements
to this prospectus.
You should read this prospectus and any supplement carefully
before you invest.
-----------------
See "Risk Factors" beginning on page 5 of this prospectus
for certain factors relevant to an investment in these securities.
-----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
The date of this prospectus is February 9, 1999.
ABOUT THIS PROSPECTUS
This prospectus (this "Prospectus") is part of a registration statement
that we filed with the Securities and Exchange Commission (the "SEC") utilizing
a "shelf" registration process. Under the shelf process, we may sell any
combination of certain securities in one or more offerings. This Prospectus
provides you with a general description of the securities we may offer. Each
time we sell securities, we will provide a prospectus supplement that will
contain specific information about the terms of that offering. The prospectus
supplement may also add, update or change information contained in this
Prospectus. Before you invest, you should read both this Prospectus and any
prospectus supplement together with the additional information described under
the next heading.
WHERE YOU CAN FIND MORE INFORMATION
Brandywine Realty Trust (collectively with its subsidiaries, the
"Company") files annual, quarterly and special reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's web site at http://www.sec.gov. You may also photocopy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms.
The registration statement on Form S-3 of which this Prospectus is a
part contains important additional information not included in this Prospectus.
Statements in the registration statement summarizing other documents are
qualified by reference to such documents which have been filed as exhibits to
the registration statement or other filings made with the SEC. The registration
statement is available at the SEC's web site and public reference rooms.
The SEC allows us to "incorporate by reference" the information which
we file with them, which means we can disclose important information to you by
referring to those documents. The information incorporated by reference is an
important part of this Prospectus and information which we file later with the
SEC will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we make with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
until we sell all of the securities.
o The Company's Annual Report on Form 10-K for the year ended
December 31, 1997, as amended by a Form 10-K/A No. 1;
o The Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998, June 30, 1998 and September 30, 1998;
o The combined statements of revenues and certain expenses of the
Green Hills Properties for the year ended December 31, 1996; the
combined statements of revenues and certain expenses of Berwyn
Park Properties for the year ended December 31, 1996; and the
reports thereon of the Company's independent public accountants
included in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997;
o The Company's Current Reports on Form 8-K/A No. 1 dated February
13, 1997; Form 8-K/A No. 2 dated February 24, 1997; Form 8-K/A
No. 1 dated April 29, 1997; Form 8-K dated June 9, 1997; Form 8-K
dated June 26, 1997; Form 8-K dated September 10, 1997; Form 8-K
dated October 30, 1997; Form 8-K dated December 17, 1997; Form
8-K dated January 9, 1998; Form 8-K dated January 27, 1998; Form
8-K dated January 30, 1998; Form 8-K dated February 13, 1998;
Form 8-K dated February 23, 1998; Form 8-K dated February 25,
1998; Form 8-K dated March 17, 1998; Form 8-K dated April 13,
1998; Form 8-K/A dated April 16, 1998; Form 8-K dated April 17,
1998; Form 8-K dated May 14, 1998; Form 8-K dated June 3, 1998;
Form 8-K/A No. 1 dated July 30, 1998; Form 8-K dated July 30,
1998; Form 8-K dated October 13, 1998; Form 8-K/A No. 1 dated
October 21, 1998; and Form 8-K dated January 20, 1999; and
-2-
o The description of the Common Shares contained in the Company's
Registration Statement on Form 8-A dated October 14, 1997 and any
other reports or amendments filed for the purpose of updating
such description.
You may request a copy of these filings (not including the exhibits to
such filings unless such exhibits are specifically incorporated by reference
therein) at no cost, by writing or telephoning us at the following address:
Brandywine Realty Trust
14 Campus Boulevard
Newtown Square
Pennsylvania 19073
Attention: Brad A. Molotsky, Secretary
(610) 325-5600
You should rely only on the information provided or incorporated by
reference in this Prospectus or any prospectus supplement. We have not
authorized anyone else to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. 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 those documents.
SUMMARY
The following summary is qualified in its entirety by the more detailed
descriptions and the financial information and statements appearing elsewhere
and incorporated by reference in this Prospectus.
The Company
The Company is a self-administered and self-managed real estate
investment trust ("REIT") active in acquiring, developing, redeveloping, leasing
and managing office and industrial properties. As of December 1, 1998, the
Company's portfolio included 199 office properties, 70 industrial facilities and
one mixed use property (collectively, the "Properties") that contained an
aggregate of approximately 18.5 million net rentable square feet. As of December
1, 1998, the Company also owned or held options to purchase approximately 457.0
acres of land for future development.
In addition, as of December 1, 1998, the Company owned economic
interests, ranging from 35% to 65%, in ten office real estate ventures (the
"Real Estate Ventures"). Four of the Real Estate Ventures own eight suburban
office buildings that contain an aggregate of approximately 451,000 net rentable
square feet. A fifth Real Estate Venture is in the process of redeveloping an
existing suburban building into an office building that is expected to contain
approximately 72,000 net rentable square feet upon completion in early 1999. As
of December 1, 1998, the Real Estate Ventures also owned or held options to
purchase approximately 46.8 acres of land for future development.
The Company owns its assets and conducts its operations through
Brandywine Operating Partnership, L.P. (the "Operating Partnership") and
subsidiaries of the Operating Partnership. The Company is the sole general
partner of the Operating Partnership and, as of December 1, 1998, held an
approximately 88.6% interest in the Operating Partnership and was entitled to
approximately 94.8% of the Operating Partnership's income after the payment of
preferred distributions on the Operating Partnership's Series B Preferred Units.
The Company provides real estate management services through a
management company (the "Management Company"). As of December 1, 1998, the
Management Company managed approximately 16.9 million net rentable square feet,
of which 16.7 million net rentable square feet related to the Properties.
Through its ownership of securities of the Management Company, the Operating
Partnership is entitled to receive 95% of amounts paid as dividends by the
Management Company.
-3-
The Company was organized as a Maryland real estate investment trust in
1986. The Company's principal executive offices are located at 14 Campus
Boulevard, Newtown Square, Pennsylvania 19073 and its telephone number is (610)
325-5600.
Securities Offered
Pursuant to this Prospectus, the Company may offer any combination of
the following securities (the "Securities") with an aggregate public offering
price of up to $663,129,026:
o common shares of beneficial interest, $0.01 par value per share
("Common Shares");
o one or more series of preferred shares of beneficial interest,
$0.01 par value per share ("Preferred Shares");
o one or more series of Preferred Shares represented by depositary
shares ("Depositary Shares"); and
o warrants to purchase Preferred Shares, Common Shares or
Depository Shares ("Warrants").
RISK FACTORS
This Prospectus contains forward-looking statements. These statements
are identified by words such as "expect," "anticipate," "should," "pro forma"
and words of similar import. Actual results may differ significantly from those
expressed or implied by the forward-looking statements. Factors that might cause
such a difference include the various risks stated below that we believe are
material to investors who purchase or own our securities. Before deciding to
purchase the securities offered, prospective investors should carefully consider
the following information together with the other information contained in this
Prospectus.
There can be no assurance that we will effectively manage our rapid growth
We have been growing rapidly. Since August 1, 1996, we have acquired or
developed 266 of the 270 Properties owned by us on December 1, 1998. We plan on
managing this growth by applying our experience to newly acquired properties and
expect to be successful in that effort. No assurances can be given, however,
that we will succeed in our integration efforts or that newly acquired
properties will perform as we expect.
We depend on the performance of our primary markets, and changes in such markets
may adversely affect our financial condition
Most of our Properties are currently located in suburban markets in
Pennsylvania, New Jersey, New York, Virginia and Delaware. Like other real
estate markets, these commercial real estate markets have experienced economic
downturns in the past, and future declines in any of these real estate markets
could adversely affect our operations or cash flow and ability to make
distributions to shareholders. Our financial performance will be particularly
sensitive to the economic conditions in these markets. Our revenues and the
value of our Properties may be adversely affected by a number of factors,
including the economic climate in these markets (which may be adversely impacted
by business layoffs, industry slowdowns, changing demographics and other
factors) and real estate conditions in these markets (such as oversupply of or
reduced demand for office and industrial properties). These factors, when and if
they occur in the area in which our Properties are located, would adversely
affect our cash flow and ability to make distributions to shareholders.
Our ability to make distributions is subject to various risks
We pay regular distributions to our shareholders. Our ability to make
distributions in the future will depend upon:
o the performance of our Properties;
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o expenditures with respect to existing and newly acquired
properties;
o the amount of, and the interest rates on, our debt;
o the absence of significant expenditures relating to environmental
or other regulatory matters; and
o future sales of Common Shares.
Certain of these matters are beyond our control and any significant difference
between our expectations and actual results could have a material adverse effect
our cash flow and our ability to make or sustain distributions.
We may be unable to renew leases or relet space as leases expire
If our tenants fail to renew their leases upon expiration, we may be
unable to relet the subject space. Even if the tenants do renew their leases or
we can relet the space, the terms of renewal or reletting (including the cost of
required renovations) may be less favorable than current lease terms. Certain
leases grant the tenants an early termination right upon payment of a
termination penalty. While we have estimated the necessary expenditures for new
and renewal leases for 1999 and 2000, no assurances can be given as to the
accuracy of such estimates.
Financially distressed tenants may limit our ability to realize the value of our
investments
Following a tenant's lease default, we may experience delays in
enforcing our rights as a landlord and may incur substantial costs in protecting
our investment. In addition, a tenant may seek bankruptcy law protection which
could relieve the tenant from its obligation to make lease payments.
We face significant competition from other real estate developers
We compete with a number of real estate developers, operators and
institutions for tenants and acquisition opportunities. Some of these
competitors have significantly greater resources than we do. No assurances can
be given that this competition will not adversely affect our cash flow and
ability to make distributions to shareholders.
Because real estate is illiquid, we may not be able to sell properties when
appropriate
Real estate investments generally cannot be sold quickly. We may not be
able to vary our portfolio promptly in response to economic or other conditions.
In addition, the Internal Revenue Code (the "Code") limits our ability to sell
properties held for fewer than four years. Purchase options and rights of first
refusal held by certain tenants may limit our ability to sell certain
properties. Any of these factors could adversely affect our cash flow and
ability to make distributions to shareholders as well as the ability of someone
to purchase us, even if a purchase were in our shareholders' best interests.
We have agreed not to sell certain of our properties
We have agreed with the sellers of certain of our properties not to
sell certain properties for varying periods of time in any transaction that
would trigger taxable income, subject to certain exceptions. Some of these
agreements are with current trustees of our company. In addition, we may enter
into similar agreements with future sellers of properties. These agreements
generally provide that we may dispose of the applicable properties in
transactions that qualify as tax-free exchanges under Section 1031 of the Code.
Therefore, without suffering adverse tax consequences, we may be precluded from
selling certain properties other than in transactions that would qualify as
tax-free exchanges for federal income tax purposes.
Changes in the law may adversely affect our cash flow
Because increases in income and service taxes are generally not passed
through to tenants under leases, such increases may adversely affect our cash
flow and ability to make expected distributions to shareholders. The Properties
are also subject to various regulatory requirements, such as those relating to
fire and safety. Our failure to comply with these requirements could result in
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the imposition of fines and damage awards. While we believe that the Properties
are currently in material compliance with all such requirements, there can be no
assurance that these requirements will not change or that newly imposed
requirements will not require significant unanticipated expenditures.
By holding properties through the Operating Partnership and various joint
ventures, we are exposed to certain additional risks
We own our Properties and our interests in the Real Estate Ventures
through the Operating Partnership. In the future, we expect to continue to
participate with other entities in property ownership through joint ventures or
partnerships. Partnership or joint venture investments may, under certain
circumstances, involve risks not otherwise present in direct investments. Such
risks include:
o the potential bankruptcy of our partners or co-venturers;
o a conflict between our business goals and those of our partners
or co-venturers; and
o actions taken by our partners or co-venturers contrary to our
instructions or objectives, including our policy of maintaining
our REIT qualification.
We will, however, seek to maintain sufficient control of such partnerships and
joint ventures to enable us to achieve our business objectives. Investors should
be aware that there is no limitation under our organizational documents as to
the amount of funds which we may invest in partnerships or joint ventures.
Future acquisitions may fail to perform in accordance with our expectations and
may require development and renovation costs exceeding our estimates
We intend to continue acquiring office and industrial properties.
Changing market conditions, however, including competition from others, may
diminish our opportunities for making attractive acquisitions. Once made, our
investments may fail to perform in accordance with our expectations. In
addition, the estimated renovation and improvement costs incurred in bringing an
acquired property up to market standards may exceed our estimates. We anticipate
financing future acquisitions and renovations through a combination of advances
under lines of credit and other forms of secured or unsecured financing. If new
developments are financed through construction loans, there is a risk that, upon
completion of construction, permanent financing for newly developed properties
may not be available or may be available only on disadvantageous terms.
In addition to acquisitions, we periodically consider developing,
redeveloping and constructing office buildings and other commercial properties.
Risks associated with development, redevelopment and construction activities
include:
o the unavailability of favorable financing;
o the abandonment of such activities prior to completion;
o construction costs exceeding original estimates;
o construction and lease-up delays resulting in increased debt
service expense and construction costs; and
o insufficient occupancy rates and rents at a newly completed
property causing a property to be unprofitable.
Development and redevelopment activities are subject to risks relating to our
inability to obtain, or delays in obtaining, all necessary zoning, land-use,
building, occupancy and other required governmental and utility company
authorizations.
-6-
Our indebtedness subjects us to additional risks
Debt Financing and Existing Debt Maturities. We are subject to risks
normally associated with debt financing, such as the insufficiency of cash flow
to meet required payment obligations and the inability to refinance existing
indebtedness. If our debt cannot be paid, refinanced or extended at maturity, in
addition to our failure to repay our debt, we may not be able to make
distributions to shareholders at expected levels or at all. Furthermore, if any
refinancing is done at higher interest rates, the increased interest expense
could adversely affect our cash flow and ability to make distributions to
shareholders. In addition, if we do not meet our mortgage financings
obligations, any properties securing such indebtedness could be foreclosed on,
which would have a material adverse effect our cash flow and ability to make
distributions and, depending on the number of properties foreclosed on, could
threaten our continued viability.
Risk of Rising Interest Rates and Variable Rate Debt. Increases in
interest rates on variable rate indebtedness would increase our interest
expense, which could adversely affect our cash flow and ability to make
distributions to shareholders.
No Limitation on Debt. Our organizational documents do not contain any
limitation on our debt-to-total market capitalization ratio. Accordingly, our
Board of Trustees could increase the Company's leverage without restriction. The
increased debt service could adversely affect our cash flow and ability to make
distributions and could increase the risk of default on our indebtedness.
Our status as a REIT is dependent on compliance with federal income tax
requirements
Our failure to qualify as a REIT would have serious adverse
consequences to our shareholders. We believe that, since 1986, we have qualified
for taxation as a REIT for federal income tax purposes. We plan to continue to
meet the requirements for taxation as a REIT. Many of these requirements,
however, are highly technical and complex. The determination that we are a REIT
requires an analysis of various factual matters and circumstances that may not
be totally within our control. For example, to qualify as a REIT, at least 95%
of our gross income must come from certain sources that are itemized in the REIT
tax laws. We are also required to distribute to shareholders at least 95% of our
REIT taxable income (excluding capital gains). The fact that we hold our assets
through the Operating Partnership and its subsidiaries further complicates the
application of the REIT requirements. Even a technical or inadvertent mistake
could jeopardize our REIT status. Furthermore, Congress and the IRS might change
the tax laws and regulations, and the courts might issue new rulings that make
it more difficult, or impossible, for the Company to remain qualified as a REIT.
