e424b5
Filed Pursuant To Rule 424(b)(5)
Registration
No.: 333-112465
PROSPECTUS Supplement
(To Prospectus dated
April 2, 2004)
Investors Real Estate
Trust
6,000,000 Common Shares of
Beneficial Interest
We are a self-advised equity real estate investment trust that
owns and operates commercial office, medical, industrial and
retail properties and multi-family residential properties
located primarily in the upper Midwest.
We are offering 6,000,000 common shares of beneficial interest,
no par value. Our common shares are traded on the NASDAQ Global
Select Market under the symbol “IRETS.” On
October 17, 2007, the last reported sale price of our
common shares, as reported on the NASDAQ Global Select Market,
was $10.81 per share.
Investing in our common shares involves risks. See “Risk
Factors” beginning on page S-13 of this prospectus
supplement and in our Annual Report on
Form 10-K
for the fiscal year ended April 30, 2007, which is
incorporated herein by reference.
| |
|
|
|
|
|
|
|
|
|
|
|
Per
Share
|
|
|
Total
|
|
|
|
|
Public offering price
|
|
$
|
10.20
|
|
|
$
|
61,200,000
|
|
|
|
|
Underwriting discount
|
|
$
|
0.561
|
|
|
$
|
3,366,000
|
|
|
|
|
Proceeds, before expenses, to us
|
|
$
|
9.639
|
|
|
$
|
57,834,000
|
|
The underwriters have a
30-day
option to purchase up to an additional 900,000 common shares
from us on the same terms set forth above, to cover
over-allotments, if any.
In part so that we can continue to qualify as a “real
estate investment trust” under the federal income tax laws,
our declaration of trust generally does not permit anyone to own
more than 9.8% of our outstanding common shares. See
“Description of Common Shares” in the accompany
prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these
securities or determined if this prospectus supplement or the
accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
We expect to deliver the shares on or about October 23,
2007.
Robert W. Baird &
Co.
D.A. Davidson &
Co.
J.J.B. Hilliard, W.L. Lyons,
Inc.
October 17, 2007
Table
of Contents
| |
|
|
|
|
|
|
|
Page
|
|
|
|
Prospectus Supplement
|
|
|
|
|
S-1
|
|
|
|
|
|
S-2
|
|
|
|
|
|
S-2
|
|
|
|
|
|
S-4
|
|
|
|
|
|
S-13
|
|
|
|
|
|
S-14
|
|
|
|
|
|
S-15
|
|
|
|
|
|
S-15
|
|
|
|
|
|
S-31
|
|
|
|
|
|
S-32
|
|
|
|
|
|
S-32
|
|
|
|
|
|
S-32
|
|
|
|
|
Prospectus
|
|
|
|
|
i
|
|
|
|
|
|
1
|
|
|
|
|
|
1
|
|
|
|
|
|
1
|
|
|
|
|
|
3
|
|
|
|
|
|
9
|
|
|
|
|
|
9
|
|
|
|
|
|
14
|
|
|
|
|
|
14
|
|
|
|
|
|
14
|
|
|
|
|
|
15
|
|
|
|
|
|
16
|
|
(This page intentionally left
blank)
Special
Note Regarding Forward-Looking Statements
Certain statements included in this prospectus supplement, the
accompanying prospectus and the documents incorporated into this
prospectus supplement and the accompanying prospectus by
reference are “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, and Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange
Act. These forward-looking statements include statements about
our intention to invest in properties that we believe will
increase in income and value; our belief that the real estate
markets in which we invest will continue to perform well; our
belief that we have the liquidity and capital resources
necessary to meet our known obligations and to make additional
real estate acquisitions and capital improvements when
appropriate to enhance long term growth; and other statements
preceded by, followed by or otherwise including words such as
“believe,” “expect,” “intend,”
“project,” “anticipate,”
“potential,” “may,” “will,”
“designed,” “estimate,” “should,”
“continue” and other similar expressions. These
statements indicate that we have used assumptions that are
subject to a number of risks and uncertainties that could cause
our actual results or performance to differ materially from
those projected.
Although we believe that the expectations reflected in
forward-looking statements are based on reasonable assumptions,
you should not place undue reliance on our forward-looking
statements because the matters they describe are subject to
known and unknown risks, uncertainties and other unpredictable
factors, many of which are beyond our control. Important factors
that could cause our actual results to differ materially from
the expectations reflected in our forward-looking statements
include:
|
|
|
| |
n
|
the economic health of the markets in which we own and operate
multi-family and commercial properties, in particular, the
states of Minnesota and North Dakota, or other markets in which
we may invest in the future;
|
| |
| |
n
|
the economic health of our commercial tenants;
|
| |
| |
n
|
market rental conditions, including occupancy levels and rental
rates, for multi-family residential and commercial properties;
|
| |
| |
n
|
our ability to identify and secure additional multi-family
residential and commercial properties that meet our criteria for
investment;
|
| |
| |
n
|
the level and volatility of prevailing market interest rates and
the pricing of our shares of beneficial interest;
|
| |
| |
n
|
financing risks, such as our inability to obtain debt or equity
financing on favorable terms, or at all;
|
| |
| |
n
|
our ability to timely complete and
lease-up
properties under construction;
|
| |
| |
n
|
compliance with applicable laws, including those concerning the
environment and access by persons with disabilities;
|
| |
| |
n
|
the availability and cost of casualty insurance for
losses; and
|
| |
| |
n
|
other factors discussed under the heading “Risk
Factors” in this prospectus supplement, in our Annual
Report on
Form 10-K
for the year ended April 30, 2007 and other documents filed
with the Securities and Exchange Commission, or SEC, or
otherwise incorporated by reference into this prospectus
supplement.
|
In light of these uncertainties, the events anticipated by our
forward-looking statements might not occur and we caution you
not to place undue reliance on any of our forward-looking
statements. We undertake no obligation to update or revise our
forward-looking statements, whether as a result of new
information, future events or otherwise, and those statements
speak only as of the date made. The foregoing review of factors
that could cause our actual results to differ materially from
those contemplated in any forward-looking statements should not
be construed as exhaustive.
S-1
Documents
Incorporated By Reference
The SEC allows us to “incorporate by reference” our
publicly-filed reports into this prospectus supplement, which
means that information included in those reports is considered
part of this prospectus. Information that we file with the SEC
after the date of this prospectus will automatically update and
supersede the information contained in this prospectus
supplement and in prior reports. We incorporate by reference the
documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act until all of the securities offered pursuant to this
prospectus supplement have been sold. Unless expressly
incorporated into this prospectus supplement, a report, or part
of a report, furnished, but not filed, on
Form 8-K
under the Exchange Act shall not be incorporated by reference
into this prospectus supplement. The following documents filed
with the SEC are incorporated by reference in this prospectus
supplement:
|
|
|
| |
n
|
Our Annual Report on
Form 10-K
for the year ended April 30, 2007;
|
| |
| |
n
|
Our Quarterly Report on
Form 10-Q
for the quarter ended July 31, 2007; and
|
| |
| |
n
|
Our Current Reports on
Form 8-K
filed on May 16, 2007 and September 19, 2007.
|
You may request a copy of these documents, and any exhibits we
have specifically incorporated by reference as an exhibit in
this prospectus supplement, at no cost by writing us at the
following address or calling us at the telephone number listed
below:
Investors Real Estate Trust
12 Main Street South
Minot, ND 58701
Attn: Shareholder Relations
Telephone:
(701) 837-4738
Facsimile:
(701) 838-7785
You should rely only on the information provided or incorporated
by reference in this prospectus supplement. We have not, and the
underwriters have not, authorized anyone to provide you with
additional or different information. You should not assume that
the information in this prospectus supplement is accurate as of
any date other than the date on the front cover of the document.
About
this Prospectus Supplement
And the Accompanying Prospectus
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 and the terms of the common shares. 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. This prospectus supplement adds, updates and changes
information contained in the accompanying prospectus and the
information incorporated by reference. To the extent the
information contained in this prospectus supplement differs or
varies from the information contained in the accompanying
prospectus or any document incorporated by reference, the
information in this prospectus supplement shall control.
You should not assume that the information appearing in this
prospectus supplement and the accompanying prospectus is
accurate as of any date other than the date on the front of the
documents. Our business, financial condition, results of
operations and prospects may have changed since then. Updated
information may have been subsequently provided as explained
under “Where You Can Find More Information” in this
prospectus supplement and the accompanying prospectus.
It is important for you to read and consider all of the
information contained in this prospectus supplement and the
accompanying prospectus in making your decision to invest in our
common shares. You should also read and consider the information
in the documents we have referred you to in “Where You Can
Find More Information” in this prospectus supplement and
the accompanying prospectus.
You should rely only on the information contained or
incorporated by reference in this prospectus supplement and the
accompanying prospectus. We have not, and the underwriters have
not, authorized any other person to provide you with different
or additional information. If anyone provides you with different
or additional information, you should not rely on it.
We are not, and the underwriters are not, making an offer to
sell these securities in any jurisdiction where the offer or
sale is not permitted.
S-2
As used in this prospectus supplement and the accompanying
prospectus, references to “we,” “our,”
“us,” the “Company,” “IRET” and
similar references are to Investors Real Estate Trust and its
consolidated subsidiaries, unless otherwise expressly stated or
the context otherwise requires. References to “shares”
and to “common shares” or “Shares” are to
our common shares of beneficial interest, no par value.
References to “Series A preferred shares” are to
our 8.25% Series A Cumulative Redeemable Preferred Shares
of Beneficial Interest, no par value. References to “shares
of beneficial interest” are to all of our shares of
beneficial interest including, without limitation, our common
shares, our Series A preferred shares and any other shares
of beneficial interest that we may issue in the future.
S-3
Prospectus
Supplement Summary
This section summarizes information contained elsewhere in
this prospectus supplement and the accompanying prospectus and
does not contain all the information you should consider before
investing in our common shares. You should read this summary
together with the more detailed information appearing elsewhere
in this prospectus supplement, the accompanying prospectus or
incorporated by reference into this prospectus supplement and
the accompanying prospectus, including the section of this
prospectus supplement entitled “Risk Factors” before
making a decision to invest in our common shares. Unless
otherwise stated or the context otherwise requires, the
information contained in this prospectus supplement assumes that
the underwriters do not exercise their option to purchase
additional Shares to cover over-allotments.
We are a self-advised real estate investment trust, or REIT,
that owns and operates commercial office, medical, industrial
and retail properties and multi-family residential properties
located primarily in the upper Midwest. The charts below show,
as of July 31, 2007, the geographic distribution of our
properties and their classification by type, in both cases
measured on the basis of our investment in our properties
(original investment plus improvements, if any).
| |
|
|
|
Geographic
Distribution of Properties
|
|
Classification of
Properties by Type
|
|
|
|
|
|
As of July 31, 2007, our real estate portfolio consisted of:
|
|
|
| |
n
|
69 multi-family residential properties, containing 9,397
apartment units and having a total carrying amount (net of
accumulated depreciation and intangibles) of
$400.2 million; and
|
| |
| |
n
|
153 commercial properties, containing approximately
10.7 million square feet of leasable space and having a
total carrying amount (net of accumulated depreciation and
intangibles) of $930.6 million, as follows:
|
|
|
|
| |
–
|
65 office properties containing approximately 4.8 million
square feet of leasable space and having a total carrying amount
(net of accumulated depreciation and intangibles) of
$491.6 million;
|
| |
| |
–
|
35 medical properties (including senior housing/assisted living
facilities) containing approximately 1.7 million square
feet of leasable space and having a total carrying amount (net
of accumulated depreciation and intangibles) of
$252.3 million;
|
| |
| |
–
|
16 industrial properties containing approximately
2.7 million square feet of leasable space and having a
total carrying amount (net of accumulated depreciation and
intangibles) of $87.4 million; and
|
| |
| |
–
|
37 retail properties containing approximately 1.5 million
square feet of leasable space and having a total carrying amount
(net of accumulated depreciation and intangibles) of
$99.3 million.
|
S-4
Our commercial properties are typically leased to tenants under
long term lease arrangements, with no single tenant accounting
for more than approximately 6.3% of our total annualized
commercial rental revenues as of July 31, 2007. At
July 31, 2007, the economic occupancy rates for our
stabilized properties were as follows:
| |
|
|
|
|
|
Property
Type
|
|
Economic
Occupancy
|
|
|
|
Multi-family Residential
|
|
|
92.6%
|
|
|
Commercial Office
|
|
|
91.9%
|
|
|
Commercial Medical
|
|
|
96.0%
|
|
|
Commercial Industrial
|
|
|
98.3%
|
|
|
Commercial Retail
|
|
|
86.7%
|
|
Economic occupancy represents actual rental revenues recognized
for the period indicated as a percentage of scheduled rental
revenues for the period. Percentage rents, tenant concessions,
straightline adjustments and expense reimbursements are not
considered in computing either actual revenues or scheduled
revenues.
Our principal executive office is located at 12 Main Street
South, Minot, North Dakota, 58701, and our telephone number is
(701) 837-4738.