We do not believe, however, that any pending or proposed tax law changes would
jeopardize our REIT status.
To maintain REIT status, a REIT may not own more than 10% of the voting
stock of any corporation, except for a qualified REIT subsidiary (which must be
wholly-owned by the REIT) or another REIT. In order to comply with this rule,
the Operating Partnership owns 5% of the voting common stock and all of the
non-voting preferred stock of the Management Company. The Internal Revenue
Service ("IRS"), however, could contend that the Operating Partnership's
ownership of all of the non-voting preferred stock of the Management Company
should be viewed as voting stock because of the Operating Partnership's
substantial economic position in the Management Company. If successful in such a
contention, the Company's status as a REIT would be lost and the Company would
be subject to the consequences summarized below.
Arthur Andersen LLP, special tax advisor to the Company, has given us
an opinion to the effect that, beginning with our taxable year ended December
31, 1986, we have been organized and have operated in conformity with the
requirements for qualification and taxation as a REIT under the Code for each of
our taxable years and that our current method of organization and operation will
enable us to continue to so qualify. See "Federal Income Tax Considerations --
General." The opinion of Arthur Andersen LLP is based on assumptions and factual
representations made by us regarding our ability to meet the requirements for
qualification as a REIT and the opinion of Pepper Hamilton LLP that the shares
of preferred stock issued by the Management Company to the Operating Partnership
do not constitute voting securities for purposes of the Investment Company Act
of 1940. Such opinion is not binding on the IRS or any court. Moreover, Arthur
Andersen LLP does not review or monitor our compliance with the requirements for
REIT qualification on an ongoing basis. We cannot guarantee that we will be
-7-
qualified and taxed as a REIT, because our qualification and taxation as a REIT
will depend upon our ability to meet, on an ongoing basis, the requirements
imposed under the Code.
If we fail to qualify as a REIT, we would be subject to federal income
tax at regular corporate rates. Also, unless the IRS granted us relief under
certain statutory provisions, we would remain disqualified as a REIT for four
years following the year we first failed to qualify. If we failed to qualify as
a REIT, we would have to pay significant income taxes and would therefore have
less money available for investments or for distributions to shareholders. This
would likely have a significant adverse affect of the value of our securities.
In addition, we would no longer be required to make any distributions to
shareholders. See "Federal Income Tax Considerations -- Failure to Qualify."
In order to make the distributions required to maintain our REIT
status, we may need to borrow funds. To obtain the favorable tax treatment
associated with REIT qualification, we generally will be required to distribute
to shareholders at least 95% of our annual REIT taxable income (excluding net
capital gain). In addition, we will be subject to tax on our undistributed net
taxable income and net capital gain and a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by us with respect to any
calendar year are less than the sum of 85% of our ordinary income plus 95% of
our capital gain net income for the calendar year, plus certain undistributed
amounts from prior years.
We intend to make distributions to shareholders to comply with the
distribution provisions of the Code and to avoid income and other taxes. Our
income will consist primarily of our share of the income of the Operating
Partnership and our cash flow will consist primarily of our share of
distributions from the Operating Partnership. Differences in timing between the
receipt of income and the payment of expenses in arriving at taxable income (of
the Company or the Operating Partnership) and the effect of required debt
amortization payments could require us to borrow funds on a short-term basis or
liquidate funds on adverse terms to meet the REIT qualification distribution
requirements.
The failure of the Operating Partnership (or a subsidiary partnership)
to be treated as a partnership would have serious adverse consequences to our
shareholders. If the IRS were to successfully challenge the tax status of the
Operating Partnership or any of its subsidiary partnerships for federal income
tax purposes, the Operating Partnership or the affected subsidiary partnership
would be taxable as a corporation. In such event, we would cease to qualify as a
REIT and the imposition of a corporate tax on the Operating Partnership or a
subsidiary partnership would reduce the amount of cash available for
distribution from such partnership to us and our shareholders. See "Federal
Income Tax Considerations - Income Taxation of the Operating Partnership, the
Title Holding Partnerships and Their Partners."
We do pay some taxes. Even if we qualify as a REIT, we are required to
pay certain federal, state and local taxes on our income and property. In
addition, the Management Company is subject to federal, state and local income
tax at regular corporate rates on its net taxable income derived from its
management, leasing and related service business. If we have net income from a
prohibited transaction, such income will be subject to a 100% tax. See "Federal
Income Tax Considerations - Taxation of the Company as a REIT."
We own a subsidiary REIT. One of our subsidiaries, Atlantic American
Properties Trust ("AAPT"), that indirectly holds approximately 35 of the
Properties, elected to be taxed as a REIT for the tax year ended December 31,
1997. So long as we seek to maintain AAPT's REIT status, AAPT will be subject to
all the requirements and risks associated with maintaining REIT status
summarized above, including the limitation on the ownership of more than 10% of
the voting securities of any corporation (other than a qualified REIT subsidiary
or another REIT). AAPT indirectly owns non-voting common stock issued by a
corporation which is neither a qualified REIT subsidiary nor a REIT.
Environmental problems are possible and may be costly
Federal, state and local laws, ordinances and regulations may require a
current or previous owner or operator of real estate to investigate and clean up
hazardous or toxic substances or releases at such property. The owner or
operator may be forced to pay for property damage and for investigation and
clean-up costs incurred by others in connection with environmental
contamination. Such laws typically impose clean-up responsibility and liability
-8-
without regard to whether the owner or operator knew of or caused the presence
of the contaminants. Even if more than one person may have been responsible for
the contamination, each person covered by the environmental laws may be held
responsible for all of the clean-up costs incurred. In addition, third parties
may sue the owner or operator of a site for damages and costs resulting from
environmental contamination emanating from that site. These costs may be
substantial and the presence of such substances may adversely affect the owner's
ability to sell or rent such property or to borrow using such property as
collateral.
Independent environmental consultants have conducted a standard Phase I
or similar general environmental site assessment ("ESA") of each of our
Properties to identify potential sources of environmental contamination and
assess environmental regulatory compliance. For a number of the Properties, the
Phase I ESA either referenced a prior Phase II ESA obtained on such Property or
prompted us to have a Phase II ESA of such Property conducted. A Phase II ESA
generally involves invasive procedures, such as soil sampling and testing or the
installation and monitoring of groundwater wells. While the ESAs conducted have
identified environmental contamination on a few of the Properties, they have not
revealed any environmental contamination, liability or compliance concern that
we believe would have a material adverse effect on our cash flow or ability to
make distributions to shareholders.
It is possible that the existing ESAs relating to the Properties do not
reveal all environmental contaminations, liabilities or compliance concerns
which currently exist. In addition, future properties which we acquire may be
subject to environmental conditions.
Some potential losses are not covered by insurance
We carry comprehensive liability, fire, extended coverage and rental
loss insurance on all of our Properties. We believe the policy specifications
and insured limits of these policies are adequate and appropriate. There are,
however, certain types of losses, such as lease and other contract claims, that
generally are not insured. Should an uninsured loss or a loss in excess of
insured limits occur, we could lose all or a portion of the capital we have
invested in a property, as well as the anticipated future revenue from the
property. In such an event, we might nevertheless remain obligated for any
mortgage debt or other financial obligations related to the property.
We do not control the Management Company
While we own substantially all (95%) of the economic interest in the
Management Company, to maintain our REIT qualification, certain of the executive
officers of the Company indirectly hold 95% of the voting common stock of the
Management Company. Therefore, we do not control the timing or amount of
distributions by, or the management and operation of, the Management Company. As
a result, decisions relating to the payment of distributions by, and the
business policies and operations of, the Management Company could be adverse to
our interests.
The Board of Trustees may change our policies without shareholder approval
The Board of Trustees controls our policies concerning investment,
financing, borrowing and distribution, as well as, our operational and growth
activities. The Board of Trustees may amend or revise such policies or
activities without notice to, or a vote of, our shareholders. Such amendments or
revisions may not fully serve the interests of all shareholders and could
adversely affect our distributions, financial condition, results of operations
or the market price of the Common Shares.
We are dependent upon our key personnel
We are dependent upon the efforts of our executive officers,
particularly Anthony A. Nichols, Sr. and Gerard H. Sweeney. The loss of their
services could have an adverse affect on our operations. Although we have
employment agreements with Messrs. Nichols and Sweeney, such agreements do not
restrict their ability to become employed by a competitor following the
termination of their employment with us.
-9-
Certain limitations exist with respect to a third party's ability to acquire us
or effectuate a change in control
Limitations imposed to protect our REIT status. In order to protect us
against loss of our REIT status, our Declaration of Trust limits any shareholder
from owning more than 9.8% in value of our outstanding shares, subject to
certain exceptions. If you or anyone else acquires shares in excess of the
ownership limit, we may:
o consider the transfer to be null and void;
o not reflect the transaction on our books;
o institute legal action to stop the transaction;
o not pay dividends or other distributions with respect to those
shares;
o not recognize any voting rights for those shares; and
o consider the shares held in trust for the benefit of a person to
whom such shares may be transferred.
Limitation due to our ability to issue preferred shares. Our
Declaration of Trust authorizes the Board of Trustees to issue Preferred Shares.
The Board of Trustees may establish the preferences and rights of any Preferred
Shares issued which could have the effect of delaying or preventing someone from
taking control of us, even if a change in control were in our shareholders' best
interests.
Limitations imposed by the Business Combination Law. The Maryland
General Corporation Law (the "MGCL"), as applicable to Maryland real estate
investment trusts, establishes special restrictions against "business
combinations" between a Maryland real estate investment trust and "interested
shareholders" or their affiliates unless an exemption is applicable. An
interested shareholder includes a person who beneficially owns, and an affiliate
or associate of the trust who, at any time within the two-year period prior to
the date in question, was the beneficial owner of, ten percent or more of the
voting power of our then-outstanding voting shares. Among other things, the law
prohibits (for a period of five years) a merger and certain other transactions
between the trust and an interested shareholder unless the board of trustees
approved the transaction before the party became an interested shareholder. The
five-year period runs from the most recent date on which the interested
shareholder became an interested shareholder. Thereafter, any such business
combination must be recommended by the board of trustees and approved by two
super-majority shareholder votes unless, among other conditions, the trust's
common shareholders receive a minimum price for their shares and the
consideration is received in cash or in the same form as previously paid by the
interested shareholder for its shares or unless the board of trustees approved
the transaction before the party in question became an interested shareholder.
The business combination statute could have the effect of discouraging offers to
acquire us and of increasing the difficulty of consummating any such offers,
even if our acquisition would be in our shareholders' best interests.
We have exempted any business combination involving SSI, The Nichols
Company ("TNC"), the Commonwealth of Pennsylvania State Employees' Retirement
System ("SERS") and a voting trust established for its benefit (the "SERS Voting
Trust"), Morgan Stanley Asset Management Inc. and two funds (the "Morgan Stanley
Funds") managed by it, Lazard Freres Real Estate Investors, L.L.C. ("Lazard"),
Gerard H. Sweeney (the Company's President and Chief Executive Officer) and any
of their respective affiliates or associates. As a result, these entities and
Mr. Sweeney and their affiliates and associates (including Anthony A. Nichols,
Sr., the Company's Chairman of the Board) may be able to enter into business
combinations with the Company which may not be in the best interest of the
shareholders.
Limitations imposed by the Maryland Control Share Statute. The Maryland
General Corporation Law provides that "control shares" of a Maryland real estate
investment trust acquired in a "control share acquisition" have no voting rights
except to the extent approved by a vote of two-thirds of the votes entitled to
be cast on the matter, excluding shares of beneficial interest owned by the
acquiror, by officers or by trustees who are employees of the trust. If voting
rights are not approved at a meeting of shareholders or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
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subject to certain conditions and limitations, the trust may redeem any or all
of the control shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for control shares are approved at a
shareholders meeting and the acquiror becomes entitled to vote a majority of the
shares entitled to vote, all other shareholders may exercise appraisal rights.
The control share statute could have the effect of discouraging offers to
acquire us and of increasing the difficulty of consummating any such offers,
even if our acquisition would be in our shareholders' best interests.
We have exempted acquisitions by SSI, TNC, SERS, the SERS Voting Trust,
Morgan Stanley Asset Management Inc., the Morgan Stanley Funds and any current
of future affiliate or associate of theirs from the control shares statute. As a
result, these entities will be able to possess voting power not generally
available to other persons.
Sales of a substantial number of Common Shares, or the perception that such
sales could occur, could adversely affect prevailing prices for the Common
Shares
As of December 1, 1998, we had reserved: (i) 4,955,107 Common Shares
for issuance upon redemption of Operating Partnership Units, (ii) 3,005,808
Common Shares for issuance upon exercise of outstanding options and warrants and
(iii) 1,415,094 Common Shares for issuance upon the conversion or redemption of
the Company's Series A Preferred Shares. Our Declaration of Trust permits the
Board of Trustees to increase the aggregate number of authorized shares of any
class without shareholder approval. We cannot predict the effect that future
sales of Company securities, or the perception that such sales could occur, will
have on the market price of the Common Shares.
The Issuance of Preferred Shares may adversely affect the rights of holders of
Common Shares
Because the Board of Trustees has the power to establish the
preferences and rights of each class or series of Preferred Shares, it may
afford the holders in any series or class of Preferred Shares preferences,
distributions, powers and rights, voting or otherwise, senior to the rights of
holders of Common Shares.
RATIOS OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED SHARE DISTRIBUTIONS
The following table sets forth the ratios of earnings to combined fixed
charges and preferred share distributions for the Company for each of the five
years ended December 31, 1997, 1996, 1995, 1994 and 1993 and for the nine months
ended September 30, 1998 and 1997.
Brandywine Realty Trust
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Share Distributions
(in thousands)
For the nine
months ended
For the years ended December 31, September 30,
----------------------------------------- -------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
Fixed Charge Coverage Ratio (1) N/A(2) (3) (3) (3) 2.71 2.53 2.36
===========================================================
(1) The fixed charge coverage ratio represents the number of times fixed
charges were covered by earnings. The ratio is computed by dividing
fixed charges and preferred share distributions into earnings before
extraordinary items, plus fixed charges. Fixed charges include interest
expense and amortization of debt issuance costs.
(2) Ratio cannot be computed as there were no fixed charges during fiscal
year 1993.
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(3) Ratio calculated to be less than one-to-one coverage. The amount of the
deficiency to cover fixed charges is $563,000, $824,000 and $1,841,000
for the years 1996, 1995 and 1994, respectively.
USE OF PROCEEDS
Unless otherwise indicated in the accompanying prospectus supplement,
the Company will contribute or otherwise transfer the net proceeds of any sale
of any of its securities hereunder to the Operating Partnership in exchange for
additional partnership interests in the Operating Partnership, the economic
terms of which will be substantially identical to the Securities sold. The
Operating Partnership will use such net proceeds for general business purposes
including, without limitation, the repayment of certain outstanding debt and the
acquisition of office and industrial properties.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following summary of the terms of the shares of beneficial interest
of the Company does not purport to be complete and is subject to and qualified
in its entirety by reference to the Declaration of Trust and Bylaws of the
Company, as amended, which are incorporated by reference into the Registration
Statement of which this Prospectus is a part.