We seek to employ a disciplined investment strategy focused on
growing assets in our target geographical markets, achieving
diversification by property type, adhering to targeted returns
in acquiring properties, and regularly increasing funds from
operations. We believe this investment strategy has enabled us
to achieve our goal of regularly increasing distributions on our
Shares. We have increased our distributions per common share
every year since our inception 37 years ago and every
quarter since 1988.
We attempt to concentrate our multi-family residential
properties in communities with populations of approximately
50,000 to 500,000 and we attempt to concentrate our commercial
properties in metropolitan areas with populations of
approximately 100,000 to 3.0 million. We focus most of our
investment activity in markets in the upper Midwest, due to our
greater familiarity with these markets, our existing market
presence and our belief that these markets attract less
competition from other leading REITs and institutional
investors. As of July 31, 2007, approximately 55.8% of our
properties, measured by investment amount, net of accumulated
depreciation, are located in the greater Minneapolis/St. Paul
metropolitan area.
We continually receive, evaluate and identify opportunities for
the acquisition and development of commercial and multi-family
residential properties, particularly in the states in which we
currently own properties. These investment and development
opportunities are sourced through various channels, including
real estate brokers, property owners, property management firms
and our own business development efforts. In evaluating
commercial properties for acquisition, we consider factors that
include market size, economic and market rental conditions,
property type, property quality, existing occupancy and lease
rates, tenant makeup and quality, lease rollover risk and
current and prospective cash flow levels. In evaluating
multi-family residential properties for acquisition, we consider
factors that include market size and growth characteristics,
demographic considerations, apartment rental conditions and
trends, market rent and occupancy levels, property quality,
operating expense and maintenance considerations, property
occupancy rates and current and prospective cash flow levels.
Upon identifying properties that meet our investment criteria,
we conduct financial analyses, perform property inspections,
identify borrowing sources and terms and submit or negotiate
acquisition proposals on terms that we expect will allow us,
under reasonable assumptions, to meet our targeted investment
returns. In evaluating multi-family residential and commercial
development opportunities, we consider factors that include
property site location, access, soil conditions and other
physical characteristics of the site, market size and growth
characteristics, demographic considerations, existing property
development adjacent or near the site, prospective tenants and
cash flow levels.
Typically, we seek to acquire existing, well-maintained
properties that have a strong tenant base and lease or rental
revenues and terms that immediately support our return on
investment objectives. Due to varying market conditions over
time, this investment focus can lead to a greater concentration
of investment activity in certain property types during
particular market cycles. For instance, during the
12 months ended July 31, 2007, approximately 66.1% of
our property acquisitions, based on investment amount, were
commercial office properties, due to the greater availability of
these properties on terms that meet our return on investment
objectives. As market conditions evolve, however, this trend may
be reversed and we may again purchase a greater percentage of
multi-family residential properties, or commercial medical,
retail or industrial properties. We typically seek to develop
commercial properties when we have identified or secured an
anchor tenant for the
S-5
property. We typically seek to develop multi-family residential
properties when we have identified a community with attractive
economic and market rental conditions.
We generally use available cash or short-term floating rate debt
to acquire real estate. We then replace the cash or short-term
floating rate debt with fixed-rate secured debt, typically in an
amount equal to 65% to 75% of the acquisition cost. In
appropriate circumstances, we also may acquire one or more
properties in exchange for our shares of beneficial interest or
for limited partnership units, or LP units, of our operating
partnership, IRET Properties, which typically are redeemable for
our common shares on a one-to-one basis or, at our option, cash,
after the expiration of a minimum one-year holding period.
Subject to our continued ability to raise equity capital and
issue LP units of IRET Properties and obtain satisfactory
financing terms, we generally intend to acquire
$100 million to $200 million of real estate assets on
an annual basis. We generally finance development projects with
available cash or short-term floating rate debt, and re-finance
with fixed-rate secured debt, typically in an amount equal to
65% to 75% of the property’s appraised value.
We conduct our operations from offices in Minot, North Dakota;
Minneapolis, Minnesota and Omaha, Nebraska. We also have
property management offices in St. Louis, Missouri and
Kansas City, Kansas. In Minot, our
39-person
staff is engaged in activities that include management and
planning, financial analysis and accounting, marketing, property
sourcing and evaluation, legal and compliance, information
management and investor relations. In Minneapolis, our
12-person
staff is primarily engaged in sourcing, evaluating and managing
commercial properties in the Minneapolis/St. Paul metropolitan
area. In Omaha, Nebraska, our seven-person staff is engaged in
sourcing, evaluating and managing commercial properties in the
Omaha metropolitan area, and in managing our capital markets
activities.
The day-to-day management of our commercial properties is
carried out by our own employees and by third-party property
management companies. In markets where the amount of rentable
square footage we own does not justify self-management, when
properties acquired have effective pre-existing property
management in place, or when for other reasons particular
properties are in our judgment not attractive candidates for
self-management, we may utilize third-party professional
management companies for day-to-day management. As of
July 31, 2007, we have under internal management 79
commercial properties. The remaining 74 properties are managed
by third parties. The management and leasing of our multi-family
residential properties is handled by locally-based, third-party
management companies, which we believe allows us to benefit from
local knowledge of the applicable real estate markets.
The tables set forth below present summary financial information
regarding our commercial and multi-family residential properties.
Commercial and
Multi-Family Residential Properties by State
The following table presents, as of July 31, 2007, an
analysis by state of each of the five categories of properties
owned by us – multi-family residential and commercial
office, medical, industrial and retail:
Total Real Estate
by Investment Amount
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
As of
July 31, 2007
|
|
|
|
|
Multi-Family
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
Office
|
|
|
Medical
|
|
|
Industrial
|
|
|
Retail
|
|
|
Total
|
|
|
Total
%
|
|
|
|
|
Minnesota
|
|
$
|
138,158
|
|
|
$
|
346,401
|
|
|
$
|
215,388
|
|
|
$
|
62,175
|
|
|
$
|
71,917
|
|
|
$
|
834,039
|
|
|
|
54.8
|
%
|
|
North Dakota
|
|
|
116,444
|
|
|
|
16,709
|
|
|
|
9,705
|
|
|
|
7,141
|
|
|
|
25,062
|
|
|
|
175,061
|
|
|
|
11.5
|
%
|
|
Montana
|
|
|
40,344
|
|
|
|
–
|
|
|
|
1,551
|
|
|
|
–
|
|
|
|
5,270
|
|
|
|
47,165
|
|
|
|
3.1
|
%
|
|
Colorado
|
|
|
42,737
|
|
|
|
22,150
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
64,887
|
|
|
|
4.3
|
%
|
|
South Dakota
|
|
|
33,171
|
|
|
|
7,088
|
|
|
|
6,121
|
|
|
|
–
|
|
|
|
–
|
|
|
|
46,380
|
|
|
|
3.1
|
%
|
|
Texas
|
|
|
39,308
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
39,308
|
|
|
|
2.6
|
%
|
|
Nebraska
|
|
|
31,500
|
|
|
|
79,107
|
|
|
|
22,277
|
|
|
|
–
|
|
|
|
3,699
|
|
|
|
136,584
|
|
|
|
9.0
|
%
|
|
Kansas
|
|
|
42,299
|
|
|
|
14,676
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
56,975
|
|
|
|
3.7
|
%
|
|
All Other States
|
|
|
9,053
|
|
|
|
53,161
|
|
|
|
23,809
|
|
|
|
26,796
|
|
|
|
7,758
|
|
|
|
120,576
|
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
493,014
|
|
|
$
|
539,292
|
|
|
$
|
278,851
|
|
|
$
|
96,112
|
|
|
$
|
113,706
|
|
|
$
|
1,520,975
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-6
Comparison of
Results from Commercial and Residential Properties
The following table presents an analysis of the relative
investment in (corresponding to “Property owned” on
the balance sheet, i.e., cost), and the financial contribution
of (i.e., the net operating income produced by), our commercial
and multi-family residential properties over the past three
fiscal years.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Fiscal Years
Ended April 30
|
|
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
2005
|
|
|
%
|
|
|
|
|
Real Estate Investments – (cost)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Family Residential
|
|
$
|
489,644
|
|
|
|
32.9
|
%
|
|
$
|
452,251
|
|
|
|
35.6
|
%
|
|
$
|
442,109
|
|
|
|
37.5
|
%
|
|
Commercial Office
|
|
|
536,431
|
|
|
|
36.0
|
%
|
|
|
383,280
|
|
|
|
30.2
|
%
|
|
|
353,536
|
|
|
|
30.0
|
%
|
|
Commercial Medical
|
|
|
274,779
|
|
|
|
18.4
|
%
|
|
|
263,300
|
|
|
|
20.7
|
%
|
|
|
205,333
|
|
|
|
17.4
|
%
|
|
Commercial Industrial
|
|
|
75,257
|
|
|
|
5.1
|
%
|
|
|
59,583
|
|
|
|
4.7
|
%
|
|
|
58,233
|
|
|
|
4.9
|
%
|
|
Commercial Retail
|
|
|
113,176
|
|
|
|
7.6
|
%
|
|
|
111,009
|
|
|
|
8.8
|
%
|
|
|
120,645
|
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,489,287
|
|
|
|
100.0
|
%
|
|
$
|
1,269,423
|
|
|
|
100.0
|
%
|
|
$
|
1,179,856
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating
Income(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Family Residential
|
|
$
|
35,639
|
|
|
|
29.4
|
%
|
|
$
|
32,056
|
|
|
|
31.0
|
%
|
|
$
|
31,253
|
|
|
|
32.9
|
%
|
|
Commercial Office
|
|
|
43,140
|
|
|
|
35.6
|
%
|
|
|
33,921
|
|
|
|
32.8
|
%
|
|
|
29,123
|
|
|
|
30.6
|
%
|
|
Commercial Medical
|
|
|
26,108
|
|
|
|
21.5
|
%
|
|
|
23,356
|
|
|
|
22.6
|
%
|
|
|
19,246
|
|
|
|
20.2
|
%
|
|
Commercial Industrial
|
|
|
6,838
|
|
|
|
5.6
|
%
|
|
|
5,120
|
|
|
|
4.9
|
%
|
|
|
5,235
|
|
|
|
5.5
|
%
|
|
Commercial Retail
|
|
|
9,614
|
|
|
|
7.9
|
%
|
|
|
9,033
|
|
|
|
8.7
|
%
|
|
|
10,227
|
|
|
|
10.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
121,339
|
|
|
|
100.0
|
%
|
|
$
|
103,486
|
|
|
|
100.0
|
%
|
|
$
|
95,084
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
We define net operating income as
total revenues less property operating expenses and real estate
taxes. We believe that net operating income is an important
supplemental measure of operating performance for a real estate
investment trust’s operating real estate because it
provides a measure of core operations that is unaffected by
depreciation, amortization, financing and general and
administrative expense. Net operating income does not represent
cash generated by operating activities in accordance with
accounting principles generally accepted in the United States,
or GAAP, and should not be considered as an alternative to net
income, net income available to common shareholders or cash flow
from operating activities as a measure of financial performance.
A reconciliation of net operating income to income before
minority interest and discontinued operations and gain on sale
of other investments is as follows:
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Multi-Family
|
|
|
Commercial-
|
|
|
Commercial-
|
|
|
Commercial-
|
|
|
Commercial-
|
|
|
|
|
|
April 30,
2007
|
|
Residential
|
|
|
Office
|
|
|
Medical
|
|
|
Industrial
|
|
|
Retail
|
|
|
Total
|
|
|
|
|
Real estate revenue
|
|
$
|
67,214
|
|
|
$
|
73,640
|
|
|
$
|
34,783
|
|
|
$
|
8,091
|
|
|
$
|
14,089
|
|
|
$
|
197,817
|
|
|
Real estate expenses
|
|
|
31,575
|
|
|
|
30,500
|
|
|
|
8,675
|
|
|
|
1,253
|
|
|
|
4,475
|
|
|
|
76,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
$
|
35,639
|
|
|
$
|
43,140
|
|
|
$
|
26,108
|
|
|
$
|
6,838
|
|
|
$
|
9,614
|
|
|
$
|
121,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(58,450
|
)
|
|
Depreciation/amortization
|
|
|
(45,563
|
)
|
|
Administrative, advisory and trustee fees
|
|
|
(4,451
|
)
|
|
Operating expenses
|
|
|
(1,240
|
)
|
|
Non-operating income
|
|
|
2,665
|
|
|
|
|
|
|
|
|
Income before minority interest and discontinued
operations and gain on sale of other investments
|
|
$
|
14,300
|
|
|
|
|
|
|
|
S-7
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Multi-Family
|
|
|
Commercial-
|
|
|
Commercial-
|
|
|
Commercial-
|
|
|
Commercial-
|
|
|
|
|
|
April 30,
2006
|
|
Residential
|
|
|
Office
|
|
|
Medical
|
|
|
Industrial
|
|
|
Retail
|
|
|
Total
|
|
|
|
|
Real estate revenue
|
|
$
|
61,906
|
|
|
$
|
57,523
|
|
|
$
|
31,670
|
|
|
$
|
6,372
|
|
|
$
|
12,977
|
|
|
$
|
170,448
|
|
|
Real estate expenses
|
|
|
29,850
|
|
|
|
23,602
|
|
|
|
8,314
|
|
|
|
1,252
|
|
|
|
3,944
|
|
|
|
66,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
$
|
32,056
|
|
|
$
|
33,921
|
|
|
$
|
23,356
|
|
|
$
|
5,120
|
|
|
$
|
9,033
|
|
|
$
|
103,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(50,727
|
)
|
|
Depreciation/amortization
|
|
|
(37,698
|
)
|
|
Administrative, advisory and trustee fees
|
|
|
(3,894
|
)
|
|
Operating expenses
|
|
|
(1,269
|
)
|
|
Non-operating income
|
|
|
1,240
|
|
|
|
|
|
|
|
|
Income before minority interest and discontinued
operations and gain on sale of other investments
|
|
$
|
11,138
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Multi-Family
|
|
|
Commercial-
|
|
|
Commercial-
|
|
|
Commercial-
|
|
|
Commercial-
|
|
|
|
|
|
April 30,
2005
|
|
Residential
|
|
|
Office
|
|
|
Medical
|
|
|
Industrial
|
|
|
Retail
|
|
|
Total
|
|
|
|
|
Real estate revenue
|
|
$
|
58,702
|
|
|
$
|
48,604
|
|
|
$
|
25,424
|
|
|
$
|
6,459
|
|
|
$
|
13,748
|
|
|
$
|
152,937
|
|
|
Real estate expenses
|
|
|
27,449
|
|
|
|
19,481
|
|
|
|
6,178
|
|
|
|
1,224
|
|
|
|
3,521
|
|
|
|
57,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
$
|
31,253
|
|
|
$
|
29,123
|
|
|
$
|
19,246
|
|
|
$
|
5,235
|
|
|
$
|
10,227
|
|
|
$
|
95,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(47,393
|
)
|
|
Depreciation/amortization
|
|
|
(33,403
|
)
|
|
Administrative, advisory and trustee fees
|
|
|
(3,947
|
)
|
|
Operating expenses
|
|
|
(1,407
|
)
|
|
Non-operating income
|
|
|
986
|
|
|
|
|
|
|
|
|
Income before minority interest and discontinued
operations and gain on sale of other investments
|
|
$
|
9,920
|
|
|
|
|
|
|
|
We are currently in negotiations to acquire a portfolio of six
medical office buildings located in the greater Minneapolis,
Minnesota metropolitan area for approximately
$52.0 million. We expect to assume the sellers’
existing debt financing of approximately $29 million and
pay the approximately $23 million balance in cash
and/or
limited partnership units of our operating partnership, IRET
Properties. The purchase of these properties is subject to the
execution of a purchase agreement and, if such purchase
agreement is executed by all parties, the satisfactory
completion by us of due diligence and the satisfaction of other
customary closing conditions. There can be no assurance that we
will enter into the purchase agreement, or that this acquisition
will be completed on the general terms described above or at all.
We recently commenced construction on the following development
projects, scheduled for completion in fiscal years 2008 and 2009:
Southdale Medical Building Expansion
Project: In July 2007, we signed a lease with
an anchor tenant committing us to construct an approximately
26,000 square foot addition to our existing Southdale
Medical Building located in Edina, Minnesota. The estimated cost
of this expansion project is approximately $7.5 million,
with an additional approximately $2 million in relocation,
tenant improvement and leasing costs expected to be incurred to
relocate tenants in the existing facility. Construction began in
September 2007, and the expansion project is scheduled for
completion in July 2008.
2828 Chicago Avenue Medical
Building: During fiscal year 2007, we
committed to construct an approximately 56,000 square foot
medical office building adjacent to our existing
55,000 square foot, five-story Chicago Avenue medical
office building located in Minneapolis, Minnesota. This new
structure, and an adjoining parking ramp, have a planned project
completion date of August 2008 and an estimated total project
cost of $15.7 million. As of July 2007, approximately 60%
of this new medical office building has been pre-leased to an
anchor tenant. Construction on the project began in August 2007.
S-8
Cottonwood Apartments: During fiscal
year 2007, we began construction of a multi-family residential
property adjacent to three existing apartment buildings owned by
us in Bismarck, North Dakota. The
67-unit
Cottonwood IV apartment complex is expected to cost
approximately $6.1 million to construct, and is targeted
for completion in the third quarter of fiscal year 2008. As of
July 31, 2007, we have funded approximately
$2.6 million of the estimated construction cost of this
project. The project is scheduled to be completed by
January 1, 2008.
Minot Mixed-Use Project: We are in the
preliminary stages of construction of a mixed-use project on a
greenfield site in Minot, North Dakota, to consist of
approximately 67 apartments and 60,100 rentable square feet
of office and retail space. We currently expect that we will
move our Minot, North Dakota offices to this location, occupying
approximately one-third of the proposed office/retail space.
Current estimates are that the project would be completed in the
second quarter of our fiscal year 2009, at a total cost of
approximately $17.75 million. However, because we are in
the early stages of site work and construction, and further
design changes to the project are possible, the cost estimate is
not yet firm, and no assurances can be given that this project
will be completed as currently proposed.
We continually receive, evaluate and identify opportunities for
the acquisition and development of commercial and multi-family
residential properties, particularly in the states in which we
currently own properties. We believe that the above-described
projects are indicative of our current active acquisition and
development pipelines.
|
|
|
|
Shares Offered |
|
6,000,000 Shares(1) |
| |
|
Shares Outstanding After this Offering |
|
55,513,004 Shares(1)(2) |
| |
|
Restriction on Ownership and Transfer |
|
Our Shares are subject to certain restrictions on ownership and
transfer designed to preserve our qualification as a REIT for
federal income tax purposes. See “Description of Common
Shares” in the accompanying prospectus. |
| |
|
Use of Proceeds |
|
We estimate that the net proceeds we will receive from this
offering will be approximately $57.6 million, or
approximately $66.3 million if the underwriters exercise
their over-allotment option in full. We intend to contribute the
net proceeds to our operating partnership, IRET Properties, to
use for the acquisition, development, renovation, expansion or
improvement of income-producing real estate properties,
including the acquisition or development of the properties
described above under “Recent Developments.” |
| |
|
NASDAQ trading symbol |
|
IRETS |
|
|
|
|
(1)
|
|
Excludes 900,000 common shares that
we may issue upon exercise of the underwriters’
over-allotment option.
|
|
(2)
|
|
Based on 49,513,004 common shares
outstanding as of October 5, 2007; excludes 20,117,412
common shares issuable upon redemption of limited partnership
units of our operating partnership.
|
Summary
Consolidated Financial and Other Data
The following table sets forth summary consolidated financial
data, which should be read in conjunction with, and is qualified
by reference to, the consolidated financial statements and
related notes and Management’s Discussion and Analysis of
Financial Condition and Results of Operations incorporated by
reference into this prospectus supplement. Our summary
consolidated financial data as of and for each of the fiscal
years in the three-year period ended April 30, 2007, is
derived from our consolidated financial statements, which have
been audited by Deloitte & Touche LLP. Our summary
consolidated financial data as of July 31, 2007, and for
the three months ended July 31, 2007 and 2006 has been
derived from our unaudited financial statements. Our unaudited
financial statements have been prepared on the same basis as our
audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, that we
consider necessary
S-9
for a fair presentation of our financial position and our
results of operations for these periods. Operating results for
the three months ended July 31, 2007, are not necessarily
indicative of the results that may be expected for the full year.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31
|
|
|
Fiscal Year Ended
April 30
|
|
(In
thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
53,642
|
|
|
$
|
44,342
|
|
|
$
|
197,817
|
|
|
$
|
170,448
|
|
|
$
|
152,937
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
15,442
|
|
|
|
12,931
|
|
|
|
58,450
|
|
|
|
50,727
|
|
|
|
47,393
|
|
|
Depreciation/Amortization
|
|
|
12,205
|
|
|
|
9,929
|
|
|
|
44,481
|
|
|
|
36,953
|
|
|
|
32,973
|
|
|
Utilities and maintenance
|
|
|
9,967
|
|
|
|
7,851
|
|
|
|
36,920
|
|
|
|
32,706
|
|
|
|
26,698
|
|
|
Property management
|
|
|
3,848
|
|
|
|
3,251
|
|
|
|
13,854
|
|
|
|
11,809
|
|
|
|
10,401
|
|
|
Taxes
|
|
|
651
|
|
|
|
569
|
|
|
|
23,322
|
|
|
|
19,785
|
|
|
|
18,191
|
|
|
Other operating expenses
|
|
|
8,231
|
|
|
|
6,792
|
|
|
|
9,155
|
|
|
|
8,570
|
|
|
|
8,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
50,344
|
|
|
$
|
41,323
|
|
|
$
|
186,182
|
|
|
$
|
160,550
|
|
|
$
|
144,003
|
|
|
Operating income
|
|
$
|
3,298
|
|
|
$
|
3,019
|
|
|
$
|
11,635
|
|
|
$
|
9,898
|
|
|
$
|
8,934
|
|
|
Non-operating income
|
|
|
635
|
|
|
|
278
|
|
|
|
2,665
|
|
|
|
1,240
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before gain/loss on properties and minority interest
|
|
|
3,933
|
|
|
|
3,297
|
|
|
|
14,300
|
|
|
|
11,138
|
|
|
|
9,920
|
|
|
(Loss) gain on sale of other investments
|
|
|
(1
|
)
|
|
|
0
|
|
|
|
(38
|
)
|
|
|
23
|
|
|
|
3
|
|
|
Minority interest portion of joint ventures
|
|
|
36
|
|
|
|
12
|
|
|
|
26
|
|
|
|
(484
|
)
|
|
|
(379
|
)
|
|
Minority interest portion of operating partnership income
|
|
|
(987
|
)
|
|
|
(612
|
)
|
|
|
(3,229
|
)
|
|
|
(1,896
|
)
|
|
|
(1,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2,981
|
|
|
$
|
2,697
|
|
|
$
|
11,059
|
|
|
$
|
8,781
|
|
|
$
|
7,806
|
|
|
Discontinued operations, net
|
|
|
0
|
|
|
|
416
|
|
|
|
3,051
|
|
|
|
2,786
|
|
|
|
7,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,981
|
|
|
$
|
3,113
|
|
|
$
|
14,110
|
|
|
$
|
11,567
|
|
|
$
|
15,076
|
|
|
Dividends to preferred shareholders
|
|
|
(593
|
)
|
|
|
(593
|
)
|
|
|
(2,372
|
)
|
|
|
(2,372
|
)
|
|
|
(2,372
|
)
|
|
Net income available to common shareholders
|
|
|
2,388
|
|
|
|
2,520
|
|
|
|
11,738
|
|
|
|
9,195
|
|
|
|
12,704
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from
operations(1)
|
|
$
|
15,861
|
|
|
$
|
12,638
|
|
|
$
|
57,003
|
|
|
$
|
46,711
|
|
|
$
|
42,314
|
|
|
Cash distributions to holders of common shares and unitholders
|
|
|
8,609
|
|
|
|
7,038
|
|
|
|
31,123
|
|
|
|
27,530
|
|
|
|
25,241
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing and discontinued operations
|
|
$
|
.05
|
|
|
$
|
.05
|
|
|
$
|
.24
|
|
|
$
|
.20
|
|
|
$
|
.30
|
|
|
Funds from
operations(1)
|
|
|
.23
|
|
|
|
.21
|
|
|
|
.88
|
|
|
|
.79
|
|
|
|
.76
|
|
|
Cash distributions
|
|
|
.1665
|
|
|
|
.1645
|
|
|
|
.6610
|
|
|
|
.6530
|
|
|
|
.6450
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate investments, net
|
|
$
|
1,340,259
|
|
|
$
|
1,130,825
|
|
|
$
|
1,316,534
|
|
|
$
|
1,126,400
|
|
|
$
|
1,067,345
|
|
|
Total assets
|
|
|
1,441,066
|
|
|
|
1,213,288
|
|
|
|
1,435,389
|
|
|
|
1,207,315
|
|
|
|
1,151,158
|
|
|
Total liabilities
|
|
|
986,394
|
|
|
|
806,804
|
|
|
|
981,030
|
|
|
|
797,139
|
|
|
|
736,955
|
|
|
Minority interest in consolidated partnerships
|
|
|
12,818
|
|
|
|
16,342
|
|
|
|
12,925
|
|
|
|
16,403
|
|
|
|
15,860
|
|
|
Minority interests in operating partnership
|
|
|
159,477
|
|
|
|
102,258
|
|
|
|
156,465
|
|
|
|
104,213
|
|
|
|
103,171
|
|
|
Total shareholders’ equity
|
|
|
282,377
|
|
|
|
287,884
|
|
|
|
284,969
|
|
|
|
289,560
|
|
|
|
295,172
|
|
|
|
|
|
(1)
|
|
We consider funds from operations,
or FFO, a useful measure of performance for an equity REIT. We
use the definition of FFO adopted by the National Association of
Real Estate Investment Trusts, or NAREIT, in 1991, as clarified
in 1995, 1999 and 2002. NAREIT defines FFO to mean net income
(computed in accordance with GAAP), excluding gains (or losses)
from sales of depreciated property, plus depreciation and
amortization, and after
|
S-10
|
|
|
|
|
|
adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures will be calculated to reflect
FFO on the same basis. A reconciliation of FFO to net income
computed in accordance with GAAP is as follows:
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31
|
|
|
Fiscal Year Ended
April 30
|
|
(In thousands,
except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Net income
|
|
$
|
2,981
|
|
|
$
|
3,113
|
|
|
$
|
14,110
|
|
|
$
|
11,567
|
|
|
$
|
15,076
|
|
|
Less dividends to preferred shareholders
|
|
|
(593
|
)
|
|
|
(593
|
)
|
|
|
(2,372
|
)
|
|
|
(2,372
|
)
|
|
|
(2,372
|
)
|
|
Net income available to common shareholders
|
|
|
2,388
|
|
|
|
2,520
|
|
|
|
11,738
|
|
|
|
9,195
|
|
|
|
12,704
|
|
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in earnings of holders of LP units
|
|
|
987
|
|
|
|
733
|
|
|
|
4,299
|
|
|
|
2,705
|
|
|
|
3,873
|
|
|
Depreciation and
amortization(a)
|
|
|
12,485
|
|
|
|
10,205
|
|
|
|
45,568
|
|
|
|
38,104
|
|
|
|
34,342
|
|
|
(Gain) loss from depreciable property sales
|
|
|
1
|
|
|
|
(820
|
)
|
|
|
(4,602
|
)
|
|
|
(3,293
|
)
|
|
|
(8,605
|
)
|
|
Fully diluted FFO
|
|
|
15,861
|
|
|
|
12,638
|
|
|
|
57,003
|
|
|
|
46,711
|
|
|
|
42,314
|
|
|
Weighted averages shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
|
|
|
48,663
|
|
|
|
47,043
|
|
|
|
47,672
|
|
|
|
45,717
|
|
|
|
43,214
|
|
|
Common shares issuable to holders of
LP units(b)
|
|
|
20,284
|
|
|
|
13,762
|
|
|
|
17,017
|
|
|
|
13,329
|
|
|
|
12,621
|
|
|
Total
|
|
|
68,947
|
|
|
|
60,805
|
|
|
|
64,689
|
|
|
|
59,046
|
|
|
|
55,835
|
|
|
Net income per common
share(c)
|
|
$
|
.05
|
|
|
$
|
.05
|
|
|
$
|
.24
|
|
|
$
|
.20
|
|
|
$
|
.30
|
|
|
FFO per common share and LP
unit(c)
|
|
$
|
.23
|
|
|
$
|
.21
|
|
|
$
|
.88
|
|
|
$
|
.79
|
|
|
$
|
.76
|
|
|
|
|
|
(a)
|
|
Real estate depreciation and
amortization consists of the sum of depreciation/amortization
related to real estate investments and amortization related to
non-real estate investments from the Consolidated Statement of
Operations, and depreciation/amortization from Discontinued
Operations, less corporate-related depreciation and amortization
on office equipment and other assets.