General
The Declaration of Trust of the Company provides that the Company is
authorized to issue up to 105,000,000 shares of beneficial interest of the
Company ("Shares"), consisting of 100,000,000 Common Shares and 5,000,000
Preferred Shares. Seven hundred and fifty thousand of the Preferred Shares are
designated as 7.25% Series A Cumulative Convertible Preferred Shares and are
referred to in this Prospectus as the Series A Preferred Shares. The Declaration
of Trust may be amended by the Board of Trustees, without shareholder approval,
to increase or decrease the aggregate number of authorized Shares of any class
except for the Series A Preferred Shares. The authorized Common Shares and
undesignated Preferred Shares are available for future issuance without further
action by the Company's shareholders, unless such action is required by
applicable law, the rules of any stock exchange or automated quotation system on
which the Company's securities may be listed or traded or pursuant to the
preferential rights of Series A Preferred Shares.
Both Maryland statutory law governing real estate investment trusts
organized under Maryland law (the "Maryland REIT Law") and the Company's
Declaration of Trust provide that no shareholder of the Company will be
personally liable, by reason of his status as a shareholder of the Company, for
any obligation of the Company. The Company's Bylaws further provide that the
Company shall indemnify any shareholder or former shareholder against any claim
or liability to which such shareholder may become subject by reason of his being
or having been a shareholder, and that the Company shall reimburse each
shareholder who has been successful, on the merits or otherwise, in the defense
of a proceeding to which he has been made a party by reason of his status as
such for all reasonable expenses incurred by him in connection with any such
claim or liability. In addition, it is a requirement of the Declaration of Trust
that all written contracts to which the Company is a party shall include a
provision to the effect that shareholders shall not be personally liable
thereon.
The Declaration of Trust provides that, subject to the provisions of
any class or series of preferred shares then outstanding (including the Series A
Preferred Shares) and to the mandatory provisions of applicable law, the
shareholders are entitled to vote only on the following matters: (i) election or
removal of Trustees; (ii) amendment of the Declaration of Trust (other than an
amendment to increase or decrease the aggregate number of authorized Shares of
any class); (iii) a determination by the Trust to invest in commodities
contracts (other than interest rate futures intended to hedge the Company
against interest rate risk), engage in securities trading (as compared to
investment) activities or hold properties primarily for sale to customers in the
ordinary course of business; and (iv) a merger of the Company with another
entity. Except with respect to the foregoing, no action taken by the
shareholders of the Company at any meeting shall in any way bind the Board of
Trustees. For a description of the rights and preferences of the Series A
Preferred Shares, see "--Classification or Reclassification of Preferred Shares
-- Series A Preferred Shares."
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Transfer Agent and Registrar
The transfer agent and registrar for the Common Shares is The Bank of
New York.
Shares
Common Shares of Beneficial Interest
Each outstanding Common Share entitles the holder thereof to one vote
on all matters submitted to a vote of shareholders, including the election of
Trustees. There is no cumulative voting in the election of Trustees, which means
that, subject to (i) the voting rights of the Series A Preferred Shares and (ii)
such voting rights as may be granted by the Board of Trustees in connection with
the issuances of additional classes of Preferred Shares, the holders of a
majority of the outstanding Common Shares can elect all of the Trustees then
standing for election. Subject to (i) the preferential rights of the Series A
Preferred Shares and (ii) such preferential rights as may be granted by the
Board of Trustees of the Company in connection with the future issuances, of
additional classes of Preferred Shares, holders of Common Shares are entitled to
such distributions as may be authorized and declared from time to time by the
Board of Trustees out of funds legally available therefor.
Holders of Common Shares have no conversion, exchange, redemption or
preemptive rights to subscribe to any securities of the Company. All outstanding
Common Shares will be fully paid and nonassessable. In the event of any
liquidation, dissolution or winding-up of the affairs of the Company, subject to
(i) the preferential rights of the Series A Preferred Shares and (ii) such
preferential rights as may be granted by the Board of Trustees of the Company in
connection with the future issuances of additional classes of Preferred Shares,
holders of Common Shares will be entitled to share ratably in the assets of the
Company remaining after provision for payment of liabilities to creditors. All
Common Shares have equal dividend, distribution, liquidation and other rights.
Preferred Shares of Beneficial Interest
The Preferred Shares authorized by the Company's Declaration of Trust
may be issued from time to time in one or more series. Prior to the issuance of
Preferred Shares of each such series, the Board of Trustees is required by the
Maryland REIT Law and the Company's Declaration of Trust to set for each series
the terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms or conditions of
redemption, as are permitted by the Maryland REIT Law. Such rights, powers,
restrictions and limitations could include the right to receive specified
distributions and payments on liquidation prior to any such payments being made
to the holders of Common Shares. Under certain circumstances, the issuance of
Preferred Shares could have the effect of delaying, deferring or preventing a
change of control of the Company and may adversely affect the voting and other
rights of the holders of the Common Shares.
Classification or Reclassification of Preferred Shares
The Declaration of Trust authorizes the Trustees to classify or
reclassify, in one or more series, any unissued Preferred Shares by setting or
changing the number of Preferred Shares constituting such series and the
designation, preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications or terms or
conditions of redemption of such Preferred Shares.
-13-
Series A Preferred Shares. The Company currently has 750,000 Series A
Preferred Shares issued and outstanding. Each Series A Preferred Share has a
stated value (the "Stated Value") of $50.00 and is convertible into Common
Shares at the option of the holder at a conversion price (the "Conversion
Price") of $28.00. The Conversion Price will be reduced to $26.50 if the average
closing price of the Common Shares during the 60-trading day period ending on
December 31, 2003 is $23.00 or lower. At any time that the average market price
of the Common Shares is equal to or greater than 120% of the Conversion Price
for 60 consecutive trading days, the Company has the right to redeem all or any
part of the outstanding Series A Preferred Shares for an amount in cash equal to
the aggregate Stated Value of the Series A Preferred Shares to be redeemed (plus
accrued and unpaid distributions) or for a number of Common Shares equal to the
aggregate Stated Value of the Series A Preferred Shares to be redeemed divided
by the Conversion Price (plus accrued and unpaid distributions). In addition, at
any time on or after January 2, 2004, the Company has the right to redeem all or
any part of the outstanding Series A Preferred Shares for an amount in cash
equal to the aggregate Stated Value of the Series A Preferred Shares to be
redeemed (plus accrued and unpaid distributions) or, in the event that the
average closing price of the Common Shares is equal to or greater than 110% of
the Conversion Price for 60 consecutive trading days, for a number of Common
Shares equal to the aggregate Stated Value of the Series A Preferred Shares to
be redeemed divided by the Conversion Price (plus accrued and unpaid
distributions). Each Series A Preferred Share accrues distributions, payable in
cash and prior to the payment of any distribution on the Common Shares, in an
amount equal to the greater of (i) $0.9063 per quarter (equivalent to $3.625 per
annum) or (ii) the cash distributions paid or payable for the most recent
quarter on the number of Common Shares into which a Series A Preferred Share is
convertible. The holders of Series A Preferred Shares have no voting rights
except (i) with respect to actions which would have a material and adverse
effect on the rights of such holders and (ii) in the event quarterly
distributions on the Series A Preferred Shares are in arrears for six or more
quarters. In the event the quarterly distributions are so in arrears, the
holders of the Series A Preferred Shares have the right, voting together as a
single class with any other class of the Company's Preferred Shares ranking on a
parity with the Series A Preferred Shares, to elect two additional members to
the Board of Trustees. In the event of any liquidation, dissolution or
winding-up of the affairs of the Company, the holders of the Series A Preferred
Shares are entitled to receive from the assets remaining after provision for
payment of liabilities to creditors an amount equal to the aggregate Stated
Value of the Series A Preferred Shares then outstanding together with any
accrued and unpaid distributions thereon prior to the distribution of any such
assets to the holders of the Common Shares.
Preferred Shares
The prospectus supplement relating to any Preferred Shares offered
thereby will contain the specific terms thereof, including, without limitation:
(1) The title and stated value of such Preferred Shares;
(2) The number of such Preferred Shares offered, the liquidation
preference per share and the offering price of such Preferred Shares;
(3) The distribution rate(s), period(s) and /or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Shares;
(4) The date from which distributions on such Preferred Shares shall
accumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Shares;
(6) The provision for a sinking fund, if any, for such Preferred
Shares;
(7) The provision for redemption, if applicable, of such Preferred
Shares;
(8) Any listing of such Preferred Shares on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred
Shares will be convertible into Common Shares of the Company, including the
conversion price (or manner of calculation thereof);
(10) Whether interests in such Preferred Shares will be represented by
Depositary Shares;
-14-
(11) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Shares;
(12) A discussion of all material federal income tax considerations, if
any, applicable to such Preferred Shares that are not discussed in this
Prospectus;
(13) The relative ranking and preferences of such Preferred Shares as
to distribution rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(14) Any limitations on issuance of any series of Preferred Shares
ranking senior to or on a parity with such series of Preferred Shares as to
distribution rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company; and
(15) Any limitations on direct or beneficial ownership and restrictions
on transfer, in each case as may be appropriate to preserve the status of the
Company as a REIT.
Restrictions on Transfer
For the Company to qualify as a REIT under the Code, not more than 50%
in value of its outstanding Shares may be owned, directly or indirectly, by five
or fewer individuals (defined in the Code to include certain entities such as
qualified pension plans) during the last half of a taxable year and Shares must
be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months (or during a proportionate part of a shorter
taxable year).
Because the Board of Trustees believes it is at present essential for
the Company to continue to qualify as a REIT, the Declaration of Trust, subject
to certain exceptions, contains provisions that restrict the number of Shares
that a person may own and that are designed to safeguard the Company against an
inadvertent loss of REIT status. In order to prevent any shareholder from owning
Shares in an amount that would cause more than 50% in value of the outstanding
Shares to be held by five or fewer individuals, the Board, pursuant to authority
granted in the Declaration of Trust, has passed a resolution that, subject to
certain exceptions described below, provides that no person may own, or be
deemed to own by virtue of the attribution provisions of the Code, more than
9.8% in value of the outstanding Shares, except for Safeguard Scientifics, Inc.
("SSI") which, pursuant to a separate agreement with the Company, may own no
more than 14.75% in value of the outstanding Shares (the "Ownership Limit"). The
Board of Trustees, subject to limitations, retains the authority to effect
additional increases to, or establish exemptions from, the Ownership Limit. The
Board of Trustees, pursuant to authority granted in the Declaration of Trust,
has passed resolutions that provide that, (i) for purposes of determining
applicable ownership limitations (a) the beneficiaries of SERS (in accord with
their actuarial interests therein), and not SERS or the SERS Voting Trust, shall
be deemed the direct owners of Shares held by the SERS Voting Trust and, (b) the
owners of the Morgan Stanley Funds (in proportion to their ownership therein),
and not such Morgan Stanley Funds nor a related entity, shall be deemed the
direct owners of Shares held by such Morgan Stanley Funds and (ii) exempt Lazard
(and their permitted transferees) from the Ownership Limit, on the condition
that, and for so long as, such holders comply with certain representations,
warranties and agreements intended to ensure that no direct or indirect owner of
Lazard owns more than 9.8% in value of the outstanding Shares.
In addition, pursuant to the Declaration of Trust, no purported
transfer of Shares may be given effect if it would result in ownership of all of
the outstanding Shares by fewer than 100 persons (determined without any
reference to the rules of attribution) or result in the Company being "closely
held" within the meaning of Section 856(h) of the Code (the "Ownership
Restrictions"). In the event of a purported transfer or other event that would,
if effective, result in the ownership of Shares in violation of the Ownership
Limit or the Ownership Restrictions, such transfer would be deemed void ab
initio and such Shares would automatically be exchanged for "Excess Shares"
authorized by the Declaration of Trust, according to rules set forth in the
Declaration of Trust, to the extent necessary to ensure that the purported
transfer or other event does not result in the ownership of Shares in violation
of the Ownership Limit or the Ownership Restrictions.
Holders of Excess Shares are not entitled to voting rights (except to
the extent required by law), dividends or distributions. If, after the purported
transfer or other event resulting in an exchange of Shares for Excess Shares and
prior to the discovery by the Company of such exchange, dividends or
distributions are paid with respect to Shares that were exchanged for Excess
Shares, then such dividends or distributions would be repayable to the Company
upon demand. While outstanding, Excess Shares would be held in trust by the
Company for the benefit of the ultimate transferee of an interest in such trust,
as described below. While Excess Shares are held in trust, an interest in that
trust may be transferred by the purported transferee or other purported holder
with respect to such Excess Shares only to a person whose ownership of the
Shares would not violate the Ownership Limit or the Ownership Restrictions, at
which time the Excess Shares would be automatically exchanged for Shares of the
same type and class as the Shares for which the Excess Shares were originally
exchanged. The Declaration of Trust contains provisions that are designed to
ensure that the purported transferee or other purported holder of the Excess
Shares may not receive in return for such a transfer an amount that reflects any
appreciation in the Shares for which such Excess Shares were exchanged during
the period that such Excess Shares were outstanding. Any amount received by a
purported transferee or other purported holder in excess of the amount permitted
to be received would be required to be turned over to the Company.
-15-
The Declaration of Trust also provides that Excess Shares shall be
deemed to have been offered for sale to the Company, or its designee, which
shall have the right to accept such offer for a period of 90 days after the
later of: (i) the date of the purported transfer or event which resulted in an
exchange of Shares for such Excess Shares; and (ii) the date the Board of
Trustees determines that a purported transfer or other event resulting in an
exchange of Shares for such Excess Shares has occurred if the Company does not
receive notice of any such transfer. The price at which the Company may purchase
such Excess Shares would be equal to the lesser of: (i) in the case of Excess
Shares resulting from a purported transfer for value, the price per share in the
purported transfer that caused the automatic exchange for such Excess Shares or,
in the case of Excess Shares resulting from some other event, the market price
of such Shares on the date of the automatic exchange for Excess Shares; or (ii)
the market price of such Shares on the date that the Company accepts such Excess
Shares. Any dividend or distribution paid to a proposed transferee on Excess
Shares prior to the discovery by the Company that such Shares have been
transferred in violation of the provisions of the Declaration of Trust shall be
repaid to the Company upon demand. If the foregoing restrictions are determined
to be void or invalid by virtue of any legal decision, statute, rule or
regulation, then the intended transferee or holder of any Excess Shares may be
deemed, at the option of the Company, to have acted as an agent on behalf of the
Company in acquiring or holding such Excess Shares and to hold such Excess
Shares on behalf of the Company.
The Trustees may waive the Ownership Restrictions if evidence
satisfactory to the Trustees and the Company's tax counsel or tax accountants is
presented showing that such waiver will not jeopardize the Company's status as a
REIT under the Code. As a condition of such waiver, the Trustees may require
that an intended transferee give written notice to the Company, furnish such
opinions of counsel, affidavits, undertakings, agreements and information as may
be required by the Trustees and/or an undertaking from the applicant with
respect to preserving the status of the Company. The Ownership Restrictions will
not apply if the Company determines that it no longer will attempt to qualify,
or continue to qualify, as a REIT. Any transfer of Shares, or any security
convertible into Shares that would: (i) create a direct or indirect ownership of
Shares in excess of the Ownership Limit; or (ii) result in the violation of the
Ownership Restrictions will be void with respect to the intended transferee and
will result in Excess Shares as described above.
Neither the Ownership Restrictions nor the Ownership Limit will be
automatically removed even if the REIT provisions of the Code are changed so as
no longer to contain any ownership concentration limitation or if the ownership
concentration limitation is increased. Except as otherwise described above, any
change in the Ownership Restrictions would require an amendment to the
Declaration of the Trust. Amendments to the Declaration require the affirmative
vote of holders owning not less than a majority of the outstanding Shares
entitled to vote thereon. In addition to preserving the Company's status as a
REIT, the Ownership Restrictions and the Ownership Limit may have the effect of
precluding an acquisition of control of the Company without the approval of the
Board of Trustees.