|
|
(b)
|
|
LP units of IRET Properties
are redeemable at the option of the holder for cash or at our
option, common shares on a one-for-one basis.
|
|
(c)
|
|
Net income per common share is
calculated using the number of outstanding common shares. FFO
per common share is calculated using the number of common shares
outstanding and the number of common shares issuable to holders
of outstanding LP units.
|
While we use the NAREIT definition of FFO, the components of
that definition in many cases require interpretation and,
accordingly, we have made certain interpretations in applying
the definition. In particular, in calculating FFO per share, we
“add back” to net income computed in accordance with
GAAP the allocations made to limited partners of IRET
Properties, and divide this amount by the total outstanding
number of our common shares and limited partnership units, or LP
units, of IRET Properties. Under the partnership agreement
pursuant to which the LP units of IRET Properties are issued,
holders of LP units effectively have the same claim on our
earnings and assets as do the holders of our common shares and,
therefore, we consider that the LP units of IRET Properties also
should be included with the common shares in calculating FFO per
share.
While FFO is widely used by REITs as a primary performance
metric, not all real estate companies use the same definition of
FFO or calculate FFO in the same way. Accordingly, FFO presented
by us is not necessarily comparable to FFO presented by other
real estate companies.
FFO should not be considered as an alternative to net income as
determined in accordance with GAAP as a measure of our
performance, but rather should be considered as an additional,
supplemental measure. FFO does not represent cash generated from
operating activities in accordance with GAAP, and is not
necessarily indicative of sufficient cash flow to fund all of
our needs or our ability to service indebtedness or make
distributions.
S-11
Price
Range of Shares and Distribution History
Our common shares are traded on the NASDAQ Global Select Market,
or NASDAQ, under the symbol “IRETS.” At
September 30, 2007, there were approximately 4,136 record
holders of our common shares. The following table sets forth,
for the periods indicated, the range of the high and low sales
prices of our common shares on the NASDAQ.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
|
|
|
High
|
|
|
Low
|
|
|
per
Share
|
|
|
|
|
Fiscal Year 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
10.24
|
|
|
$
|
9.04
|
|
|
$
|
.1625
|
|
|
Second Quarter
|
|
|
10.16
|
|
|
|
8.85
|
|
|
|
.1630
|
|
|
Third Quarter
|
|
|
9.79
|
|
|
|
9.20
|
|
|
|
.1635
|
|
|
Fourth Quarter
|
|
|
9.67
|
|
|
|
9.11
|
|
|
|
.1640
|
|
|
Fiscal Year 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
9.50
|
|
|
|
8.85
|
|
|
|
.1645
|
|
|
Second Quarter
|
|
|
10.15
|
|
|
|
9.22
|
|
|
|
.1650
|
|
|
Third Quarter
|
|
|
10.68
|
|
|
|
9.65
|
|
|
|
.1655
|
|
|
Fourth Quarter
|
|
|
11.00
|
|
|
|
9.66
|
|
|
|
.1660
|
|
|
Fiscal Year 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
10.86
|
|
|
|
9.40
|
|
|
|
.1665
|
|
|
Second Quarter (through October 17, 2007)
|
|
|
11.59
|
|
|
|
9.35
|
|
|
|
.1670
|
|
The last reported sale price for our common shares on NASDAQ on
October 17, 2007 was $10.81 per share.
We have paid quarterly distributions since July 1, 1971.
Distributions are generally paid in January, April, July and
October of each year. Our last quarterly distribution of $.1670
per share was paid on October 1, 2007.
S-12
In addition to the other information contained or
incorporated by reference in this prospectus supplement or the
accompanying prospectus, including “Risk Factors” in
our Annual Report on
Form 10-K
for the fiscal year ended April 30, 2007, prospective
investors should consider carefully the following factors when
evaluating an investment in our Shares offered by this
prospectus supplement and the accompanying prospectus. You
should also review our disclosures under the heading
“Special Note Regarding Forward-Looking Statements” in
this prospectus supplement.
Risks Related to
this Offering and the Purchase of our Common Shares
Our future
growth depends, in part, on our ability to raise additional
equity capital, which will have the effect of diluting the
interests of the holders of our common shares.
Our future growth depends upon, among other things, our ability
to raise equity capital and issue limited partnership units of
IRET Properties. The issuance of additional common shares, and
of limited partnership units for which we subsequently issue
common shares upon the redemption of the limited partnership
units, will dilute the interests of holders of our common
shares. Additionally, sales of substantial amounts of our common
shares or preferred shares in the public market, or issuances of
our common shares upon redemption of limited partnership units
in our operating partnership, or the perception that such sales
or issuances might occur, could adversely affect the market
price of our common shares.
We may issue
additional classes or series of our shares of beneficial
interest with rights and preferences that are superior to the
rights and preferences of our common shares.
Without the approval of the holders of our common shares, our
board of trustees may establish additional classes or series of
our shares of beneficial interest, and such classes or series
may have dividend rights, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences
or other rights and preferences that are superior to the rights
of the holders of our common shares.
Payment of
distributions on our shares of beneficial interest is not
guaranteed.
Our board of trustees must approve our payment of distributions
and may elect at any time, or from time to time, and for an
indefinite duration, to reduce the distributions payable on our
shares of beneficial interest or to not pay distributions on our
shares of beneficial interest. Our board of trustees may reduce
distributions for a variety of reasons, including, but not
limited to, the following:
|
|
|
| |
n
|
operating and financial results below expectations that cannot
support the current distribution payment;
|
| |
| |
n
|
unanticipated costs or cash requirements; or
|
| |
| |
n
|
a conclusion that the payment of distributions would cause us to
breach the terms of certain agreements or contracts, such as
financial ratio covenants in our debt financing documents.
|
Our
distributions are not eligible for the lower tax rate on
dividends, except in limited situations.
The tax rate applicable to qualifying corporate dividends
received by certain non-corporate shareholders prior to 2010 has
been reduced to a maximum rate of 15%. This special tax rate is
generally not applicable to distributions paid by a REIT, unless
such distributions represent earnings on which the REIT itself
had been taxed. As a result, distributions (other than capital
gain distributions) paid by us to certain non-corporate
shareholders will generally be subject to the tax rates that are
otherwise applicable to ordinary income which, currently, are as
high as 35%. This change in law may make an investment in our
common shares comparatively less attractive relative to an
investment in the shares of other entities, which pay dividends
but are not formed as REITs.
Changes in
market conditions could adversely affect the price of our
shares.
As is the case with any publicly-traded securities, certain
factors outside of our control could influence the value of our
common shares. These conditions include, but are not limited to:
|
|
|
| |
n
|
market perception of REITs in general;
|
| |
| |
n
|
market perception of REITs relative to other investment
opportunities;
|
| |
| |
n
|
market perception of our financial condition, performance,
distributions and growth potential;
|
| |
| |
n
|
prevailing interest rates;
|
S-13
|
|
|
| |
n
|
general economic and business conditions;
|
| |
| |
n
|
government action or regulation, including changes in the tax
laws; and
|
| |
| |
n
|
relatively low trading volumes in securities of REITS.
|
Higher market
interest rates may adversely affect the market price of our
common shares, and low trading volume on the NASDAQ may prevent
the timely resale of our common shares.
One of the factors that investors may consider important in
deciding whether to buy or sell shares of a REIT is the
distribution with respect to such REIT’s shares as a
percentage of the price of those shares, relative to market
interest rates. If market interest rates rise, prospective
purchasers of REIT shares may expect a higher distribution rate
in order to maintain their investment. Higher market interest
rates would likely increase our borrowing costs and might
decrease funds available for distribution. Thus, higher market
interest rates could cause the market price of our common shares
to decline. In addition, although our common shares of
beneficial interest are listed on the NASDAQ, the daily trading
volume of our shares may be lower than the trading volume for
other companies. The average daily trading volume for the period
of May 1, 2006, through April 30, 2007, was
93,365 shares and the average monthly trading volume for
the period of May 1, 2006 through April 30, 2007 was
1,937,197 shares. As a result of this trading volume, an
owner of our common shares may encounter difficulty in selling
our shares in a timely manner and may incur a substantial loss.
We estimate that the net proceeds from the sale of our common
shares in this offering will be approximately
$57.6 million, or approximately $66.3 million if the
underwriters exercise their over-allotment option in full.
“Net proceeds” is what we expect to receive after
deducting the underwriting discount and our estimated expenses.
We currently plan to contribute the net proceeds of this
offering to our operating partnership, IRET Properties, to use
for the acquisition, development, renovation, expansion or
improvement of income-producing real estate properties,
including the properties referred to above under
“Prospectus Supplement Summary – Recent
Developments.” Pending use, the net proceeds of this
offering may be invested in short-term income-producing
investments, such as U.S. treasury bonds with terms of six
months or less.
S-14
The following table sets forth our capitalization as of
July 31, 2007 on an actual basis, and on a pro forma basis
to give effect to our receipt of approximately
$57.6 million in estimated net proceeds from our sale of
6,000,000 common shares in this offering. This table should be
read in conjunction with the consolidated financial statements
and related notes and Management’s Discussion and Analysis
of Financial Condition and Results of Operations incorporated by
reference into this prospectus supplement.
| |
|
|
|
|
|
|
|
|
|
|
|
July 31,
2007
|
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
(in
thousands)
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
Mortgages payable
|
|
$
|
960,086
|
|
|
$
|
960,086
|
|
|
Other
|
|
|
1,103
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
|
961,189
|
|
|
|
961,189
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred Shares of Beneficial Interest (Cumulative
redeemable preferred shares, no par value, 1,150,000 shares
issued and outstanding at July 31, 2007 and April 30,
2007, aggregate liquidation preference of $28,750,000)
|
|
|
27,317
|
|
|
|
27,317
|
|
|
Common Shares of Beneficial Interest (Unlimited
authorization, no par value, 48,893,074 shares issued and
outstanding at July 31, 2007, and 54,893,074 shares
issued and outstanding on a pro forma
basis)(1)
|
|
|
357,614
|
|
|
|
415,248
|
|
|
Accumulated distributions in excess of net income
|
|
|
(102,526
|
)
|
|
|
(102,526
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(28
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
282,377
|
|
|
|
340,011
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
1,243,566
|
|
|
$
|
1,301,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Does not include up to 20,117,412
common shares issuable upon exchange of outstanding limited
partnership units of our operating partnership.
|
Additional
Federal Income Tax Considerations
The following discussion summarizes the material federal income
tax consequences relating to our taxation as a REIT and to the
purchase, ownership and disposition of our common shares.
Pringle & Herigstad, P.C. has acted as our
special tax counsel in connection with this offering, has
reviewed this summary and is of the opinion that it accurately
describes the federal income tax consequences that are likely to
be material to a holder of our common shares. However, because
this is only a summary, it may not contain all of the
information that may be important in your specific
circumstances. As you review this discussion, you should keep in
mind that:
|
|
|
| |
n
|
the tax consequences to you may vary depending upon your
particular tax situation;
|
| |
| |
n
|
special rules that we do not discuss below may apply if, for
example, you are a tax-exempt organization, a broker-dealer, a
non-U.S. person,
a trust, an estate, a regulated investment company, a financial
institution, an insurance company or otherwise subject to
special tax treatment under the Internal Revenue Code;
|
| |
| |
n
|
this summary generally does not address state, local or
non-U.S. tax
considerations;
|
| |
| |
n
|
this summary deals only with shareholders that hold our common
shares as “capital assets” within the meaning of
Section 1221 of the Internal Revenue Code; and
|
| |
| |
n
|
we do not intend this discussion to be, and you should not
construe it as, tax advice.
|
You should review the following discussion and consult with
your own tax advisor to determine the effect of the acquisition,
ownership and disposition of our common shares on your
individual tax situation, including any state, local or
non-U.S. tax
consequences.
We base the information in this section on the current Internal
Revenue Code, current final, temporary and proposed Treasury
regulations, the legislative history of the Internal Revenue
Code, current administrative interpretations and practices
S-15
of the Internal Revenue Service (the “IRS”), including
its practices and policies as endorsed in private letter
rulings, which are not binding on the IRS, and existing court
decisions. Future legislation, regulations, administrative
interpretations and court decisions could change current law or
adversely affect existing interpretations of current law. Any
change could apply retroactively. It is possible that the IRS
could challenge the statements in this discussion, which do not
bind the IRS or the courts, and that a court could agree with
the IRS.
Taxation of
Investors Real Estate Trust as a REIT
We elected to be taxed as a REIT under the federal income tax
laws commencing with our taxable year ended April 30, 1971.
We believe that, commencing with such taxable year, we have been
organized and have operated in such a manner as to qualify for
taxation as a REIT under the Internal Revenue Code, and we
intend to continue to be organized and to operate in such a
manner. However, we cannot assure you that we have operated or
will operate in a manner so as to qualify or remain qualified as
a REIT. Qualification as a REIT depends on our continuing to
satisfy numerous asset, income, stock ownership and distribution
tests described below, the satisfaction of which depends, in
part, on our operating results. The sections of the Internal
Revenue Code relating to qualification and operation as a REIT,
and the federal income taxation of a REIT and its shareholders,
are highly technical and complex. The following discussion sets
forth only the material aspects of those sections. This summary
is qualified in its entirety by the applicable Internal Revenue
Code provisions and the related rules and regulations.
Federal Income
Taxation of Investors Real Estate Trust
In the opinion of Pringle & Herigstad, P.C., we
qualified to be taxed as a REIT for our taxable years ended
April 30, 2000 through April 30, 2007, and our
organization and current and proposed method of operation will
enable us to continue to qualify as a REIT for our taxable year
ending April 30, 2008 and in the future. Investors should
be aware that Pringle & Herigstad’s opinion is
based upon customary assumptions, is conditioned upon certain
representations made by us as to factual matters, including
representations regarding the nature of our properties and the
future conduct of our business, and is not binding upon the
Internal Revenue Service or any court. In addition,
Pringle & Herigstad’s opinion is based on
existing federal income tax law governing qualification as a
REIT, which is subject to change, possibly on a retroactive
basis. Moreover, our continued qualification and taxation as a
REIT depend upon our ability to meet on a continuing basis,
through actual annual operating results, certain qualification
tests set forth in the federal tax laws. Those qualification
tests involve the percentage of income that we earn from
specified sources, the percentage of our assets that falls
within specified categories, the diversity of our share
ownership, and the percentage of our earnings that we
distribute. While Pringle & Herigstad has reviewed
those matters in connection with the foregoing opinion,
Pringle & Herigstad will not review our compliance
with those tests on a continuing basis. Accordingly, no
assurance can be given that the actual results of our operations
for any particular taxable year will satisfy such requirements.
For a discussion of the tax consequences of our failure to
qualify as a REIT, see “– Failure to
Qualify.”
If we have qualified and continue to qualify for taxation as a
REIT, we generally will not be subject to federal corporate
income tax on that portion of our ordinary income or capital
gain that is timely distributed to shareholders. The REIT
provisions of the Internal Revenue Code generally allow a REIT
to deduct distributions paid to its shareholders, substantially
eliminating the federal “double taxation” on earnings
(that is, taxation at the corporate level when earned, and again
at the shareholder level when distributed) that usually results
from investments in a corporation. Nevertheless, we will be
subject to federal income tax as follows:
First, we will be taxed at regular corporate rates on our
undistributed “REIT taxable income,” including
undistributed net capital gains.
Second, under some circumstances, we may be subject to the
“alternative minimum tax” as a consequence of our
items of tax preference.
Third, if we have net income from the sale or other disposition
of “foreclosure property” that we hold primarily for
sale to customers in the ordinary course of business or other
non-qualifying income from foreclosure property, we will be
subject to tax at the highest corporate rate on such income.
Fourth, if we have 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.
S-16
Fifth, if we should fail to satisfy either the 75% gross income
test or the 95% gross income test (discussed below) but have
nonetheless maintained our qualification as a REIT because we
have met other requirements, we will be subject to a 100% tax on
the greater of the amount by which the 75% gross income test was
not satisfied or the amount by which the 95% gross income test
was not satisfied, in each case multiplied by a fraction
intended to reflect our profitability. The 100% tax is imposed
on (1) the gross income attributable to the greater of
(a) the amount by which we fail the 75% test or
(b) the amount by which 90% (or 95% commencing with taxable
years beginning on or after January 1, 2005) of our
gross income exceeds the amount of income qualifying for the 95%
income test, multiplied by (2) a fraction intended to
reflect our profitability.
Sixth, if we fail to satisfy any of the asset tests (described
below) (other than a de minimis failure of the 5% asset test or
the 10% vote or value test) or any of the REIT qualification
requirements other than the gross income and asset tests and
such failure is due to reasonable cause and not willful neglect,
we may avoid disqualification as a REIT by, among other things,
paying a penalty of $50,000 or more in certain cases.
Seventh, if we fail to distribute during each year at least the
sum of
|
|
|
| |
n
|
85% of our REIT ordinary income for such year,
|
| |
| |
n
|
95% of our capital gain net income for such year, and
|
| |
| |
n
|
any undistributed taxable income from prior periods,
|
then we will be subject to a 4% excise tax on the excess of this
required distribution amount over the amounts actually
distributed.
Eighth, if we should acquire any asset from a “C”
corporation (i.e., a corporation generally subject to full
corporate-level tax) in a carryover-basis transaction and no
election is made for the transaction to be currently taxable,
and we subsequently recognize gain on the disposition of such
asset during the
10-year
period beginning on the date on which we acquired the asset, we
generally will be subject to tax at the highest regular
corporate rate on the lesser of the amount of gain that we
recognize at the time of the sale or disposition and the amount
of gain that we would have recognized if we had sold the asset
at the time we acquired the asset, the “Built-in Gains
Tax.”
Ninth, if we own taxable REIT subsidiaries, we will be subject
to a 100% excise tax on transactions with them that are not
conducted on an arm’s-length basis. Currently we do not own
any direct or indirect interests in taxable REIT subsidiaries.
Tenth, we may elect to retain and pay income tax on our net
long-term capital gain. In that case, a U.S. shareholder
would be taxed in its proportionate share of our undistributed
long-term capital gain (to the extent that we make a timely
designation of such gain to the shareholder) and would receive a
credit or refund for its proportionate share of the tax we paid.
Requirements for
Qualification
To qualify as a REIT, we must elect to be treated as a REIT and
must meet the requirements, discussed below, relating to our
organization, sources of income, nature of assets and
distributions.
The Internal Revenue Code defines a REIT as a corporation, trust
or association:
|
|
|
| |
n
|
that is managed by one or more trustees or directors;
|
| |
| |
n
|
the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
|
| |
| |
n
|
that would be taxable as a domestic corporation but for
application of the REIT rules;
|
| |
| |
n
|
that is neither a financial institution nor an insurance company
subject to certain provisions of the Internal Revenue Code;
|
| |
| |
n
|
that has at least 100 persons as beneficial owners;
|
| |
| |
n
|
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, through the application of certain attribution
rules, by five or fewer individuals (as defined in the Internal
Revenue Code to include certain entities);
|
| |
| |
n
|
that files an election or continues such election to be taxed as
a REIT on its return for each taxable year;
|
S-17
|
|
|
| |
n
|
that (unless the entity qualified as a REIT for any taxable year
beginning on or before October 4, 1976, which is the case
with us) uses the calendar year as its taxable year and complies
with the recordkeeping requirements of the federal income tax
laws; and
|
| |
| |
n
|
that satisfies the income tests, the asset tests, and the
distribution tests, described below.
|
The Internal Revenue Code provides that REITs must satisfy all
of the first four preceding requirements during the entire
taxable year. REITs must satisfy the fifth requirement 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. For purposes of the sixth requirement, the
beneficiaries of a pension or profit-sharing trust described in
Section 401(a) of the Internal Revenue Code, and not the
pension or profit-sharing trust itself, are treated as REIT
shareholders. We will be treated as having met the sixth
requirement if we comply with certain Treasury Regulations for
ascertaining the ownership of our common shares for such year
and if we did not know (or after the exercise of reasonable
diligence would not have known) that the sixth condition was not
satisfied for such year. Our declaration of trust currently
includes restrictions regarding transfer of our common shares
that, among other things, assist us in continuing to satisfy the
fifth and sixth of these requirements.
If a REIT owns a corporate subsidiary that is a “qualified
REIT subsidiary,” the separate existence of that subsidiary
will be disregarded for federal income tax purposes. Generally,
a qualified REIT subsidiary is a corporation, other than a
taxable REIT subsidiary, all of the capital stock of which is
owned by the REIT. All assets, liabilities and items of income,
deduction and credit of the qualified REIT subsidiary will be
treated as assets, liabilities and items of income, deduction
and credit of the REIT itself for purposes of applying the
requirements herein. Our qualified REIT subsidiaries will not be
subject to federal corporate income taxation, although they may
be subject to state and local taxation in some states.
A REIT that is a partner in a partnership is deemed to own its
proportionate share of the assets of the partnership and to earn
its proportionate share of the partnership’s income, in
both cases being based on its relative capital interest in the
partnership. The character of the assets and gross income of the
partnership retain the same character in the hands of the REIT
for purposes of the gross income and asset tests. Thus, our
proportionate share of the assets, liabilities and items of
income of IRET Properties, our operating partnership (including
our operating partnership’s share of the assets,
liabilities and items of income with respect to any partnership
in which it holds an interest) is treated as our assets,
liabilities and items of income for purposes of applying the
requirements described herein.
A REIT is permitted to own up to 100% of the stock of one or
more “taxable REIT subsidiaries.” A taxable REIT
subsidiary is a fully taxable corporation that may earn income
that would not be qualifying income if earned directly by the
parent REIT. The subsidiary and the REIT must jointly elect to
treat the subsidiary as a taxable REIT subsidiary. A taxable
REIT subsidiary will pay income tax at regular corporate rates
on any income that it earns. In addition, the taxable REIT
subsidiary rules limit the deductibility of interest paid or
accrued by a taxable REIT subsidiary to its parent REIT to
assure that the taxable REIT subsidiary is subject to an
appropriate level of corporate taxation. Further, the rules
impose a
100% excise tax on transactions between a taxable REIT
subsidiary and its parent REIT or the REIT’s tenants that
are not conducted on an arm’s-length basis. Although we
previously owned an interest in a taxable REIT subsidiary,
currently we do not own any direct or indirect interests in
taxable REIT subsidiaries. However, it is possible that in the
future we may engage in activities indirectly through one or
more taxable REIT subsidiaries to obtain the benefit of income
or services that would jeopardize our REIT status if we engaged
in the activities directly.
Income Tests. In order to maintain
qualification as a REIT, we must satisfy two gross income
requirements. First, we must derive, directly or indirectly, at
least 75% of our gross income (excluding gross income from
prohibited transactions) for each taxable year from investments
relating to real property or mortgages on real property,
including “rents from real property,” gains on
disposition of real estate, dividends paid by another REIT and
interest on obligations secured by real property or on interests
in real property, or from certain types of temporary
investments. Second, we must derive at least
95% of our gross income (excluding gross income from prohibited
transactions) for each taxable year from any combination of
income qualifying under the 75% test and dividends, interest,
and gain from the sale or disposition of stock or securities.