All persons who own, directly or by virtue of the applicable
attribution provisions of the Code, more than 4.0% of the value of any class of
outstanding Shares, must file an affidavit with the Company containing the
information specified in the Declaration by January 31 of each year. In
addition, each shareholder shall upon demand be required to disclose to the
Company in writing such information with respect to the direct, indirect and
constructive ownership of Shares as the Trustees deem 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.
The Ownership Limit could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for the Common Shares or otherwise be in the best
interest of the shareholders of the Company.
All certificates representing Shares that are hereafter issued will
bear a legend referring to the restrictions and limitations described above.
-16-
DESCRIPTION OF DEPOSITARY SHARES
General
The Company may issue receipts ("Depositary Receipts") for the
Depository Shares, each of which will represent a fractional interest of a share
of a particular series of Preferred Shares, as specified in the applicable
prospectus supplement. Preferred Shares of each series represented by Depositary
Shares will be deposited under a separate Deposit Agreement (each, a "Deposit
Agreement") among the Company, the depositary named therein (the "Preferred
Share Depositary") and the holders from time to time of the Depositary Receipts.
Subject to the terms of the Deposit Agreement, each owner of a Depositary
Receipt will be entitled, in proportion to the fractional interest of a share of
a particular series of Preferred Shares represented by the Depositary Shares
evidenced by such Depositary Receipt, to all the rights and preferences of the
Preferred Shares represented by such Depositary Shares (including distribution,
voting, conversion, redemption and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the issuance
and delivery of the Preferred Shares by the Company to the Preferred Share
Depositary, the Company will cause the Preferred Share Depositary to issue, on
behalf of the Company, the Depositary Receipts. Copies of the applicable form of
Deposit Agreement and Depositary Receipt may be obtained from the Company upon
request, and the following summary of the form thereof filed as an exhibit to
the Registration Statement of which this Prospectus is a part is qualified in
its entirety by reference to these documents.
Distributions
The Preferred Share Depositary will distribute all cash distributions
received in respect of the Preferred Shares to the record holders of Depositary
Receipts evidencing the related Depositary Shares in proportion to the number of
such Depositary Receipts owned by such holders, subject to certain obligations
of holders to file proofs, certificates and other information and to pay certain
charges and expenses to the Preferred Share Depositary.
In the event of a distribution other than in cash, the Preferred Share
Depositary will distribute property received by it to the record holders of
Depositary Receipts entitled to such distributions, subject to certain
obligations of holders to file proofs, certificates and other information and to
pay certain charges and expenses to the Preferred Share Depositary, unless the
Preferred Share Depositary determines that it is not feasible to make such
distribution, in which case the Preferred Share Depositary may, with the
approval of the Company, sell such property and distribute the net proceeds from
such sale to such holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any Preferred Shares converted into Excess Shares.
Withdrawal of Shares
Upon surrender of the Depositary Receipts at the corporate trust office
of the Preferred Share Depositary (unless the related Depositary Shares have
previously been called for redemption or converted into Excess Shares), the
holders thereof will be entitled to delivery at such office, to or upon such
holder's order, of the number of whole or fractional Preferred Shares and any
money or other property represented by the Depositary Shares evidenced by such
Depositary Receipts. Holders of Depositary Receipts will be entitled to receive
whole or fractional shares of the related Preferred Shares on the basis of the
proportion of the Preferred Shares represented by each Depositary Share as
specified in the applicable prospectus supplement, but holders of such Preferred
Shares will not thereafter be entitled to receive Depositary Shares therefor. If
the Depositary Receipts delivered by the holder evidence a number of Depositary
Shares in excess of the number of Depositary Shares representing the number of
Preferred Shares to be withdrawn, the Preferred Share Depositary will deliver to
such holder at the same time a new Depositary Receipt evidencing such excess
number of Depositary Shares.
-17-
Redemption of Depositary Shares
Whenever the Company redeems Preferred Shares held by the Preferred
Share Depositary, the Preferred Share Depositary will redeem as of the same
redemption date the number of Depositary Shares representing the Preferred
Shares so redeemed, provided the Company shall have paid in full to the
Preferred Share Depositary the redemption price of the Preferred Shares to be
redeemed plus an amount equal to any accrued and unpaid distributions thereon to
the date fixed for redemption. The redemption price per Depositary Share will be
equal to the redemption price and any other amounts per share payable with
respect to the Preferred Shares. If fewer than all the Depositary Shares are to
be redeemed, the Depositary Shares to be redeemed will be selected pro rata (as
nearly as may be practicable without creating fractional Depositary Shares) or
by any other equitable method determined by the Company that will not result in
the issuance of any Excess Shares.
From and after the date fixed for redemption, all distributions in
respect of the Preferred Shares so called for redemption will cease to accrue,
the Depositary Shares so called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the Depositary Receipts evidencing
the Depositary Shares so called for redemption will cease, except the right to
receive any monies payable upon such redemption and any money or other property
to which the holders of such Depositary Receipts were entitled upon such
redemption upon surrender thereof to the Preferred Share Depositary.
Voting of the Preferred Shares
Upon receipt of notice of any meeting at which the holders of the
Preferred Shares are entitled to vote, the Preferred Share Depositary will mail
the information contained in such notice of meeting to the record holders of the
Depositary Receipts evidencing the Depositary Shares which represent such
Preferred Shares. Each record holder of Depositary Receipts evidencing
Depositary Shares on the record date (which will be the same date as the record
date for the Preferred Shares) will be entitled to instruct the Preferred Share
Depositary as to the exercise of the voting rights pertaining to the amount of
Preferred Shares represented by such holder's Depositary Shares. The Preferred
Share Depositary will vote the amount of Preferred Shares represented by such
Depositary Shares in accordance with such instructions, and the Company will
agree to take all reasonable action which may be deemed necessary by the
Preferred Share Depositary in order to enable the Preferred Share Depositary to
do so. The Preferred Share Depositary will abstain from voting the amount of
Preferred Shares represented by such Depositary Shares to the extent it does not
receive specific instructions from the holders of Depositary Receipts evidencing
such Depositary Shares. The Preferred Share Depositary shall not be responsible
for any failure to carry out any instruction to vote, or for the manner or
effect of any such vote made, as long as any such action or non-action is in
good faith and does not result from negligence or willful misconduct of the
Preferred Share Depositary.
Liquidation Preference
In the event of the liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of each Depositary
Receipt will be entitled to the fraction of the liquidation preference accorded
each Preferred Share represented by the Depositary Share evidenced by such
Depositary Receipt, as set forth in the applicable prospectus supplement.
Conversion of Preferred Shares
The Depositary Shares, as such, are not convertible into Common Shares
or any other securities or property of the Company, except in connection with
certain conversions in connection with the preservation of the Company's status
as a REIT. Nevertheless, if so specified in the applicable prospectus supplement
relating to an offering of Depositary Shares, the Depositary Receipts may be
surrendered by holders thereof to the Preferred Share Depositary with written
instructions to the Preferred Share Depositary to instruct the Company to cause
conversion of the Preferred Shares represented by the Depositary Shares
evidenced by such Depositary Receipts into whole Common Shares, other Preferred
Shares (including Excess Shares) of the Company or other shares of beneficial
interest, and the Company has agreed that upon receipt of such instructions and
any amounts payable in respect thereof, it will cause the conversion thereof
utilizing the same procedures as those provided for delivery of Preferred Shares
to effect such conversion. If the Depositary Shares evidenced by a Depositary
Receipt are to be converted in part only, a new Depositary Receipt or Receipts
will be issued for any Depositary Shares not to be converted. No fractional
Common Shares will be issued upon conversion, and if such conversion will result
in a fractional share being issued, an amount will be paid in cash by the
Company equal to the value of the fractional interest based upon the closing
price of the Common Shares on the last business day prior to the conversion.
-18-
Amendment and Termination of the Deposit Agreement
The form of Depositary Receipt evidencing the Depositary Shares which
represent the Preferred Shares and any provision of the Deposit Agreement may at
any time be amended by agreement between the Company and the Preferred Share
Depositary. However, any amendment that materially and adversely alters the
rights of the holders of Depositary Receipts or that would be materially and
adversely inconsistent with the rights granted to the holders of the related
Preferred Shares will not be effective unless such amendment has been approved
by the existing holders of at least a majority of the Depositary Shares
evidenced by the Depositary Receipts then outstanding. No amendment shall impair
the right, subject to certain exceptions in the Depositary Agreement, of any
holder of Depositary Receipts to surrender any Depositary Receipt with
instructions to deliver to the holder the related Preferred Shares and all money
and other property, if any, represented thereby, except in order to comply with
law. Every holder of an outstanding Depositary Receipt at the time any such
amendment becomes effective shall be deemed, by continuing to hold such
Depositary Receipt, to consent and agree to such amendment and to be bound by
the Deposit Agreement as amended thereby.
The Deposit Agreement may be terminated by the Company upon not less
than 30 days' prior written notice to the Preferred Share Depositary if: (i)
such termination is necessary to assist in maintaining the Company's status as a
REIT or (ii) a majority of each series of Preferred Shares affected by such
termination consents to such termination, whereupon the Preferred Share
Depositary shall deliver or make available to each holder of Depositary
Receipts, upon surrender of the Depositary Receipts held by such holder, such
number of whole or fractional Preferred Shares as are represented by the
Depositary Shares evidenced by such Depositary Receipts together with any other
property held by the Preferred Share Depositary with respect to such Depositary
Receipts. The Company has agreed that if the Deposit Agreement is terminated to
assist in maintaining the Company's status as a REIT, then, if the Depositary
Shares are listed on a national securities exchange, the Company will use its
best efforts to list the Preferred Shares issued upon surrender of the related
Depositary Shares on a national securities exchange. In addition, the Deposit
Agreement will automatically terminate if: (i) all outstanding Depositary Shares
shall have been redeemed, (ii) there shall have been a final distribution in
respect of the related Preferred Shares in connection with any liquidation,
dissolution or winding up of the Company and such distribution shall have been
distributed to the holders of Depositary Receipts evidencing the Depositary
Shares representing such Preferred Shares or (iii) each share of the related
Preferred Shares shall have been converted into shares of beneficial interest of
the Company not so represented by Depositary Shares.
Charges of Preferred Share Depositary
The Company will pay all transfer and other taxes and governmental
charges arising solely from the existence of the Deposit Agreement. In addition,
the Company will pay the fees and expenses of the Preferred Share Depositary in
connection with the performance of its duties under the Deposit Agreement.
However, holders of Depositary Receipts will pay certain other transfer and
other taxes and governmental charges as well as the fees and expenses of the
Preferred Share Depositary for any duties requested by such holders to be
performed which are outside of those expressly provided for in the Deposit
Agreement.
Resignation and Removal of Depositary
The Preferred Share Depositary may resign at any time by delivering to
the Company notice of its election to do so, and the Company may at any time
remove the Preferred Share Depositary, any such resignation or removal to take
effect upon the appointment of a successor Preferred Share Depositary. A
successor Preferred Share Depositary must be appointed within 60 days after
delivery of the notice of resignation or removal and must be a bank or trust
company having its principal office in the United States and having a combined
capital and surplus of at least $50,000,000.
-19-
Miscellaneous
The Preferred Share Depositary will forward to holders of Depositary
Receipts any reports and communications from the Company which are received by
the Preferred Share Depositary with respect to the related Preferred Shares.
Neither the Preferred Share Depositary nor the Company will be liable
if it is prevented from or delayed in, by law or any circumstances beyond its
control, performing its obligations under the Deposit Agreement. The obligations
of the Company and the Preferred Share Depositary under the Deposit Agreement
will be limited to performing their duties thereunder in good faith and without
negligence (in the case of any action or inaction in the voting of Preferred
Shares represented by the Depositary Shares), gross negligence or willful
misconduct, and the Company and the Preferred Share Depositary will not be
obligated to prosecute or defend any legal proceeding in respect of any
Depositary Receipts, Depositary Shares or Preferred Shares represented thereby
unless satisfactory indemnity is furnished. The Company and the Preferred Share
Depositary may rely on written advice of counsel or accountants, or information
provided by persons presenting Preferred Shares represented thereby for deposit,
holders of Depositary Receipts or other persons believed in good faith to be
competent to give such information, and on documents believed in good faith to
be genuine and signed by a proper party.
In the event the Preferred Share Depositary shall receive conflicting
claims, requests or instructions from any holders of Depositary Receipts, on the
one hand, and the Company, on the other hand, the Preferred Share Depositary
shall be entitled to act on such claims, requests or instructions received from
the Company.
DESCRIPTION OF WARRANTS
The Company may issue Warrants to purchase of Preferred Shares,
Depositary Shares or Common Shares. Warrants may be issued independently or
together with any Securities and may be attached to or separate from such
securities. Each series of Warrants will be issued under a separate warrant
agreement (each, a "Warrant Agreement") to be entered into between the Company
and a specified warrant agent ("Warrant Agent"). The Warrant Agent will act
solely as an agent of the Company in connection with the Warrants of such series
and will not assume any obligation or relationship of agency or trust for or
with any holders or beneficial owners of Warrants.
The applicable prospectus supplement will describe the following terms,
where applicable, of the Warrants in respect of which this Prospectus is being
delivered: (i) the title of such Warrants; (ii) the aggregate number of such
Warrants; (iii) the price or prices at which such Warrants will be issued; (iv)
the currencies in which the price or prices of such Warrants may be payable; (v)
the designation, amount and terms of the Securities purchasable upon exercise of
such Warrants; (vi) the designation and terms of the other Securities with which
such Warrants are issued and the number of such Warrants issued with each such
security; (vii) if applicable, the date on and after which such Warrants and the
Securities purchasable upon exercise of such Warrants will be separately
transferable; (viii) the price or prices at which and currency or currencies in
which the Securities purchasable upon exercise of such Warrants may be
purchased; (ix) the date on which the right to exercise such Warrants shall
commence and the date on which such right shall expire; (x) the minimum or
maximum amount of such Warrants which may be exercised at any one time; (xi)
information with respect to book-entry procedures, if any; (xii) a discussion of
certain Federal income tax considerations; and (xiii) any other material terms
of such Warrants, including terms, procedures and limitations relating to the
exchange and exercise of such Warrants.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S DECLARATION OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and Bylaws does not purport to be complete and is subject
to and qualified in its entirety by reference to Maryland law and to the
Declaration of Trust and Bylaws of the Company, as amended, which are
incorporated by reference into this Registration Statement.
-20-
Duration
Under the Company's Declaration of Trust, the Company has a perpetual
term and will continue perpetually subject to the authority of the Board of
Trustees to terminate the Company's existence and liquidate its assets and
subject to termination pursuant to the Maryland REIT Law.
Board of Trustees
The Company's Declaration of Trust provides that the number of Trustees
of the Company shall not be less than three nor more than 15. Any vacancy
(including a vacancy created by an increase in the number of Trustees) will be
filled, at any regular meeting or at any special meeting called for that
purpose, by a majority of the Trustees (although less than a quorum). The
Trustees will each serve for a term of one year (except that an individual who
has been elected to fill a vacancy will hold office only until the next annual
meeting of shareholders and until his successor has been duly elected and
qualified).