For taxable years beginning on or after January 1, 2005,
any income from a hedging transaction that is clearly and timely
identified and hedges indebtedness incurred or to be incurred to
acquire or carry real estate assets will not constitute gross
income, rather than being treated as qualifying or nonqualifying
income, for purposes of the 95% gross income test.
Rents that we receive will qualify as “rents from real
property” in satisfying the gross income requirements for a
REIT described above 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 but can be based on a fixed
percentage of gross receipts or gross sales. Second, “rents
from real property” generally excludes any amount received
directly or indirectly from any tenant if we, or an owner of 10%
of more of our outstanding shares, directly or constructively,
own 10% or more of such tenant taking into consideration the
applicable attribution rules, which we refer to as a
“related party tenant.” Third, “rents from real
property” excludes rent attributable to
S-18
personal property except where such personal property is leased
in connection with a lease of real property and the rent
attributable to such personal property is less than or equal to
15% of the total rent received under the lease. The rent
attributable to personal property under a lease is the amount
that bears the same ratio to total rent under the lease for the
taxable year as the average of the fair market values of the
leased personal property at the beginning and at the end of the
taxable year bears to the average of the aggregate fair market
values of both the real and personal property covered by the
lease at the beginning and at the end of such taxable year.
Finally, amounts that are attributable to services furnished or
rendered in connection with the rental of real property, whether
or not separately stated, will not constitute “rents from
real property” unless such services are customarily
provided in the geographic area. Customary services that are not
considered to be provided to a particular tenant (e.g.,
furnishing heat and light, the cleaning of public entrances, and
the collection of trash) can be provided directly by us. Where,
on the other hand, such services are provided primarily for the
convenience of the tenants or are provided to such tenants, such
services must be provided by an independent contractor from whom
we do not receive any income or a taxable REIT subsidiary.
Non-customary services that are not performed by an independent
contractor or taxable REIT subsidiary in accordance with the
applicable requirements will result in impermissible tenant
service income to us to the extent of the income earned (or
deemed earned) with respect to such services. If the
impermissible tenant service income exceeds 1% of our total
income from a property, all of the income from that property
will fail to qualify as rents from real property. If the total
amount of impermissible tenant services does not exceed 1% of
our total income from the property, the services will not cause
the rent paid by tenants of the property to fail to qualify as
rents from real property, but the impermissible tenant services
income will not qualify as “rents from real property.”
We do not currently charge and do not anticipate charging rent
that is based in whole or in part on the income or profits of
any person (unless based on a fixed percentage or percentages of
receipts or sales, as is permitted). We also do not anticipate
either deriving rent attributable to personal property leased in
connection with real property that exceeds 15% of the total
rents or receiving rent from related party tenants.
The operating partnership does provide some services with
respect to our properties. We believe that the services with
respect to our properties that are and will be provided directly
are usually or customarily rendered in connection with the
rental of space for occupancy only and are not otherwise
considered rendered to particular tenants and, therefore, that
the provision of such services will not cause rents received
with respect to the properties to fail to qualify as rents from
real property. Services with respect to the properties that we
believe may not be provided by us or the operating partnership
directly without jeopardizing the qualification of rent as
“rents from real property” are and will be performed
by independent contractors or taxable REIT subsidiaries.
We may, directly or indirectly, receive fees for property
management and brokerage and leasing services provided with
respect to some properties not owned entirely by the operating
partnership. These fees, to the extent paid with respect to the
portion of these properties not owned, directly or indirectly,
by us, will not qualify under the 75% gross income test or the
95% gross income test. The operating partnership also may
receive other types of income with respect to the properties it
owns that will not qualify for either of these tests. We
believe, however, that the aggregate amount of these fees and
other non-qualifying income in any taxable year will not cause
us to exceed the limits on non-qualifying income under either
the 75% gross income test or the 95% gross income test.
Tenants may be required to pay, besides base rent,
reimbursements for certain amounts we are obligated to pay to
third parties (such as a lessee’s proportionate share of a
property’s operational or capital expenses), penalties for
nonpayment or late payment of rent or additions to rent. These
and other similar payments should qualify as “rents from
real property.” To the extent they do not, they should be
treated as interest that qualifies for the 95% gross income test.
We will be subject to tax at the maximum corporate rate on any
income from foreclosure property, other than income that
otherwise would be qualifying income for purposes of the 75%
gross income test, less expenses directly connected with the
production of that income. However, gross income from
foreclosure property will qualify under the 75% and 95% gross
income tests. “Foreclosure property” is any real
property, including interests in real property, and any personal
property incident to such real property that is acquired by a
REIT as the result of such REIT having bid on the property at
foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law after
actual or imminent default on a lease of the property or on
indebtedness secured by the property (any such proceeding or
agreement referred to as a “Repossession Action”).
Property acquired by a Repossession Action will not be
considered “foreclosure property” if (a) the REIT
held or acquired the property subject to a lease or securing
indebtedness for sale to customers in the ordinary course of
business or (b) the lease or loan was acquired or entered
into with intent to take Repossession Action or in circumstances
where the REIT had reason to know a default would occur. The
determination of such intent or reason to know must be based on
all relevant facts and circumstances. In no case will property
be considered “foreclosure property” unless the REIT
makes a proper election to treat the property as foreclosure
property.
S-19
A REIT will not be considered to have foreclosed on a property
where the REIT takes control of the property as a
mortgagee-in-possession
and cannot receive any profit or sustain any loss except as a
creditor of the mortgagor. Property generally ceases to be
foreclosure property at the end of the third taxable year
following the taxable year in which the REIT acquired the
property (or longer if an extension is granted by the Secretary
of the Treasury). This period (as extended, if applicable)
terminates, and foreclosure property ceases to be foreclosure
property on the first day:
|
|
|
| |
n
|
on which a lease is entered into for the property that, by its
terms, will give rise to income that does not qualify for
purposes of the 75% gross income test, or any amount is received
or accrued, directly or indirectly, pursuant to a lease entered
into on or after such day that will give rise to income that
does not qualify for purposes of the
75% gross income test;
|
| |
| |
n
|
on which any construction takes place on the property, other
than completion of a building or, any other improvement, where
more than 10% of the construction was completed before default
became imminent; or
|
| |
| |
n
|
which is more than 90 days after the day on which the REIT
acquired the property and the property is used in a trade or
business which is conducted by the REIT, other than through an
independent contractor from whom the REIT itself does not derive
or receive any income.
|
From time to time, we may enter into hedging transactions with
respect to our assets or liabilities. Our hedging activities may
include entering into interest rate swaps, caps, and floors,
options to purchase such items, and futures and forward
contracts. For taxable years beginning prior to January 1,
2005, any periodic income or gain from the disposition of any
financial instrument for these or similar transactions to hedge
indebtedness we incurred to acquire or carry “real estate
assets” was qualifying income for purposes of the 95% gross
income test, but not the 75% gross income test. To the extent we
hedged with other types of financial instruments, or in other
situations, it is not entirely clear how the income from those
transactions should have been treated for the gross income
tests. For taxable years beginning on or after January 1,
2005, taxable year, income and gain from “hedging
transactions” will be excluded from gross income for
purposes of the 95% gross income test, but not the 75% gross
income test. For those taxable years, a “hedging
transaction” means any transaction entered into in the
normal course of our trade or business primarily to manage the
risk of interest rate, price changes, or currency fluctuations
with respect to borrowings made or to be made, or ordinary
obligations incurred or to be incurred, to acquire or carry real
estate assets. We will be required to clearly identify any such
hedging transaction before the close of the day on which it was
acquired, originated, or entered into and to satisfy other
identification requirements. We intend to structure any hedging
or similar transactions so as not to jeopardize our status as a
REIT.
The term “interest” generally does not include any
amount received or accrued, directly or indirectly, if the
determination of the amount depends in whole or in part on the
income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term
“interest” solely because it is based on a fixed
percentage or percentages of receipts or sales. Furthermore, to
the extent that interest from a loan that is based on the profit
or net cash proceeds from the sale of the property securing the
loan constitutes a “shared appreciation provision,”
income attributable to such participation feature will be
treated as gain from the sale of the secured property.
If we fail to satisfy the 75% gross income test or the 95% gross
income test for any taxable year, we may nevertheless qualify as
a REIT for that year if we are eligible for relief under the
Internal Revenue Code. For taxable years beginning prior to
January 1, 2005, the relief provisions generally will be
available if:
|
|
|
| |
n
|
our failure to meet these tests was due to reasonable cause and
not due to willful neglect;
|
| |
| |
n
|
we file a disclosure schedule with the IRS after we determine
that we have not satisfied one of the gross income
tests; and
|
| |
| |
n
|
any incorrect information on the schedule is not due to fraud
with intent to evade tax.
|
Commencing with taxable years beginning on or after
January 1, 2005, those relief provisions will be available
if:
|
|
|
| |
n
|
our failure to meet these tests is due to reasonable cause and
not to willful neglect; and
|
| |
| |
n
|
we file a disclosure schedule with the IRS after we determine
that we have not satisfied one of the gross income tests in
accordance with regulations prescribed by the Secretary of the
Treasury.
|
We cannot state whether in all circumstances we would be
entitled to the benefit of this relief provision. For example,
if we fail to satisfy the gross income tests because
non-qualifying income that we intentionally earn exceeds the
limits on such income, the IRS could conclude that our failure
to satisfy the tests was not due to reasonable cause. Even if
this relief provision applies, the Internal Revenue Code imposes
a 100% tax with respect to a portion of the non-qualifying
income, as described above.
S-20
Asset Tests. At the close of each quarter of
our taxable year, we also must satisfy four tests relating to
the nature and diversification of our assets:
|
|
|
| |
n
|
At least 75% of the value of our total assets must be
represented by real estate assets (including interests in real
property, interests in mortgages on real property, and stock in
other REITs), cash and cash items (including receivables),
government securities and investments in stock or debt
instruments during the one year period following our receipt of
new capital that we raise through equity offerings or public
offerings of debt with at least a
five-year-term.
|
| |
| |
n
|
No more than 25% of the value of our total assets may be
represented by securities other than those in the
75% asset class.
|
| |
| |
n
|
Except for equity investments in REITs, qualified REIT
subsidiaries or taxable REIT subsidiaries or other securities
that qualify as “real estate assets” for purposes of
the 75% asset test:
|
|
|
|
| |
n
|
the value of any one issuer’s securities that we own may
not exceed 5% of the value of our total assets;
|
| |
| |
n
|
we may not own more than 10% of any one issuer’s
outstanding voting securities; and
|
| |
| |
n
|
we may not own more than 10% of the value of the outstanding
securities of any one issuer.
|
|
|
|
| |
n
|
No more than 20% of our total assets may be represented by
securities of one of more taxable REIT subsidiaries.
|
Certain types of securities are disregarded as securities for
purposes of the 10% value limitation discussed above, including
(i) straight debt securities (including straight debt that
provides for certain contingent payments); (ii) any loan to
an individual or an estate; (iii) any rental agreement
described in Section 467 of the Internal Revenue Code,
other than with a ”related person”; (iv) any
obligation to pay rents from real property; (v) certain
securities issued by a State or any political subdivision
thereof, the District of Columbia, a foreign government, or any
political subdivision thereof, or the Commonwealth of Puerto
Rico; (vi) any security issued by a REIT; and
(vii) any other arrangement that, as determined by the
Secretary of the Treasury, is excepted from the definition of a
security. In addition, (a) a REIT’s interest as a
partner in a partnership is not considered a
”security” for purposes of applying the 10% value test
to securities issued by the partnership; (b) any debt
instrument issued by a partnership (other than straight debt or
another excluded security) will not be considered a security
issued by the partnership if at least 75% of the
partnership’s gross income (excluding income from
prohibited transactions) is derived from sources that would
qualify for the 75% REIT gross income test, and (c) any
debt instrument issued by a partnership (other than straight
debt or another excluded security) will not be considered a
security issued by the partnership to the extent of the
REIT’s interest as a partner in the partnership. For
taxable years beginning after October 22, 2004, special
look-through rules apply for determining a REIT’s share of
securities held by a partnership in which the REIT holds an
interest.
We believe that substantially all of our assets consist of
(1) real properties, (2) stock or debt investments
that earn qualified temporary investment income, (3) other
qualified real estate assets, and (4) cash, cash items and
government securities. We monitor the status of our assets for
purposes of the various asset tests, and manage our portfolio in
order to comply with such tests.
After initially meeting the asset tests at the close of any
quarter, we will not lose our qualification 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, we can cure the
failure by disposing of a sufficient amount of non-qualifying
assets within 30 days after the close of that quarter. We
intend to maintain adequate records of the value of our assets
to ensure compliance with the asset tests and to take such other
actions within 30 days after the close of any quarter as
necessary to cure any noncompliance.
Commencing with taxable years beginning on or after
January 1, 2005, after the
30-day cure
period, a REIT may avoid disqualification as a REIT by disposing
of sufficient assets to cure a violation that does not exceed
the lesser of 1% of the REIT’s assets at the end of the
relevant quarter or $10,000,000, provided that the disposition
occurs within six months following the last day of the quarter
in which the REIT first identified the assets causing the
violation. For violations of any of the REIT asset tests due to
reasonable cause that are larger than this amount, a REIT may
avoid disqualification as a REIT after the
30-day cure
period, if such failure was due to reasonable cause and not due
to willful neglect, by taking certain steps, including the
disposition of sufficient assets within the six month period
described above to meet the applicable asset test, paying a tax
equal to the greater of $50,000 or the highest corporate tax
rate multiplied by the net income generated by the
non-qualifying assets during the period of time that the assets
were held as non-qualifying assets, and filing a schedule with
the IRS that describes the non-qualifying assets.
S-21
Annual
Distribution Requirements
To qualify for taxation as a REIT, the Internal Revenue Code
requires that we make distributions (other than capital gain
distributions) to our shareholders in an amount at least equal
to (a) the sum of: (1) 90% of our “REIT taxable
income” (computed without regard to the dividends paid
deduction and our net capital gain or loss), and (2) 90% of
the net income, if any, from foreclosure property in excess of
the special tax on income from foreclosure property, minus
(b) the sum of certain items of non-cash income.
We must pay distributions in the taxable year to which they
relate. Dividends paid in the subsequent calendar year, however,
will be treated as if paid in the prior calendar year for
purposes of the prior year’s distribution requirement if
the dividends satisfy one of the following two sets of criteria:
|
|
|
| |
n
|
We declare the dividends in October, November or December, the
dividends are payable to shareholders of record on a specified
date in such a month, and we actually pay the dividends during
January of the subsequent year; or
|
| |
| |
n
|
We declare the dividends before we timely file our federal
income tax return for such year, we pay the dividends in the
12-month
period following the close of the prior year and not later than
the first regular dividend payment after the declaration, and we
elect on our federal income tax return for the prior year to
have a specified amount of the subsequent dividend treated as if
paid in the prior year.
|
Even if we satisfy the foregoing distribution requirements, we
will be subject to tax thereon to the extent that we do not
distribute all of our net capital gain or “REIT taxable
income” as adjusted. Furthermore, if we fail to distribute
at least the sum of 85% of our ordinary income for that year;
95% of our capital gain net income for that year; and any
undistributed taxable income from prior periods, we would be
subject to a 4% non-deductible excise tax on the excess of the
required distribution over the amounts actually distributed.
In addition, if during the
10-year
recognition period, we dispose of any asset subject to the
built-in gain rules described above, we must, pursuant to
guidance issued by the IRS, distribute at least 90% of the
built-in gain (after tax), if any, recognized on the disposition
of the asset.
We may elect to retain rather than distribute all or a portion
of our net capital gains and pay the tax on the gains. In that
case, we may elect to have our shareholders include their
proportionate share of the undistributed net capital gains in
income as long-term capital gains and receive a credit for their
share of the tax we paid. For purposes of the 4% excise tax
described, any such retained amounts would be treated as having
been distributed.
We intend to make timely distributions sufficient to satisfy the
annual distribution requirements. We expect that our REIT
taxable income will be less than our cash flow due to the
allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, we anticipate that
we generally will have sufficient cash or liquid assets to
enable us to satisfy the 90% distribution requirement. It is
possible, however, that we, from time to time, may not have
sufficient cash or other liquid assets to meet the 90%
distribution requirement or to distribute such greater amount as
may be necessary to avoid income and excise taxation. In this
event, we may find it necessary to arrange for borrowings or, if
possible, pay taxable dividends in order to meet the
distribution requirement or avoid such income or excise taxation.
In the event that we are subject to an adjustment to our REIT
taxable income (as defined in Section 860(d)(2) of the
Internal Revenue Code) resulting from an adverse determination
by either a final court decision, a closing agreement between us
and the IRS under Section 7121 of the Internal Revenue
Code, or an agreement as to tax liability between us and an
IRS district director, or, an amendment or supplement to our
federal income tax return for the applicable tax year, we may be
able to rectify any resulting failure to meet the 90% annual
distribution requirement by paying “deficiency
dividends” to shareholders that relate to the adjusted year
but that are paid in a subsequent year. To qualify as a
deficiency dividend, we must make the distribution within
90 days of the adverse determination and we also must
satisfy other procedural requirements. If we satisfy the
statutory requirements of Section 860 of the Internal
Revenue Code, a deduction is allowed for any deficiency dividend
we subsequently paid to offset an increase in our REIT taxable
income resulting from the adverse determination. We, however,
must pay statutory interest on the amount of any deduction taken
for deficiency dividends to compensate for the deferral of the
tax liability.
Recordkeeping
Requirements
We must maintain certain records in order to qualify as a REIT.
In addition, to avoid paying a penalty, we must request on an
annual basis information from our shareholders designed to
disclose the actual ownership of our outstanding shares. We have
complied and intend to continue to comply with these
requirements.
S-22
Failure To
Qualify
Commencing with taxable years beginning on or after
January 1, 2005, a violation of a REIT qualification
requirement other than the gross income tests or the asset tests
will not disqualify us if the violation is due to reasonable
cause and not due to willful neglect and we pay a penalty of
$50,000 for each such violation. If we fail to qualify for
taxation as a REIT in any taxable year and the relief provisions
do not apply, we will be subject to tax (including any
applicable alternative minimum tax) on our taxable income at
regular corporate rates. Distributions to shareholders in any
year in which we fail to qualify as a REIT will not be
deductible by us nor will they be required to be made. In that
event, to the extent of our positive current and accumulated
earnings and profits, distributions to shareholders will be
dividends, generally taxable to non-corporate shareholders at
long-term capital gains tax rates (as described below) and,
subject to certain limitations of the Internal Revenue Code,
corporate distributees may be eligible for the dividends
received deduction. Unless we are entitled to relief under
specific statutory provisions, we also will be disqualified from
taxation as a REIT for the four taxable years following the year
during which we lost our REIT qualification. We cannot state
whether in all circumstances we would be entitled to such
statutory relief. For example, if we fail to satisfy the gross
income tests because non-qualifying income that we intentionally
earn exceeds the limit on such income, the IRS could conclude
that our failure to satisfy the tests was not due to reasonable
cause.
Taxation of U.S.
Shareholders
As used in this prospectus, the term
“U.S. Shareholder” means a holder of our common
shares that, for federal income tax purposes:
|
|
|
| |
n
|
is a citizen or resident of the United States;
|
| |
| |
n
|
is a corporation or partnership (including an entity treated as
a corporation or partnership for federal income tax purposes)
created or organized in or under the laws of the United States
or of any political subdivision thereof;
|
| |
| |
n
|
is an estate, the income of which is subject to federal income
taxation regardless of its source;
|
| |
| |
n
|
is a trust and a court within the United States is able to
exercise primary supervision over the administration of the
trust, and one or more United States persons have the authority
to control all substantial decisions of the trust; or
|
| |
| |
n
|
is an eligible trust that elects to be taxed as a
U.S. person under applicable Treasury Regulations.
|
For any taxable year for which we qualify for taxation as a
REIT, amounts distributed to taxable U.S. Shareholders will
be taxed as discussed below.
Distributions Generally. Distributions to
U.S. Shareholders, other than capital gain dividends
discussed below, will constitute dividends up to the amount of
our positive current and accumulated earnings and profits and,
to that extent, will constitute ordinary income to
U.S. Shareholders. These distributions are not eligible for
the dividends received deduction generally available to
corporations. Certain “qualified dividend income”
received by U.S. Shareholders in taxable years 2003 through
2010 is subject to tax at the same tax rates as long-term
capital gain (generally, a maximum rate of 15% for such taxable
years). Dividends received from REITs, however, generally are
not eligible for these reduced rates and, therefore, will
continue to be subject to tax at higher ordinary income rates
(generally, a maximum rate of 35% for taxable years
2003-2010),
subject to two narrow exceptions. Under the first exception,
dividends received from a REIT may be treated as “qualified
dividend income” eligible for the reduced tax rates to the
extent that the REIT itself has received qualified dividend
income from other corporations (such as taxable REIT
subsidiaries). Under the second exception, dividends paid by a
REIT in a taxable year may be treated as qualified dividend
income in an amount equal to the sum of (i) the excess of
the REIT’s “REIT taxable income” for the
preceding taxable year over the corporate-level federal income
tax payable by the REIT for such preceding taxable year and
(ii) the excess of the REIT’s income that was subject
to the Built-in Gains Tax in the preceding taxable year over the
tax payable by the REIT on such income for such preceding
taxable year. We do not anticipate that a material portion of
our distributions will be treated as qualified dividend income.
To the extent that we make a distribution in excess of our
positive current and accumulated earnings and profits, the
distribution will be treated first as a tax-free return of
capital, reducing the tax basis in the
U.S. Shareholder’s common shares, and then the
distribution in excess of such basis will be taxable to the
U.S. Shareholder as gain realized from the sale of its
common shares. Dividends we declared in October, November or
December of any year payable to a U.S. Shareholder of
record on a specified date in any such month will be treated as
both paid by us and received by the shareholders on December 31
of that year, provided that we actually pay the dividends during
January of the following calendar year.
Capital Gain Distributions. Distributions to
U.S. Shareholders that we properly designate as capital
gain dividends will be treated as long-term capital gains (to
the extent they do not exceed our actual net capital gain) for
the taxable year
S-23
without regard to the period for which the U.S. Shareholder
has held his or her common shares. However, corporate
U.S. shareholders may be required to treat up to 20% of
certain capital gain dividends as ordinary income. Capital gain
dividends are not eligible for the dividends received deduction
for corporations.
We may elect to retain and pay income tax on net long-term
capital gain that we received during the tax year. In this
instance, U.S. Shareholders will include in their income
their proportionate share of our undistributed long-term capital
gains. U.S. Shareholders will also be deemed to have paid
their proportionate share of the tax we paid, which would be
credited against such shareholders’ U.S. income tax
liability (and refunded to the extent it exceeds such
liability). In addition, the basis of the
U.S. Shareholders’ shares will be increased by the
excess of the amount of capital gain included in our income over
the amount of tax it is deemed to have paid.
Any capital gain with respect to capital assets held for more
than one year that is recognized or otherwise properly taken
into account before January 1, 2011, generally will be
taxed to a non-corporate taxpayer at a maximum rate of 15%. In
the case of capital gain attributable to the sale of real
property held for more than one year, such gain will be taxed at
a maximum rate of 25% to the extent of the amount of
depreciation deductions previously claimed with respect to such
property. With respect to distributions we designated as capital
gain dividends (including any deemed distributions of retained
capital gains), subject to certain limits, we may designate, and
will notify our shareholders, whether the dividend is taxable to
non-corporate shareholders at regular long-term capital gains
rates (currently at a minimum rate of 15%) or at the 25% rate
applicable to unrecaptured depreciation.
Passive Activity Loss and Investment Interest
Limitations. Distributions from us and gain from
the disposition of our common shares will not be treated as
passive activity income and, therefore, U.S. Shareholders
will not be able to apply any “passive activity
losses” against such income. Dividends from us (to the
extent they do not constitute a return of capital) generally
will be treated as investment income for purposes of the
investment interest limitations. Net capital gain from the
disposition of our common shares or capital gain dividends
generally will be excluded from investment income unless the
U.S. Shareholder elects to have the gain taxed at ordinary
income rates. Shareholders are not allowed to include on their
own federal income tax returns any tax losses that we incur.
Instead, these losses are generally carried over by us for
potential affect against future income.
Dispositions of Shares. In general,
U.S. Shareholders who are not dealers in securities, will
realize capital gain or loss on the disposition of our common
shares equal to the difference between the amount of cash and
the fair market value of any property received on the
disposition and that shareholder’s adjusted basis in the
common shares. The applicable tax rate will depend on the
U.S. Shareholder’s holding period in the asset
(generally, if the U.S. Shareholder has held the asset for
more than one year, it will produce long-term capital gain) and
the shareholder’s tax bracket (the maximum rate for
non-corporate U.S. Shareholders currently being 15%). The
IRS has the authority to prescribe, but has not yet prescribed,
regulations that would apply a capital gain tax rate of 25%
(which is generally higher than the long-term capital gain tax
rates for non-corporate shareholders) to a portion of capital
gain realized by a non-corporate shareholder on the sale of our
common shares that would correspond to our “unrecaptured
Section 1250 gain.” Shareholders should consult with
their own tax advisors with respect to their capital gain tax
liability. In general, any loss recognized by a
U.S. Shareholder upon the sale or other disposition of
common shares that the U.S. shareholder has held for six
months or less, after applying the holding period rules, will be
treated as a long-term capital loss, to the extent of
distributions received by the U.S. Shareholder from us that
were required to be treated as long-term capital gains.
Treatment of Tax-Exempt
Shareholders. Distributions from us to a
tax-exempt employee pension trust or other domestic tax-exempt
shareholder generally will not constitute “unrelated
business taxable income” (“UBTI”), unless the
shareholder has borrowed to acquire or carry its common shares
or has used the shares in an unrelated trade or business.
However, for tax-exempt shareholders that are social clubs,
voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services
plans exempt from federal income taxation under
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the
Internal Revenue Code, respectively, income from an investment
in us will constitute UBTI unless the organization properly sets
aside or reserves such amounts for purposes specified in the
Internal Revenue Code. These tax-exempt shareholders should
consult their own tax advisors concerning these “set
aside” and reserve requirements.