The Declaration of Trust provides that a Trustee may be removed from
office only at a meeting of the shareholders called for that purpose, by the
affirmative vote of the holders of not less than a majority of the Shares
entitled to vote in the election of Trustees; provided, however, that in the
case of any Trustees elected solely by holders of a series of Preferred Shares,
such Trustees may be removed by the affirmative vote of a majority of the
Preferred Shares of that series then outstanding and entitled to vote in the
election of Trustees, voting together as a single class.
Meetings of Shareholders
The Declaration of Trust requires the Company to hold an annual meeting
of shareholders for the election of Trustees and the transaction of any other
proper business. Special meetings of shareholders may be called upon the written
request of shareholders holding at least 10% of the Common Shares. Special
meetings of shareholders may also be called by the holders of Preferred Shares
to the extent, if any, determined by the Board of Trustees in connection with
the establishment of a class or series of Preferred Shares. Any action required
or permitted to be taken by shareholders must be taken at a duly called annual
or special meeting of shareholders and may not be effected by any consent in
writing of shareholders.
Business Combinations
Under the MGCL, as applicable to Maryland real estate investment
trusts, certain "business combinations" (including certain mergers,
consolidations, share exchanges, or, in certain circumstances, asset transfers
or issuances or reclassifications of equity securities) between a Maryland real
estate investment trust and an "interested shareholder" or an affiliate of the
interested shareholder are prohibited for five (5) years after the most recent
date on which the interested shareholder becomes an interested shareholder. An
interested shareholder includes a person who beneficially owns, and an affiliate
or associate of the trust who, at any time within the two-year period prior to
the date in question, was the beneficial owner of, ten percent or more of the
voting power of our then-outstanding voting shares. Thereafter, any such
business combination must be: (a) recommended by the trustees of such trust and
(b) approved by the affirmative vote of at least: (i) 80% of the votes entitled
to be cast by holders of outstanding voting shares of beneficial interest of the
trust; and (ii) two-thirds of the votes entitled to be cast by holders of
outstanding voting shares of beneficial interest other than shares held by the
interested shareholder with whom (or with whose affiliate or associate) the
business combination is to be effected, unless, among other conditions, the
trust's common shareholders receive a minimum price (as defined in the MGCL) for
their shares and the consideration is received in cash or in the same form as
previously paid by the interested shareholder for its shares. These provisions
of the MGCL do not apply, however, to business combinations that are approved or
exempted by the board of trustees of the trust prior to the time that the
interested shareholder becomes an interested shareholder. An amendment to a
Maryland REIT's declaration of trust electing not to be subject to the foregoing
requirements must be approved by the affirmative vote of at least 80% of the
votes entitled to be cast by holders of outstanding voting shares of beneficial
interest of the trust, voting together as a single voting group, and two-thirds
of the votes entitled to be cast by holders of outstanding voting shares of
beneficial interest other than shares of beneficial interest held by interested
shareholders. Any such amendment shall not be effective until 18 months after
the vote of shareholders and does not apply to any business combination of the
trust with an interested shareholder on the date of the shareholder vote. The
Board of Trustees has exempted any business combinations involving SSI, TNC,
SERS, the SERS Voting Trust, Morgan Stanley Asset Management Inc., the Morgan
Stanley Funds, Lazard, Gerard H. Sweeney and their respective affiliates and
associates from the business combination provisions of the MGCL and,
consequently, the five-year prohibition and the super-majority vote requirements
will not apply to business combinations between any of them and the Company. As
a result, they may be able to enter into business combinations that may not be
in the best interest of the shareholders without compliance by the Company with
the super-majority vote requirements and the other provisions of the statute.
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The business combination statute could have the effect of delaying,
deferring or preventing offers to acquire the Company and of increasing the
difficulty of consummating any such offer.
Control Share Acquisitions
The MGCL, as applicable to Maryland real estate investment trusts,
provides that "control shares" of a Maryland real estate investment trust
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter by shareholders, excluding shares owned by the acquiror, by officers or
by trustees who are employees of the trust in question. "Control shares" are
voting shares of beneficial interest which, if aggregated with all other shares
previously acquired by such acquiror or in respect of which the acquiror is able
to exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise the voting power in the
election of trustees within one of the following ranges of voting power: (a)
one-fifth or more but less than one-third, (b) one-third or more but less than a
majority, or (c) 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 shareholder 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,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the trust's board of trustees to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the trust may itself present
the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the trust may
redeem any or all of the control shares, except those for which voting rights
have previously been approved, for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a shareholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other shareholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition,
and certain limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired
in a merger, consolidation or share exchange if the trust is a party to the
transaction, or to acquisitions approved or exempted by the declaration of trust
or bylaws of the trust. Pursuant to the statute, the Company has exempted any
and all acquisitions of Shares by SSI, TNC, SERS, SERS Voting Trust, Morgan
Stanley Asset Management, Inc., the Morgan Stanley Funds and any current or
future affiliate or associate of theirs from the control share provisions of the
MGCL. As a result, they will be able to possess voting power not generally
available to other persons and the effect may be to further enhance their
ability to control the Company.
The control share acquisition statute could have the effect of
delaying, deferring or preventing offers to acquire the Company and of
increasing the difficulty of consummating any such offer.
-22-
Amendment to the Declaration of Trust
The Company's Declaration of Trust may be amended only by the
affirmative vote of the holders of not less than a majority of the Shares then
outstanding and entitled to vote thereon, except for the provisions of the
Declaration of Trust relating to (i) increases or decreases in the aggregate
number of Shares of any class (other than the Series A Preferred Shares,) which
may be made by the Board of Trustees without shareholder approval and (ii) the
MGCL provisions on business combinations, amendment of which requires the
affirmative vote of the holders of not less than 80% of the Shares then
outstanding and entitled to vote. In addition, in the event that the Board of
Trustees shall have determined, with the advice of counsel, that any one or more
of the provisions of the Company's Declaration of Trust (the "Conflicting
Provisions") are in conflict with the Maryland REIT Law, the Code or other
applicable Federal or state law(s), the Conflicting Provisions shall be deemed
never to have constituted a part of the Declaration of Trust, even without any
amendment thereof.
Termination of the Company and REIT Status
Subject to the rights of any outstanding Preferred Shares and to the
provisions of the Maryland REIT Law, the Company's Declaration of Trust permits
the Board of Trustees to terminate the Company and to discontinue the election
of the Company to be taxed as a REIT.
Transactions Between the Company and its Trustees or Officers
The Company's Declaration of Trust provides that any contract or
transaction between the Company and one or more Trustees, officers, employees or
agents of the Company must be approved by a majority of the Trustees who have no
interest in the contract or transaction.
Limitation of Liability and Indemnification
The Maryland REIT Law permits a Maryland real estate investment trust
to include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust of the Company contains such a provision which eliminates
such liability to the maximum extent permitted by the Maryland REIT Law.
The Company's Bylaws require it to indemnify, without requiring a
preliminary determination of the ultimate entitlement to indemnification, (a)
any present or former Trustee, officer or shareholder who has been successful,
on the merits or otherwise, in the defense of a proceeding to which he was made
a party by reason of such status, against reasonable expenses incurred by him in
connection with the proceeding; (b) any present or former Trustee or officer
against any claim or liability to which he may become subject by reason of such
status unless it is established that (i) his act or omission was committed in
bad faith or was the result of active and deliberate dishonesty, (ii) he
actually received an improper personal benefit in money, property or services or
(iii) in the case of a criminal proceeding, he had reasonable cause to believe
that his act or omission was unlawful; and (c) each shareholder or former
shareholder against any claim or liability to which he may be subject by reason
of such status as a shareholder or former shareholder. However, under the MGCL,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the Company's Bylaws
require it to pay or reimburse, in advance of final disposition of a proceeding,
reasonable expenses incurred by a present or former Trustee, officer or
shareholder made a party to a proceeding by reason of his status as a Trustee,
officer or shareholder provided that, in the case of a Trustee or officer, the
Company shall have received (i) a written affirmation by the Trustee or officer
of his good faith belief that he has met the applicable standard of conduct
necessary for indemnification by the Company as authorized by the Bylaws and
(ii) a written undertaking by him or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the
applicable standard of conduct was not met. The Company's Bylaws also (i) permit
the Company, with the approval of its Trustees, to provide indemnification and
payment or reimbursement of expenses to a present or former Trustee, officer or
shareholder who served a predecessor of the Company in such capacity, and to any
employee or agent of the Company or a predecessor of the Company, (ii) provide
that any indemnification or payment or reimbursement of the expenses permitted
by the Bylaws shall be furnished in accordance with the procedures provided for
indemnification and payment or reimbursement of expenses under Section 2-418 of
the MGCL for directors of Maryland corporations and (iii) permit the Company to
provide such other and further indemnification or payment or reimbursement of
expenses as may be permitted by the MGCL for directors of Maryland corporations.
-23-
The limited partnership agreement of the Operating Partnership also
provides for indemnification by the Operating Partnership of the Company, as
general partner, and its Trustees and officers for any costs, expenses or
liabilities incurred by them by reason of any act performed by them for or on
behalf of the Operating Partnership or the Company; provided that such person's
actions were taken in good faith and in the belief that such conduct was in the
best interests of the Operating Partnership and that such person was not guilty
of fraud, willful misconduct or gross negligence.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Trustees and officers of the Company pursuant to the
foregoing provisions or otherwise, the Company has been advised that, although
the validity and scope of the governing statute has not been tested in court, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In addition, indemnification may be limited by state securities
laws.
Maryland Asset Requirements
To maintain its qualification as a Maryland real estate investment
trust, the Maryland REIT Law requires that the Company hold, either directly or
indirectly, at least 75% of the value of its assets in real estate assets,
mortgages or mortgage related securities, government securities, cash and cash
equivalent items, including high-grade short-term securities and receivables.
The Maryland REIT Law also prohibits using or applying land for farming,
agricultural, horticultural or similar purposes.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and
other policies of the Company. These policies have been determined by the
Company's Board of Trustees and may be amended or revised from time to time by
the Board of Trustees without a vote of shareholders. No assurance can be given
that the Company's investment objectives will be attained or that the value of
the Company will not decrease.
Investment Policies
Investments in Real Estate or Interests in Real Estate. The Company's
business objective is to increase cash available for distribution and to
maximize shareholder value by: (i) maximizing cash flow through leasing
strategies designed to capture potential rental growth as rental rates increase
and as below-market leases are renewed; (ii) ensuring a high tenant retention
rate through an aggressive tenant services program responsive to the varying
needs of the Company's diverse base of tenants; (iii) broadening its geographic
and economic diversification while maximizing economies of scale; (iv) acquiring
high-quality office and industrial properties and portfolios of such properties
at attractive yields in selected submarkets within the Mid-Atlantic region
(including Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia and
the District of Columbia), which management expects will experience economic
growth; (v) capitalizing on management's redevelopment expertise to selectively
acquire, redevelop and reposition underperforming properties in desirable
locations; (vi) acquiring land in anticipation of developing office or
industrial properties on a build-to-suit basis, under circumstances where
significant pre-leasing can be arranged or as otherwise warranted by market
conditions; (vii) enhancing the Company's investment strategy through the
pursuit of joint venture opportunities with high quality partners having
attractive real estate holdings or significant financial resources; and (viii)
optimizing the use of debt and equity financing to create a flexible and
conservative capital structure that will enable the Company to continue its
aggressive growth strategy.
-24-
In pursuit of its business objective of increasing cash available for
distribution and maximizing shareholder value, the Company has recently
experienced rapid growth. Between January 1, 1997 and December 1, 1998 the
Company has acquired 163 office properties containing approximately 12.5 million
net rentable square feet, 66 industrial facilities containing approximately 3.7
million net rentable square feet and one mixed use property containing
approximately 167,760 net rentable square feet and, together with the Real
Estate Ventures, has acquired ownership of, or rights to acquire, approximately
503.8 acres of undeveloped land. The aggregate purchase price for the 230
Properties acquired by the Company between January 1, 1997 and December 1, 1998
was approximately $1.7 billion. During such period, the Company also completed
the development of two office properties and one industrial facility containing
an aggregate of approximately 288,177 net rentable square feet for aggregate
development costs of approximately $19.2 million. The Company believes that,
through the expertise and extensive relationships of its management, it will
continue to identify and capitalize on substantial opportunities for additional
real estate investments from a variety of sources, including institutional and
private holders of real estate seeking liquidity or reduction in their holdings
or tax-deferred dispositions.
The Company expects to continue to concentrate its real estate
activities in submarkets within the Mid-Atlantic region where it believes that:
(i) barriers to entry (such as zoning restrictions, utility availability,
infrastructure limitations, development moratoriums, and limited developable
land) are likely to create supply constraints on office and industrial space;
(ii) current market rents do not justify new construction; (iii) it can maximize
market penetration by accumulating a critical mass of properties and thereby
enhance operating efficiencies; and (iv) there is potential for economic growth.
The Company may develop, purchase or lease income-producing properties
for long-term investment, expand and improve the Properties presently owned or
other properties purchased, or sell such properties, in whole or in part, when
circumstances warrant. Although there is no limitation on the types of
development activities that the Company may undertake, the Company expects that
its development activities will generally be on a build-to-suit basis for
particular tenants, or where a significant portion of the building is pre-leased
before construction begins. The Company may also participate with other entities
in property ownership and development through joint ventures, such as the Real
Estate Ventures, or other types of co-ownership. Equity investments may be
subject to existing or future mortgage financing and other indebtedness that
will have priority over the equity interests in the Company.
Securities of or Interests in Entities Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the percentage of ownership limitations
and gross income tests necessary for REIT qualification, the Company also may
invest in securities of other REITS, other entities engaged in real estate
activities or securities of other issuers. The Company may enter into additional
joint ventures or partnerships for the purpose of obtaining an equity interest
in a particular property in accordance with the Company's investment policies.
Investments in Real Estate Mortgages. While the Company's current
portfolio consists of, and the Company's business objectives emphasize, equity
investments in commercial real estate, the Company may, in the discretion of the
Board of Trustees, invest in other types of equity real estate investments,
mortgages and other real estate interests. The Company may also invest in
participating or convertible mortgages if the Company concludes that it may
benefit from the cash flow or any appreciation in the value of the property.
Investment through the Operating Partnership. The Company has made no
determination to conduct all of its activities through the Operating
Partnership. As of the date of this Prospectus, the Company owns all of the
Properties or the economic interest therein indirectly through the Operating
Partnership. Although the Partnership Agreement of the Operating Partnership
contains no provision restricting the Company's ability to acquire additional
properties outside the Operating Partnership, the Partnership Agreement provides
that if the Company acquires additional properties outside the Operating
Partnership, the percentage of administrative fees of the Company allocated to
the Operating Partnership will be reduced to an amount that is fair and
equitable under the circumstances.
Dispositions
The Company may sell properties in its portfolio if, based upon
management's periodic review of the Company's portfolio, the Board of Trustees
determines that such action would be in the best interests of the Company.
-25-
Financing Policies
The Company has adopted a policy to operate with a long-term average
debt-to-total market capitalization ratio (i.e., the total consolidated debt of
the Company as a percentage of the market value of issued and outstanding Shares
and Units plus total consolidated debt) of not more than 50%. As of December 1,
1998, the Company's debt-to-market capitalization ratio was approximately 54.5%.
The Company's Declaration of Trust and Bylaws do not, however, limit the amount
or percentage of indebtedness that the Company may incur. In addition, the
Company may, from time to time, modify its debt policy in light of current
economic conditions, relative costs of debt and equity capital, market values of
its properties, general conditions in the market for debt and equity securities,
fluctuations in the market price of its Common Shares, growth opportunities and
other factors. Accordingly, the Company may increase or decrease its
debt-to-market capitalization ratio beyond the limit described above. To the
extent that the Board of Trustees decides to obtain additional capital, the
Company may raise such capital through additional equity offerings (including
offerings of senior or convertible securities), debt financings or retention of
cash flow (subject to provisions in the Code concerning taxability of
undistributed REIT income), or a combination of these methods. Borrowing may be
unsecured or secured by any or all of the assets of the Company, the Operating
Partnership or any existing or new property-owning partnership and may have full
or limited recourse to all or any portion of the assets of the Company, the
Operating Partnership or any existing or new property-owning partnership.
Indebtedness incurred by the Company may be in the form of bank borrowing,
purchase money obligations to sellers of the properties, publicly or privately
placed debt instruments or financing from institutional investors or other
lenders. The proceeds from any borrowing by the Company may be used for working
capital, to refinance existing indebtedness, to finance acquisition, expansion
or development of new properties and for the payment of distributions. The
Company has not established any limit on the number or amount of mortgages that
may be placed on any single property or on its portfolio as a whole. In making
decisions regarding the incurrence of indebtedness, the Company considers such
factors as the ability of particular properties and the Company as a whole to
generate cash flow to cover expected debt service, the purchase price of
properties to be acquired with debt financing, the estimated market value of
properties upon refinancing and the impact of the debt financing on the
Company's ability to pay dividends.
Working Capital Reserves
The Company will maintain working capital reserves (and when not
sufficient, access to borrowings) in amounts that the Board of Trustees
determines to be adequate to meet normal contingencies in connection with the
Company's business and investments.
Conflict of Interests Policies
The Company has not adopted any formal or informal policies intended to
eliminate the influence of conflicts of interest. Under the Company's
Declaration of Trust, a transaction effected by the Company or any entity
controlled by the Company in which a Trustee or officer has a financial interest
may only be consummated if the transaction is first approved by a majority of
the Trustees who have no interest in the transaction.
Policies with Respect to Other Activities
The Company has authority to offer Common Shares, Preferred Shares,
senior securities or options to purchase shares in exchange for property and, to
the extent permitted by applicable law, to repurchase or otherwise acquire its
Common Shares or other securities in the open market or otherwise and may engage
in such activities in the future. The Board of Trustees periodically evaluates
authorizing the Company to repurchase Common Shares and, as of the date of this
Prospectus, has authorized the Company to repurchase up to 2.0 million Common
Shares (net of approximately 87,000 shares previously purchased). The Company
expects (but is not obligated) to issue Common Shares to holders of Units in the
Operating Partnership upon exercise of their redemption rights. The Company may
issue Preferred Shares from time to time, in one or more series, as authorized
by the Board of Trustees without the need for shareholder approval. The Company
has not engaged in trading, underwriting or agency distribution or sale of
securities of issuers, nor has the Company invested in the securities of issuers
(other than the Operating Partnership and its subsidiaries and the Real Estate
Ventures) for the purposes of exercising control, and does not intend to do so.
The Company intends to operate in a manner that will not subject it to
regulation as an investment company under the Investment Company Act. At all
times, the Company intends to make investments in such a manner as to qualify as
a REIT, unless because of circumstances or changes in the Code (or the Treasury
Regulations), the Board of Trustees determines that it is no longer in the best
interest of the Company to qualify as a REIT. The Company may make loans to
third parties, including, without limitation, to joint ventures in which it
participates. The Company's policies with respect to such activities may be
reviewed and modified or amended from time to time by the Company's Board of
Trustees without a vote of the shareholders.
-26-
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of material Federal income tax considerations
is for general information only and is not tax advice. The following discussion
summarizes all material federal income tax considerations to a holder of Common
Shares. The applicable prospectus supplement will contain information about
additional federal income tax considerations, if any, relating to Securities
other than Common Shares. In the opinion of Arthur Andersen LLP, tax advisor to
the Company (the "Tax Advisor") the discussion below, insofar as it relates to
Federal income tax matters, is correct in all material respects, and fairly
summarizes the federal income tax considerations that are material to a
shareholder. This discussion does not purport to deal with all aspects of
taxation that may be relevant to particular shareholders in light of their
personal investment or tax circumstances, or to certain types of shareholders
(including insurance companies, tax-exempt organizations, financial institutions
or broker dealers, foreign corporations and persons who are not citizens or
residents of the United States, except to the extent discussed under "Taxation
of Foreign Shareholders" below) subject to special treatment under the Federal
income tax laws. The information in this section is based on the Code, current,
temporary and proposed Treasury Regulations thereunder, the legislative history
of the Code, current administrative interpretations and practices of the IRS
(including its practices and policies as endorsed in private letter rulings,
which are not binding on the IRS except with respect to a taxpayer that receives
such a ruling), and court decisions, all as of the date hereof. The Taxpayer
Relief Act of 1997 (the "1997 Act") was enacted on August 5, 1997. The 1997 Act
contains many provisions which generally make it easier to operate and to
continue to qualify as a REIT for taxable years beginning after the date of
enactment (which, for the Company, would be applicable commencing with its
taxable year beginning January 1, 1998).
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL ESTATE
INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
General
The Company first elected to be taxed as a REIT for its taxable year
ended December 31, 1986, and has operated and expects to continue to operate in
such a manner so as to remain qualified as a REIT for Federal income tax
purposes. In the opinion of the Tax Advisor, and based on certain factual
representations made by the Company relating to the organization and operation
of the Company, the Operating Partnership and AAPT, the Company will continue to
qualify as a REIT under the Code. However, the opinion of the Tax Advisor is not
binding upon the IRS and no absolute assurance can be given that the Company
will continue to operate in a manner so as to remain qualified as a REIT.
The following is a general summary of the Code sections that govern the
Federal income tax treatment of a REIT and its shareholders. These sections of
the Code are highly technical and complex. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder ("Treasury Regulations"), and administrative and judicial
interpretations thereof as currently in effect. There is no assurance that there
will not be future changes in the Code or administrative or judicial
interpretation thereof which could adversely affect the Company's ability to
continue to qualify as a REIT or adversely affect the taxation of holders of
Common Shares or which could further limit the amount of income the Company may
derive from the management, construction, development, leasing or sale of
properties owned by the Operating Partnership or by third parties or in
partnerships with third parties.
-27-
Taxation of the Company as a REIT
An entity that qualifies for taxation as a REIT and distributes to its
shareholders at least 95% of its REIT taxable income is generally not subject to
Federal corporate income taxes on net income that it currently distributes to
shareholders. This treatment substantially eliminates the "double taxation" (at
the corporate and shareholder levels) that generally results from investment in
a corporation. However, the Company will be subject to Federal income tax as
follows:
The Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
(i) Under certain circumstances, the Company may be subject to
the "alternative minimum tax" on its items of tax preference, if any.
(ii) If the Company has net income from prohibited
transactions (which 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) such income will be subject to a 100% tax. See
"- Sale of Partnership Property."
(iii) If the Company should fail to satisfy the 75% gross
income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% test, multiplied by a fraction intended to reflect the Company's
profitability.
(iv) If the Company should fail to distribute during each
calendar year at least the sum of (1) 85% of its REIT ordinary income for such
year, (2) 95% of its REIT capital gain net income for such year, and (3) any
undistributed taxable income from prior years, it would be subject to a 4%
excise tax on the excess of such required distribution over the amounts actually
distributed.
(v) If the Company has (1) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property acquired
by the Company by foreclosure or otherwise or default on a loan secured by the
property) which is held primarily for sale to customers in the ordinary course
of business or (2) other nonqualifying income from foreclosure property, it will
be subject to tax on such income at the highest corporate rate.
(vi) If the Company acquires any asset from a C corporation
(i.e., generally a corporation subject to tax at the corporate level) in a
transaction in which the basis of the asset in the Company's hands is determined
by reference to the basis of the asset (or any other property) in the hands of
the C corporation, and the Company recognizes gain on the disposition of such
asset during the 10-year period (the "Restriction Period") beginning on the date
on which such asset was acquired by the Company then, pursuant to guidelines
issued by the IRS, the excess of the fair market value of such property at the
beginning of the applicable Restriction Period over the Company's adjusted basis
in such asset as of the beginning of such Restriction Period will be subject to
a tax at the highest regular corporate rate. The results described above with
respect to the recognition of built-in gain assume that the Company will make an
election pursuant to IRS Notice 88-19 or applicable future administrative rules
or Treasury Regulations to avail itself of the benefits of the Restriction
Period.
Qualification of the Company as a REIT
The Code defines a REIT as a corporation, trust or association:
(1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by
transferable shares or by transferable certificates of beneficial interest;
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(3) which would be taxable as a domestic corporation but for
Sections 856 through 859 of the Code;
(4) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code;
(5) which has the calendar year as its taxable year;
(6) the beneficial ownership of which is held by 100 or more
persons;
(7) during the last half of each taxable year not more than
50% in value of the outstanding stock of which is owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain exempt
organizations); and
(8) which meets certain income, asset and distribution tests,
described below.
Conditions (1) through (5), inclusive, must be satisfied
during the entire taxable year, and condition (6) must be satisfied 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. The Company has previously issued Common
Shares in sufficient proportions to allow it to satisfy requirements (6) and (7)
(the "100 Shareholder" and "five-or-fewer" requirements), respectively. In
addition, the Company's Declaration of Trust provides restrictions regarding the
transfer of its Shares that are intended to assist the Company in continuing to
satisfy the share ownership requirements described in (6) and (7) above. See
"Description of Shares of Beneficial Interest - Restrictions on Transfer."
However, these restrictions may not ensure that the Company will, in all cases,
be able to satisfy the share ownership requirements described in (6) and (7)
above. If the Company fails to satisfy such share ownership requirements, the
Company's status as a REIT will terminate. Pursuant to the 1997 Act, for the
Company's taxable years commencing on and after January 1, 1998, if the Company
complies with regulatory rules pursuant to which it is required to send annual
letters to certain of its shareholders requesting information regarding the
actual ownership of its shares, but does not know, or exercising reasonable
diligence would not have known, whether it failed to meet the requirement that
it not be closely held, the Company will be treated as having met the "five or
fewer" requirement. If the Company were to fail to comply with these regulatory
rules for any year, it would be subject to a $25,000 penalty. If the Company's
failure to comply was due to intentional disregard of the requirements, the
penalty would be increased to $50,000. However, if the Company's failure to
comply was due to reasonable cause and not willful neglect, no penalty would be
imposed. See "- Failure to Qualify."
A REIT is permitted to have a wholly-owned subsidiary (also referred to
as a "qualified REIT subsidiary"). A qualified REIT subsidiary is not treated as
a separate entity for Federal income tax purposes. Rather, all of the assets and
items of income, deductions and credit of a qualified REIT subsidiary are
treated as if they were those of the REIT. The Company has formed several
qualified REIT subsidiaries and may in the future form one or more qualified
REIT subsidiaries. For the Company's 1997 taxable year, all of the stock of such
subsidiaries must be owned by the Company from the commencement of each such
subsidiary's existence. For taxable years of the Company beginning on and after
January 1, 1998, the Company must own all of the stock of each such subsidiary,
although it will not be required to own such stock of such subsidiary from the
commencement of such subsidiary's existence.
A REIT is deemed to own its proportionate share of the assets of a
partnership in which it is a partner and is deemed to receive its proportionate
share of the income of the partnership. Thus, the Company's proportionate share
of the assets and items of income of the Operating Partnership and each of the
Title Holding Partnerships will be treated as assets and items of income of the
Company for purposes of applying the requirements described herein, provided
that the Operating Partnership and its subsidiary partnerships are treated as
partnerships for Federal income tax purposes. In addition, the character of the
assets and gross income of such partnerships shall retain the same character in
the hands of the REIT for purposes of the requirements applicable to REITs under
the Code including satisfying the income tests and the asset tests. See "Income
Taxation of the Operating Partnership, the Title Holding Partnerships and Their
Partners."
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Income Tests
To maintain qualification as a REIT, there are three gross income
requirements that must be satisfied annually. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and interest on obligations secured by a mortgage on real
property) or from "qualified temporary investment income" (described below).
Second, at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from investments
qualifying under the 75% test above, and from dividends, interest, and gain from
the sale or disposition of stock or securities or from any combination of the
foregoing. Third, for taxable years beginning on or before August 5, 1997,
short-term gain from the sale or other disposition of stock or securities, gain
from prohibited transactions, and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must represent less than 30% of the Company's
gross income (including gross income from prohibited transactions) for each
taxable year. In applying these tests, the Company will be treated as realizing
its share of any income and bearing its share of any loss of the Operating
Partnership and the character of such income or loss, as well as other
partnership items, will be determined at the partnership level.
Rents received by the Company will qualify as "rents from real
property" for purposes of satisfying the 75% and 95% gross income tests only if
several conditions are met. First the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" if the REIT, or an owner
of 10% or more of the REIT, directly or constructively owns 10% or more of such
tenant (a "Related Party Tenant"). For the Company's taxable year which begins
on January 1, 1998 and for all taxable years thereafter, only partners who own
25% or more of the capital or profits interest in a partnership are included in
the determination of whether a tenant is a "Related Party Tenant." 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 such personal property will not qualify
as "rents from real property." 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 such property, other than
through an "independent contractor" who is adequately compensated and from whom
the REIT does not derive any income; provided, however, that the Company may
directly perform certain customary services (e.g., furnishing water, heat, light
and air conditioning, and cleaning windows, public entrances and lobbies) other
than services which are considered rendered to the occupant of the property
(e.g., renting parking spaces on a reserved basis to tenants).
For taxable years of the Company beginning after August 5, 1997, if the
Company provides services to a tenant that are other than those usually or
customarily provided in connection with the rental of space for occupancy only,
amounts received or accrued by the Company for any such services will not be
treated as "rents from real property" for purposes of the REIT gross income
tests but will not cause other amounts received with respect to the property to
fail to be treated as "rents from real property" if the amounts received in
respect of such services, together with amounts received for certain management
services, do not exceed 1% of all amounts received or accrued by the Company
during the taxable year with respect to such property. If the 1% threshold is
exceeded, then all amounts received or accrued by the Company with respect to
the property will not qualify as "rents from real property," even if the
impermissible services are provided to some, but not all, of the tenants of the
property.
The Company has represented that the Company's real estate investments,
which include its allocable share of income from the Operating Partnership, will
give rise to income that qualifies as "rents from real property" for purposes of
the 75 percent and 95 percent gross income tests, other than rents received from
a Related Party Tenant. In addition, the Company has represented that the rents
received from Related Party Tenants, in addition to all other income which is
not qualifying income for the 75 percent and 95 percent gross income tests, does
not exceed five percent of the Company's gross income, and therefore, the
Company's status as a REIT should not be jeopardized.
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The Company has represented that it does not and will not (i) charge
rent for any property that is based in whole or in part on the income or profits
of any person (other than being based on a percentage of receipts or sales);
(ii) receive rents in excess of a de minimis amount from Related Party Tenants;
(iii) derive rents attributable to personal property which constitute greater
than 15% of the total rents received under the lease; or (iv) perform services
considered to be rendered to the occupant of property, other than through an
independent contractor from whom the Company derives no income.
The Operating Partnership owns 5% of the voting common stock, and all
of the preferred stock of the Management Company, a corporation that is taxable
as a regular corporation. The Management Company performs management,
development and leasing services for the Operating Partnership and other real
properties owned in whole or in part by third parties. The income earned by and
taxed to the Management Company would be nonqualifying income if earned directly
by the Company. As a result of the corporate structure, the income will be
earned by and taxed to the Management Company and will be received by the
Company only indirectly as dividends. Although interest and dividends are
generally qualifying income under the 95% test, the IRS has announced a
no-ruling policy on this issue when the dividends and interest are earned in
this manner.
If the Company fails to satisfy one or both of the 75% of 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will be generally available if (i) the Company's failure
to meet such tests was due to reasonable cause and not due to willful neglect,
(ii) the Company attaches a schedule of the sources of its income to its return,
and (iii) any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "Taxation of the Company as a REIT," even if
these relief provisions apply, a tax would be imposed with respect to the excess
net income. No similar mitigation provision applies to provide relief if the 30%
income test is failed, and if such test is not met for the taxable years of the
Company beginning before January 1, 1998, the Company would cease to qualify as
a REIT. See "-- Failure to Qualify."
Asset Tests
In order for the Company to maintain its qualification as a REIT, at
the close of each quarter of its taxable year it must also satisfy three tests
relating to the nature of its assets. First, at least 75% of the value of the
Company's total assets must be represented by real estate assets (which for this
purpose include (i) its allocable share of real estate assets held by
partnerships in which the Company or a "qualified REIT subsidiary" of the
Company owns an interest and (ii) stock or debt instruments purchased with the
proceeds of a stock offering or a long-term (at least five years) debt offering
of the Company and held for not more than one year from the date the Company
receives such proceeds), cash, cash items, and government securities. Second,
not more than 25% of the Company's total assets may be represented by securities
other than those described above in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets, and the Company may not own more than 10% of any one issuer's
outstanding voting securities (excluding securities of a qualified REIT
subsidiary, of which the REIT is required to own all of such stock, or another
REIT).
The Company anticipates that it will be able to comply with these asset
tests. The Company is deemed to hold directly its proportionate share of all
real estate and other assets of the Operating Partnership and should be
considered to hold its proportionate share of all assets deemed owned by the
Operating Partnership through its ownership of partnership interests in other
partnerships. As a result, the Company plans to hold more than 75% of its assets
as real estate assets. In addition, the Company does not plan to hold any
securities representing more than 10% of any one issuer's voting securities,
other than any qualified REIT subsidiary of the Company or another REIT, nor
securities of any one issuer exceeding 5% of the value of the Company's gross
assets (determined in accordance with generally accepted accounting principles).
As previously discussed, the Company is deemed to own its proportionate share of
the assets of a partnership in which it is a partner so that the partnership
interest, itself, is not a security for purposes of this asset test.
After initially meeting the asset tests at the close of any quarter,
the Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests, and to take such other
action within 30 days after the close of any quarter as may be required to cure
any noncompliance. However, there can be no assurance that such other action
will always be successful. If the Company fails to cure any noncompliance with
the asset test within such time period, its status as a REIT would be lost.
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As noted above, one of the requirements for qualification as a REIT is
that a REIT not own more than 10 percent of the voting stock of a corporation
other than the stock of a qualified REIT subsidiary (of which the REIT is
required to own all of such stock) and stock in another REIT. The Operating
Partnership will own only approximately 5 percent of the voting stock and all of
the non-voting preferred stock of the Management Company and therefore will
comply with this rule. However, the IRS could contend that the Company's
ownership, through its interest in the Operating Partnership, of all of the
non-voting preferred stock in the Management Company should be viewed as voting
stock because of its substantial economic position in the Management Company. If
the IRS were to be successful in such a contention, the Company's status as a
REIT would be lost and the Company would become subject to federal corporate
income tax on its net income, which would have a material adverse affect on the
Company's cash available for distribution. The Company does not have the ability
to designate a seat on the Board of Directors of the Management Company. The
Company does not believe that it will be viewed as owning in excess of 10
percent of the voting stock of the Management Company.
Administration's Proposed Changes to REIT Asset Tests
On February 2, 1998, the Clinton Administration released a summary of
its proposed budget plan, which contained provisions that, if enacted, would
affect REITs, including the Company (the "REIT Proposals"). One such provision
would prohibit REITs from owning more than ten percent of the vote or value of
all classes of stock of any corporation (other than a "qualified REIT
subsidiary" or another REIT). This provision would be effective with respect to
stock acquired on or after the date of the first committee action. However,
under the proposal, existing ownership arrangements such as the Company's
ownership of shares of the Management Company would be grandfathered, provided
that the subsidiary does not enter into a new trade or business or acquire
substantial new assets after the effective date of the change in the law.
Because the Company owns more than 10% of the value of the Management Company,
the REIT Proposals could adversely affect the manner in which the Company
structures its ownership of the Management Company and the magnitude of the
property management activities conducted by the Company in the future. It is
important to note that the REIT Proposals are only precursors to the first stage
in the lengthy legislative process that may or may not culminate in the passage
of legislation affecting REITs. Therefore, the Company is unable to determine
whether the REIT Proposals will be enacted into legislation and, if enacted, the
impact any final legislation may have on the Company.
Annual Distribution Requirements
The Company, in order to maintain its qualification as a REIT, is
required to distribute dividends (other than capital gain dividends) to its
shareholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the REIT's net capital gain) and (ii) 95% of the net income (after
tax), if any, from foreclosure property, minus (B) the excess of the sum of
certain items of non-cash income (income attributable to leveled stepped rents,
original issue discount on purchase money debt, or a like-kind exchange that is
later determined to be taxable (plus, for the Company's 1998 taxable year and
thereafter, income from cancellation of indebtedness, original issue discount,
and coupon interest) over 5% of the amount determined under clause (i) above).
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Company does not distribute all
of its net capital gain or distributes at least 95%, but less than 100%, of its
"REIT taxable income," as adjusted, it will be subject to tax on the
undistributed amount at regular capital gains and ordinary corporate tax rates.
Furthermore, if the Company should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT net capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed.
For the Company's taxable year beginning on January 1, 1998 and for all
taxable years thereafter, undistributed capital gains may be so designated by
the Company and are includable in the income of the holders of Common Shares.
Such holders are treated as having paid the capital gains tax imposed on the
Company on the designated amounts included in their income as long-term capital
gains. Such shareholders would receive an increase in their basis for income
recognized and a decrease in their basis for taxes paid by the Company. See "-
Taxation of Taxable Domestic Shareholders."
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The Company intends to make timely distributions sufficient to satisfy
the annual distribution requirements. In this regard, the limited partnership
agreement of the Operating Partnership authorizes the Company, as general
partner, to take such steps as may be necessary to cause the Operating
Partnership to distribute to its partners an amount sufficient to permit the
Company to meet these distribution requirements. It is possible that the
Company, from time to time, may not have sufficient cash or other liquid assets
to meet the 95% distribution requirement due primarily to the expenditure of
cash for nondeductible items such as principal amortization or capital
expenditures. In order to meet the 95% distribution requirement, the Company may
borrow or may cause the Operating Partnership to arrange for short-term or other
borrowing to permit the payment of required distributions or attempt to declare
a consent dividend, which is a hypothetical distribution to holders of Common
Shares out of the earnings and profits of the Company. The effect of such a
consent dividend (which, in conjunction with distributions actually paid, must
not be preferential to those holders who agree to such treatment) would be that
such holders would be treated for federal income tax purposes as if they had
received such amount in cash, and they then had immediately contributed such
amount back to the Company as additional paid-in capital. This would result in
taxable income to those holders without the receipt of any actual cash
distribution but would also increase their tax basis in their Common Shares by
the amount of the taxable income recognized.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a certain year by paying
"deficiency dividends" to shareholders in a later year that may be included in
the Company's deduction for distributions paid for the earlier year. Thus, the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be required to pay to the IRS interest
based upon the amount of any deduction taken for deficiency dividends.
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in any taxable
year and the relief provisions do not apply, the Company will be subject to tax
(including any applicable corporate alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which the Company fails to qualify will not be deductible by the Company, nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable to them as ordinary income, and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. It is not possible
to state whether in all circumstances the Company would be entitled to such
statutory relief.
Income Taxation of the Operating Partnership, the Title Holding Partnerships and
Their Partners
The following discussion summarizes certain Federal income tax
considerations applicable to the Company's investment in the Operating
Partnership and its subsidiary partnerships (referred to herein as the "Title
Holding Partnerships") .
Classification of the Operating Partnership and Title Holding Partnerships as
Partnerships
As of the date of this Prospectus, the Company owns all of the
Properties or the economic interests therein through the Operating Partnership.
The Company will be entitled to include in its income its distributive share of
the income and to deduct its distributive share of the losses of the Operating
Partnership (including the Operating Partnership's share of the income or losses
of the Title Holding Partnerships) only if the Operating Partnership and the
Title Holding Partnerships (collectively, the "Partnerships") are classified for
Federal income tax purposes as partnerships rather than as associations taxable
as corporations. For taxable periods prior to January 1, 1997, an organization
formed as a partnership was treated as a partnership for Federal income tax
purposes rather than as a corporation only if it had no more than two of the
four corporate characteristics that the Treasury Regulations used to distinguish
a partnership from a corporation for tax purposes. These four characteristics
were continuity of life, centralization of management, limited liability, and
free transferability of interests.
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Neither the Operating Partnership nor any of the Title Holding
Partnerships requested a ruling from the IRS that they would be treated as
partnerships for Federal income tax purposes. The Company received an opinion of
the Tax Advisor, which is not binding on the IRS, that the Operating Partnership
and the Title Holding Partnerships will each be treated as partnerships for
Federal income tax purposes and not as an association or publicly traded
partnership taxable as a corporation. The opinion of the Tax Advisor is based on
the provisions of the limited partnership agreement of the Operating Partnership
and the limited partnership agreements of the Title Holding Partnerships,
respectively, and certain factual assumptions and representations described in
the opinion.
Effective January 1, 1997, newly promulgated Treasury Regulations
eliminated the four-factor test described above and, instead, permit
partnerships and other non-corporate entities to be taxed as partnerships for
federal income tax purposes without regard to the number of corporate
characteristics possessed by such entity. Under those Regulations, both the
Operating Partnership and each of the Title Holding Partnerships will be
classified as partnerships for federal income tax purposes unless an affirmative
election is made by the entity to be taxed as a corporation. The Company has
represented that no such election has been made, or is anticipated to be made,
on behalf of the Operating Partnership or any of the Title Holding Partnerships.
Under a special transitional rule in the Treasury Regulations, the IRS will not
challenge the classification of an existing entity such as the Operating
Partnership or a Title Holding Partnership for periods prior to January 1, 1997
if: (i) the entity has a "reasonable basis" for its classification; (ii) the
entity and each of its members recognized the federal income tax consequences of
any change in classification of the entity made within the 60 months prior to
January 1, 1997; and (iii) neither the entity nor any of its members had been
notified in writing on or before May 8, 1996 that its classification was under
examination by the IRS. Neither the Operating Partnership nor any of the Title
Holding Partnerships changed their classification within the 60 month period
preceding May 8, 1996, nor was any one of them notified that their
classification as a partnership for federal income tax purposes was under
examination by the IRS.
If for any reason the Operating Partnership or a Title Holding
Partnership was classified as an association taxable as a corporation rather
than as a partnership for Federal income tax purposes, the Company would not be
able to satisfy the income and asset requirements for REIT status. See "--
Income Tests" and "--Asset Tests." In addition, any change in any such
Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur a tax liability without any related cash
distribution. See "--Annual Distribution Requirements." Further, items of income
and deduction of any such Partnership would not pass through to its partner
(e.g., the Company), and its partners would be treated as shareholders for tax
purposes. Any such Partnership would be required to pay income tax at corporate
tax 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.
Partnership Allocations
Although a partnership agreement will generally determine the
allocation of income and losses among partners, such allocations will be
disregarded for tax purposes if they do not comply with the provisions of
Section 704(b) and the Treasury Regulations promulgated thereunder, which
require that partnership allocations respect the economic arrangement of the
partners.
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. The Operating Partnership's
allocations of taxable income and loss are intended to comply with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations With Respect to Contributed Properties
The Company has represented that the fair market values of 98 of the
Properties contributed directly or indirectly to the Operating Partnership in
various transactions were different than the tax basis of such Properties.
Pursuant to Section 704(c) of the Code, items of 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 for Federal income tax purposes in a manner such that the
contributor is charged with or benefits from 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 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 (the "Pre-Contribution Gain or Loss"). The partnership agreement of
the Operating Partnership requires allocations of income, gain, loss and
deduction attributable to such contributed property to be made in a manner that
is consistent with Section 704(c) of the Code. Thus, if the Operating
Partnership sells contributed property at a gain or loss, such gain or loss will
be allocated to the contributing partners, and away from the Company, generally
to the extent of the Pre-Contribution Gain or Loss.
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The Treasury Department has issued final regulations under Section
704(c) of the Code (the "Regulations") which give partnerships great flexibility
in ensuring that a partner contributing property to a partnership receives the
tax benefits and burdens of any Pre-Contribution Gain or Loss attributable to
the contributed property. The Regulations permit partnerships to use any
"reasonable method" of accounting for Pre-Contribution Gain or Loss. The
Regulations specifically describe three reasonable methods, including (i) the
"traditional method" under current law, (ii) the traditional method with the use
of "curative allocations" which would permit distortions caused by
Pre-Contribution Gain or Loss to be rectified on an annual basis, and (iii) the
"remedial allocation method" which is similar to the traditional method with
"curative allocations." The Partnership Agreement permits the Company, as a
general partner, to select one of these methods to account for Pre-Contribution
Gain or Loss.
Depreciation
The Operating Partnership's assets other than cash consist largely of
appreciated property contributed by its partners. Assets contributed to a
partnership in a tax-free transaction generally retain the same depreciation
method and recovery period as they had in the hands of the partner who
contributed them to the partnership. Accordingly, the Operating Partnership's
depreciation deductions for its real property are based largely on the historic
tax depreciation schedules for the Properties prior to their contribution to the
Operating Partnership. The Properties are being depreciated over a range of 15
to 40 years using various methods of depreciation which were determined at the
time that each item of depreciable property was placed in service. Any real
property purchased by the Partnerships will be depreciated over 40 years. In
certain instances where a partnership interest rather than real property is
contributed to the Partnership, the real property may not carry over its
recovery period but rather may, similarly, be subject to the lengthier recovery
period.
Section 704(c) of the Code requires that depreciation as well as gain
and loss be allocated in a manner so as to take into account the variation
between the fair market value and tax basis of the property contributed. Thus,
because most of the property contributed to the Operating Partnerships is
appreciated, the Company will generally receive allocations of tax depreciation
in excess of its percentage interest in the Operating Partnership. Depreciation
with respect to any property purchased by the Operating Partnership subsequent
to the admission of its partners, however, will be allocated among the partners
in accordance with their respective percentage interests in the Partnerships.
As described above (see "--Tax Allocations with Respect to Contributed
Properties"), the Treasury Department's Regulations give partnerships
flexibility in ensuring that a partner contributing property to a partnership
receives the tax benefits and burdens of any Pre-Contribution Gain or Loss
attributable to the contributed property.
As described previously, the Company, as a general partner, may select
any permissible method to account for Pre-Contribution Gain or Loss. The use of
certain of these methods may result in the Company being allocated lower
depreciation deductions than if a different method were used. The resulting
higher taxable income and earnings and profits of the Company, as determined for
federal income tax purposes, should decrease the portion of distributions by the
Company which may be treated as a return of capital. See "- Annual Distribution
Requirements."
Basis in Operating Partnership Interest
The Company's adjusted tax basis in each of the partnerships in which
it has an interest generally (i) will be equal to the amount of cash and the
basis of any other property contributed to such partnership by the Company, (ii)
will be increased by (a) its allocable share of such partnership's income and
(b) its allocable share of any indebtedness of such partnership, and (iii) will
be reduced, but not below zero, by the Company's allocable share of (a) such
partnership's loss and (b) the amount of cash and the tax basis of any property
distributed to the Company and by constructive distributions resulting from a
reduction in the Company's share of indebtedness of such partnership.
-35-
If the Company's allocable share of the loss (or portion thereof) of
any partnership in which it has an interest would reduce the adjusted tax basis
of the Company's partnership interest in such partnership below zero, the
recognition of such loss will be deferred until such time as the recognition of
such loss (or portion thereof) would not reduce the Company's adjusted tax basis
below zero. To the extent that distributions from a partnership to the Company,
or any decrease in the Company's share of the nonrecourse indebtedness of a
partnership (each such decrease being considered a constructive cash
distribution to the partners), would reduce the Company's adjusted tax basis
below zero, such distributions (including such constructive distributions) would
constitute taxable income to the Company. Such distributions and constructive
distributions normally would be characterized as long-term capital gain if the
Company's interest in such partnership has been held for longer than the
long-term capital gain holding period (currently 12 months).
Sale of Partnership Property
Generally, any gain realized by a partnership on the sale of property
held by the partnership for more than 12 months will be long-term capital gain,
except for any portion of such gain that is treated as depreciation or cost
recovery recapture. However, under the requirements applicable to REITS under
the Code, the Company's share as a partner of any gain realized by the Operating
Partnership on the sale of any property held as inventory or other property held
primarily for sale to customers in the ordinary course of a trade or business
will be treated as income from a prohibited transaction that is subject to a
100% penalty tax. See "- Taxation of the Company as a REIT." Such prohibited
transaction income will also have an adverse effect upon the Company's ability
to satisfy the income tests for REIT status. See "-- Income Tests." Under
existing law, whether property is held as inventory or primarily for sale to
customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction. A safe harbor to avoid classification as a prohibited transaction
exists as to real estate assets held for the production of rental income by a
REIT for at least four years where in any taxable year the REIT has made no more
than seven sales of property or, in the alternative, the aggregate of the
adjusted bases of all properties sold does not exceed 10% of the adjusted bases
of all of the REIT's properties during the year and the expenditures includable
in a property's net sales price. The Company, as general partner of the
Operating Partnership, has represented that the Operating Partnership and the
Title Holding Partnerships intend to hold the Properties for investment with a
view to long-term appreciation, to engage in the business of acquiring,
developing, owning, and operating and leasing properties and to make such
occasional sales of the properties as are consistent with the Company's and the
Operating Partnership's investment objectives. No assurance can be given,
however, that every property sale by the Partnerships will constitute a sale of
property held for investment.
Taxation of Taxable Domestic Shareholders
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be dividends taxable
to such U.S. shareholders as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions that are designated
as long-term capital gain dividends will be taxed as long-term capital gains (to
the extent they do not exceed the Company's actual net capital gain for the
taxable year) without regard to the period for which the shareholder has held
its shares of beneficial interest. However, corporate shareholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares, but rather will reduce the adjusted
basis of such shares. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a shareholder's
shares, such distributions will be included in income as long-term capital gain
(or short-term capital gain if the shares have been held for 12 months or less)
assuming the shares are a capital asset in the hands of the shareholder. In
addition, any distribution declared by the Company in October, November or
December of any year payable to a shareholder of record on a specified date in
any such month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns any losses
of the Company.
-36-
For taxable years of the Company beginning after August 5, 1997, U.S.
shareholders holding Shares at the close of the Company's taxable year will be
required to include, in computing their long-term capital gains for the taxable
year in which the last day of the Company's taxable year falls, such amount as
the Company may designate in a written notice mailed to its shareholders. The
Company may not designate amounts in excess of the Company's undistributed net
capital gain for the taxable year. Each U.S. shareholder required to include
such a designated amount in determining such shareholder's long-term capital
gains will be deemed to have paid, in the taxable year of the inclusion, the tax
paid by the Company in respect of such undistributed net capital gains. U.S.
shareholders subject to these rules will be allowed a credit or a refund, as the
case may be, for the tax deemed to have been paid by such shareholders. U.S.
shareholders will increase their basis in their Shares by the difference between
the amount of such includable gains and the tax deemed paid by the shareholder
in respect of such gains.
In general, any loss upon a sale or exchange of shares by a shareholder
who has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent such
shareholder has received distributions from the Company required to be treated
as long-term capital gain.
Distributions from the Company and gain from the disposition of Common
Shares will not be treated as passive activity income and, therefore,
shareholders may not be able to apply any "passive losses" against such income.
Dividends from the Company (to the extent they do not constitute a return of
capital or capital gain dividends) and, on an elective basis, capital gain
dividends and gain from the disposition of Common Shares will generally be
treated as investment income for purposes of the investment income limitation.
Backup Withholding
The Company will report to its U.S. shareholders and the IRS the amount
of distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a shareholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid unless
such 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. A shareholder that does not provide the Company with his
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions to any shareholders who fail to
certify their non-foreign status to the Company. See "- Taxation of Foreign
Shareholders."
Taxation of Tax-Exempt Shareholders
Distributions by the Company to a shareholder that is a tax-exempt
entity should not constitute "unrelated business taxable income" ("UBTI"), as
defined in Section 512(a) of the Code provided that the tax-exempt entity has
not financed the acquisition of its shares with "acquisition indebtedness"
within the meaning of the Code and the shares are not otherwise used in an
unrelated trade or business of the tax-exempt entity.
In the case of a "qualified trust" (generally, a pension or
profit-sharing trust) holding shares in a REIT, the beneficiaries of such a
trust are treated as holding shares in the REIT in proportion to their actuarial
interests in the qualified trust, instead of treating the qualified trust as a
single individual (the "look-through exception"). A qualified trust that holds
more than 10 percent of the shares of a REIT is required to treat a percentage
of REIT dividends as UBTI if the REIT incurs debt to acquire or improve real
property. This rule applies, however, only if (i) the qualification of the REIT
depends upon the application of the "look through" exception (described above)
to the restriction on REIT shareholdings by five or fewer individuals, including
qualified trusts (see "Description of Shares of Beneficial Interest -
Restrictions on Transfer") and (ii) the REIT is "predominantly held" by
qualified trusts, i.e., if either (x) a single qualified trust holds more than
25 percent by value of the interests in the REIT or (y) one or more qualified
trusts, each owning more than 10 percent by value, holds in the aggregate more
than 50 percent of the interests in the REIT. The percentage of any dividend
paid (or treated as paid) to such a qualified trust that is treated as UBTI is
equal to the amount of modified gross income (gross income less directly
connected expenses) from the unrelated trade or business of the REIT (treating
the REIT as if it were a qualified trust), divided by the total modified gross
income of the REIT. A de minimis exception applies where the percentage is less
than 5 percent.
-37-
Taxation of Foreign Shareholders
The rules governing United States Federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders (collectively, "Non-U.S. Shareholders") are complex
and no attempt will be made herein to provide more than a summary of such rules.
Prospective Non-U.S. Shareholders should consult with their own tax advisors to
determine the impact of Federal, state and local income tax laws with regard to
an investment in Common Shares, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges
by the Company of United States real property interests and not designated by
the Company as capital gains dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions will ordinarily be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the Common Shares is treated as effectively connected with the
Non-U.S. Shareholder's conduct of a United States trade or business, the
Non-U.S. Shareholder generally will be subject to a tax at graduated rates, in
the same manner as U.S. shareholders are taxed with respect to such
distributions (and may also be subject to the 30% branch profits tax in the case
of a shareholder that is a foreign corporation). The Company expects to withhold
United States income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Shareholder unless (i) a lower treaty rate
applies or (ii) the Non-U.S. Shareholder files an IRS Form 4224 with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of current and accumulated earnings and profits of the Company will not
be taxable to a shareholder to the extent that such distributions do not exceed
the adjusted basis of the shareholder's shares, but rather will reduce the
adjusted basis of such shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
Non-Shareholder's shares, such distributions will give rise to tax liability if
the Non-U.S. Shareholder would otherwise be subject to tax on any gain from the
sale or disposition of his shares in the Company, as described below. If it
cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distributions will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable if it is subsequently determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of United
States real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
United States real property interests are taxed to a Non-U.S. Shareholder as if
such gain were effectively connected with a United States business. Non-U.S.
Shareholders would thus be taxed at the normal capital gain rates applicable to
U.S. shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate shareholder not entitled to treaty exemption.
The Company is required by applicable Treasury Regulations to withhold 35% of
any distribution that could be designated by the Company as a capital gains
dividend. The amount is creditable against the Non-U.S. Shareholder FIRPTA tax
liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the shares of beneficial
interest was held directly or indirectly by foreign persons. It is currently
anticipated that the Company will be a "domestically controlled REIT," and
therefore the sale of Shares will not be subject to taxation under FIRPTA.
However, because the Common Shares will be publicly traded, no assurance can be
given that the Company will continue to be a "domestically controlled REIT."
Gain not subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (i)
investment in the shares is effectively connected with the Non-U.S.
Shareholder's United States trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year, in which case the nonresident alien individual will be subject to
a 30% tax on the individual's capital gains. If the gain on the sale of Shares
were to be subject to taxation under FIRPTA, the Non-U.S. Shareholder would be
subject to the same treatment as U.S. shareholders with respect to such gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals).
-38-
Statement of Share Ownership
The Company is required to demand annual written statements from the
record holders of designated percentages of its Shares disclosing the actual
owners of the Shares. The Company must also maintain, within the Internal
Revenue District in which it is required to file its federal income tax return,
permanent records showing the information it has received as to the actual
ownership of such Shares and a list of those persons failing or refusing to
comply with such demand.
Other Tax Consequences
The Company, the Operating Partnership, the Title Holding Partnerships
and the Company's shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company,
the Operating Partnership, the Title Holding Partnerships and the Company's
shareholders may not conform to the Federal income tax consequences discussed
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the Company.
Possible Federal Tax Developments
The rules dealing with Federal income taxation are constantly under
review by the IRS, the Treasury Department and Congress. New Federal tax
legislation or other provisions may be enacted into law or new interpretations,
rulings, Treasury Regulations or court decisions could be adopted, all of which
could adversely affect the taxation of the Company or of its shareholders. No
prediction can be made as to the likelihood of passage of any new tax
legislation or other provisions or court decisions either directly or indirectly
affecting the Company or its shareholders. Consequently, the tax treatment
described herein may be modified prospectively or retroactively by legislative,
judicial or administrative action.
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for
public offering and sale by them or may sell the Securities directly to one or
more investors or through agents or through a combination of any of such
methods. Any such underwriter or agent involved in the offer and sale of the
Securities will be named in the applicable prospectus supplement.
The Company or underwriters may offer and sell the Securities at a
fixed price or prices, which may be changed, at prices related to the prevailing
market prices at the time of sale or at negotiated prices for cash or assets.
The Company also may, from time to time, authorize underwriters acting as their
agents to offer and sell the Securities upon the terms and conditions as are set
forth in the applicable prospectus supplement. In connection with the sale of
the Securities, underwriters may be deemed to have received compensation from
the Company in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of the Securities for whom they may act as
agent. Underwriters may sell Securities to or through dealers, and such dealers
may receive compensation in the form of discounts, concessions or commissions
from the underwriters and/or commissions from the purchasers for whom they may
act as agent.
Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of the Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth or described in the applicable prospectus supplement.
Underwriters, dealers and agents participating in the distribution of the
Securities may be deemed to be underwriters, and any discounts and commissions
received by them and any profit realized by them on resale of the Securities may
be deemed to be underwriting discounts and commissions under the Securities Act.
-39-
Underwriters, dealers and agents may be entitled, under agreements
entered into with the Company, to indemnification against and contribution
toward certain civil liabilities, including liabilities under the Securities
Act. In the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Unless otherwise specified in the related prospectus supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Shares which are listed on the NYSE. Any Common Shares
sold pursuant to a prospectus supplement will be listed on the NYSE, subject to
official notice of issuance. The Company may elect to list any series of
Preferred Shares or American Depository Receipts representing Depository Shares
on an exchange, but is not obligated to do so. It is possible that one or more
underwriters may make a market in a series of Securities, but will not be
obligated to do so and may discontinue any market making at any time without
notice. Therefore, no assurance can be given as to the liquidity of, or the
trading market for, the Securities.
If so indicated in the applicable prospectus supplement, the Company
will authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
at the public offering price set forth in such prospectus supplement pursuant to
Delayed Delivery Contracts ("Contracts") providing for payment and delivery on
the date or dates stated in such prospectus supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be subject
to the approval of the Company. Contracts will not be subject to any conditions
except: (i) the purchase by an institution of the Securities covered by its
Contracts shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject, and (ii)
if the Securities are being sold to underwriters, the Company shall have sold to
such underwriters the total principal amount of the Securities less the
principal amount thereof covered by Contracts.
Underwriters, dealers and agents and their affiliates may engage in
transactions with, or perform services for, or be tenants of, the Company and
its subsidiaries in the ordinary course of business.
EXPERTS
The audited financial statements and schedules (other than financial
statements identified in the next sentence) incorporated by reference in this
Prospectus and elsewhere in the Registration Statement to the extent and for the
periods indicated in their reports have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements with respect to 1000/2000 West Lincoln Drive,
3000 West Lincoln Drive and 4000/5000 West Lincoln Drive incorporated by
reference in this Prospectus from the Current Report on Form 8-K of the Company,
dated June 27, 1997, have been audited by Zelenkofske, Axelrod & Co., Ltd.,
independent public accountants, as indicated in their report and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
Future financial statements of the Company and the reports thereon of
the Company's independent public accountants also will be incorporated by
reference in this Prospectus in reliance upon the authority of that firm as
experts in giving those reports to the extent said firm has audited those
financial statements and consented to the use of their reports thereon.
LEGAL MATTERS
Unless otherwise set forth in a prospectus supplement, the validity of
the Securities offered will be passed upon for the Company by Pepper Hamilton
LLP, Philadelphia, Pennsylvania. Unless otherwise set forth in a prospectus
supplement, Pepper Hamilton LLP will rely on Ballard Spahr Andrews & Ingersoll,
LLP, Baltimore, Maryland, as to certain matters of Maryland law.
TAX MATTERS
The opinion regarding the statements in this Prospectus under the
caption "Federal Income Tax Considerations" has been rendered by Arthur Andersen
LLP, independent public accountants, and has been referred to in reliance upon
the authority of such firm as experts.
-40-
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PROSPECTUS
-----------------
BRANDYWINE REALTY TRUST
$663,129,026
Preferred Shares, Common Shares, Depositary Shares and Warrants
-----------------
February 9, 1999
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No dealer, salesperson or other individual has been authorized to give
any information or to make any representations not contained in this Prospectus
in connection with the offering covered by this Prospectus. If given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Selling Shareholders. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Common
Shares, in any jurisdiction where, or to any person to whom, it is unlawful to
make any such offer or solicitation. Neither the delivery of this Prospectus nor
any offer or sale made hereunder shall, under any circumstances, create an
implication that there has not been any change in the facts set forth in this
Prospectus or in the affairs of the Company since the date hereof.
================================================================================