Qualified trusts that hold more than 10% (by value) of the
shares of “pension-held REITs” may be required to
treat a certain percentage of such a REIT’s distributions
as UBTI. A REIT is a “pension-held REIT” only if the
REIT would not qualify as a REIT for federal income tax purposes
but for the application of a “look-through” exception
to the five or fewer requirement applicable to shares held by
qualified trusts and the REIT is “predominantly held”
by qualified trusts. A REIT is predominantly held if either
(1) at least one qualified trust holds more than 25% by
value of the REIT interests or (2) qualified
S-24
trusts, each owning more than 10% by value of the REIT
interests, holds in the aggregate more than 50% of the REIT
interests. The percentage of any REIT dividend treated as UBTI
is equal to the ratio of (a) the UBTI earned by the REIT
(treating the REIT as if it were a qualified trust and therefore
subject to tax on UBTI) to (b) the total gross income (less
certain associated expenses) of the REIT. In the event that this
ratio is less than 5% for any year, then the qualified trust
will not be treated as having received UBTI as a result of the
REIT dividend. For these purposes, a qualified trust is any
trust described in Section 401(a) of the Internal Revenue
Code and exempt from tax under Section 501(a) of the
Internal Revenue Code.
Special Tax
Considerations For
Non-U.S.
Shareholders
A
“non-U.S. Shareholder”
is a shareholder that is not a U.S. Shareholder. In
general,
non-U.S. Shareholders
will be subject to federal income tax at graduated rates with
respect to their investment in us if the income from the
investment is “effectively connected” with the
non-U.S. Shareholder’s
conduct of a trade or business in the United States in the same
manner that U.S. shareholders are taxed. A corporate
non-U.S. Shareholder
that receives income that is (or is treated as) effectively
connected with a U.S. trade or business also may be subject
to the branch profits tax under Section 884 of the Internal
Revenue Code, which is imposed in addition to regular federal
income tax at the rate of 30%, subject to reduction under a tax
treaty, if applicable. Effectively connected income that meets
various certification requirements will generally be exempt from
withholding. The following discussion will apply to
non-U.S. Shareholders
whose income from their investments in us is not so effectively
connected (except to the extent that the “FIRPTA”
rules discussed below treat such income as effectively connected
income).
Distributions by us that are not attributable to gain from the
sale or exchange by us of a “United States real property
interest” and that we do not designate as a capital gain
distribution will be treated as an ordinary income dividend to
the extent that we pay the distribution out of our current or
accumulated earnings and profits. Generally, any ordinary income
dividend will be subject to a federal income tax, required to be
withheld by us, equal to 30% of the gross amount of the
dividend, unless an applicable tax treaty reduces this tax. Such
a distribution in excess of our earnings and profits will be
treated first as a return of capital that will reduce a
non-U.S. Shareholder’s
basis in its common shares (but not below zero) and then as gain
from the disposition of such common shares, the tax treatment of
which is described under the rules discussed below with respect
to dispositions of common shares. Because we generally cannot
determine at the time we make a distribution whether the
distribution will exceed our current and accumulated earnings
and profits, we normally will withhold tax on the entire amount
of any distribution at the same rate as we would withhold on a
dividend. However, a
non-U.S. Shareholder
may obtain a refund of amounts we withhold if we later determine
that a distribution in fact exceeded our current and accumulated
earnings and profits.
Distributions by us with respect to our common shares that are
attributable to gain from the sale or exchange of a “United
States real property interest” under the Foreign Investment
in Real Property Tax Act of 1980, or “FIRPTA” will be
treated as ordinary dividends (taxed as described above) to a
non-U.S. Shareholder
as long as our common shares are ”regularly traded” on
an established securities market in the United States if the
non-U.S. Shareholder
did not own more than 5% of such class of stock at any time
during the one-year period preceding the distribution. The term
“United States real property interest” includes an
interest in real property and shares in corporations at least
50% of whose assets consist of interests in real property.
Capital gain dividends distributed to a
non-U.S. Shareholder
that held more than 5% of our common shares in the year
preceding the distribution, or to all
non-U.S. Shareholders
in the event that our common shares cease to be regularly traded
on an established securities market, will be taxed under FIRPTA.
Moreover, if a
non-U.S. Shareholder
disposes of our common shares during the 30 day period
preceding a dividend payment, and such
non-U.S. Shareholder
(or a person related to such
non-U.S. Shareholder)
acquires or enters into a contract or option to acquire our
common shares within 61 days of the 1st day of the
30 day period described above, and any portion of such
dividend payment would, but for the disposition, be treated as a
United States real property interest capital gain to such
non-U.S. Shareholder,
then such
non-U.S. Shareholder
shall be treated as having United States real property interest
capital gain in an amount that, but for the disposition, would
have been treated as United States real property interest
capital gain. Such distributions are taxed to a non-U.S
shareholder as if the distributions were gains “effectively
connected” with a U.S. trade or business. Accordingly,
a
non-U.S. Shareholder
will be required to report such gains on U.S. federal
income tax returns and will be taxed at the normal capital gain
rates applicable to a U.S. Shareholder (subject to any
applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals). Such
distributions also may be subject to a 30% branch profits tax
when made to a foreign corporation that is not entitled to an
exemption or reduced branch profits tax rate under a tax treaty.
We must withhold 35% of any distribution that we could designate
as a capital gain dividend. A
non-U.S. Shareholder
may receive a credit against our tax liability for the amount we
withhold.
S-25
Although the law is not clear on this matter, it appears that
amounts designated by us as undistributed capital gains in
respect of our common shares generally should be treated with
respect to
non-U.S. Shareholders
in the same manner as actual distributions by us of capital gain
dividends.
Although tax treaties may reduce our withholding obligations, we
generally will be required to withhold from distributions to
non-U.S. Shareholders,
and remit to the IRS, 30% of ordinary dividends paid out of
earnings and profits. Special withholding rules apply to capital
gain dividends that are not recharacterized as ordinary
dividends. In addition, we may be required to withhold 10% of
distributions in excess of our current and accumulated earnings
and profits. If the amount of tax withheld by us with respect to
a distribution to a
non-U.S. Shareholder
exceeds the shareholder’s U.S. tax liability, the
non-U.S. Shareholder
may file for a refund of such excess from the IRS.
We expect to withhold federal income tax at the rate of 30% on
all distributions (including distributions that later may be
determined to have been in excess of current and accumulated
earnings and profits) made to a
non-U.S. Shareholder
unless:
|
|
|
| |
n
|
a lower treaty rate applies and the
non-U.S. Shareholder
files with us an IRS
Form W-8BEN
evidencing eligibility for that reduced treaty rate;
|
| |
| |
n
|
the
non-U.S. Shareholder
files with us an IRS
Form W-8ECI
claiming that the distribution is income effectively connected
with the
non-U.S. Shareholder’s
trade or business so that no withholding tax is required; or
|
| |
| |
n
|
the distributions are treated for FIRPTA withholding tax
purposes as attributable to a sale of a United States real
property interest, in which case tax will be withheld at a
35% rate.
|
Unless our common shares constitute a “U.S. real
property interest” within the meaning of FIRPTA, a sale of
our common shares by a
non-U.S. Shareholder
generally will not be subject to federal income taxation. Our
common shares will not constitute a United States real property
interest if we are a “domestically controlled qualified
investment entity.” A REIT is a domestically controlled
qualified investment entity if at all times during a specified
testing period less than 50% in value of its shares is held
directly or indirectly by
non-U.S. Shareholders.
We believe that we are a domestically controlled qualified
investment entity and, therefore, that the sale of our common
shares will not be subject to taxation under FIRPTA. However,
because our common shares are publicly traded, we cannot assure
you that we are or will be a domestically controlled qualified
investment entity. If we were not a domestically controlled
qualified investment entity, a
non-U.S. Shareholder’s
sale of our common shares would be a taxable sale of a United
States real property interest unless the common shares were
“regularly traded” on an established securities market
(such as NASDAQ) and the selling shareholder owned no more than
5% of our common shares throughout the applicable testing
period. If the gain on the sale of common shares were subject to
taxation under FIRPTA, the
non-U.S. Shareholder
would be subject to the same treatment as a
U.S. Shareholder with respect to the gain (subject to
applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals).
However, even if our common shares are not a United States real
property interest, a nonresident alien individual’s gains
from the sale of shares will be taxable if the nonresident alien
individual is present in the United States for 183 days or
more during the taxable year and certain other conditions apply,
in which case the nonresident alien individual will be subject
to a 30% tax on his or her U.S. source capital gains.
A purchaser of our common shares from a
non-U.S. Shareholder
will not be required to withhold under FIRPTA on the purchase
price if the purchased common shares are “regularly
traded” on an established securities market or if we are a
domestically controlled qualified investment entity. Otherwise,
the purchaser of our common shares from a
non-U.S. Shareholder may be required to withhold 10% of the
purchase price and remit this amount to the IRS. Our common
shares currently are traded on the NASDAQ. We believe that we
qualify under both the regularly traded and the domestically
controlled qualified investment entity exceptions to withholding
but we cannot provide any assurance to that effect.
Upon the death of a nonresident alien individual, that
individual’s ownership of our common shares will be treated
as part of his or her U.S. estate for purposes of the
U.S. estate tax, except as may be otherwise provided in an
applicable estate tax treaty.
Information
Reporting Requirements and Backup Withholding Tax
U.S. Shareholders. In general,
information reporting requirements will apply to payments of
distributions on our common shares and payments of the proceeds
of the sale of our common shares, unless an exception applies.
Further, a payee may be subject to backup withholding at a rate
of up to 28% if:
|
|
|
| |
n
|
the payee fails to furnish a taxpayer identification number to
the payer or to establish an exemption from backup withholding;
|
| |
| |
n
|
the IRS notifies the payer that the taxpayer identification
number furnished by the payee is incorrect;
|
S-26
|
|
|
| |
n
|
a notified payee has been under-reporting with respect to
interest, dividends or original issue discount described in
Section 3406(c) of the Internal Revenue Code; or
|
| |
| |
n
|
the payee has failed to certify under the penalty of perjury
that the payee is not subject to backup withholding under the
Internal Revenue Code.
|
Some shareholders, including corporations, will be exempt from
backup withholding. Any amounts withheld under the backup
withholding rules from a payment to a shareholder will be
allowed as a credit against the shareholder’s federal
income tax and may entitle the shareholder to a refund, provided
that the shareholder furnishes the required information to
the IRS.
Non-U.S. Shareholders. Generally,
information reporting will apply to payments of distributions on
our common shares, and backup withholding may apply, unless the
payee certifies that it is not a U.S. person or otherwise
establishes an exemption.
The payment of the proceeds from the disposition of our common
shares to or through the U.S. office of a U.S. or
foreign broker will be subject to information reporting and,
possibly, backup withholding unless the
non-U.S. Shareholder
certifies as to its
non-U.S. status
or otherwise establishes an exemption, provided that the broker
does not have actual knowledge that the shareholder is a
U.S. person or that the conditions of any other exemption
are not, in fact, satisfied. The proceeds of the disposition by
a
non-U.S. Shareholder
of our common shares to or through a foreign office of a broker
generally will not be subject to information reporting or backup
withholding. However, if the broker is a U.S. person, a
controlled foreign corporation for U.S. tax purposes or a
foreign person 50% or more whose gross income from all sources
for specified periods is from activities that are effectively
connected with a U.S. trade or business, information
reporting generally will apply unless the broker has documentary
evidence as to the
non-U.S. Shareholder’s
foreign status and has no actual knowledge to the contrary.
Applicable Treasury regulations provide presumptions regarding
the status of shareholders when payments to the shareholders
cannot be reliably associated with appropriate documentation
provided to the payer. Because the application of these
Treasury regulations varies depending on the shareholder’s
particular circumstances, you should consult your tax advisor
regarding the information reporting requirements applicable to
you.
Other Tax
Consequences
Tax Aspects of Our Investments in the Operating
Partnership. The following discussion summarizes
certain federal income tax considerations applicable to our
direct or indirect investment in our operating partnership and
any subsidiary partnerships or limited liability companies we
form or acquire that are treated as partnerships for federal
income tax purposes, each individually referred to as a
“Partnership” and, collectively, as
“Partnerships.” The following discussion does not
cover state or local tax laws or any federal tax laws other than
income tax laws.
Classification as Partnerships. We are
entitled to include in our income our distributive share of each
Partnership’s income and to deduct our distributive share
of each Partnership’s losses only if such Partnership is
classified for federal income tax purposes as a partnership (or
an entity that is disregarded for federal income tax purposes if
the entity has only one owner or member), rather than as a
corporation or an association taxable as a corporation. An
organization with at least two owners or members will be
classified as a partnership, rather than as a corporation, for
federal income tax purposes if it:
|
|
|
| |
n
|
is treated as a partnership under the Treasury regulations
relating to entity classification (the “check-the-box
regulations”); and
|
| |
| |
n
|
is not a “publicly traded” partnership.
|
Under the check-the-box regulations, an unincorporated entity
with at least two owners or members may elect to be classified
either as an association taxable as a corporation or as a
partnership. If such an entity does not make an election, it
generally will be treated as a partnership for federal income
tax purposes. We intend that each Partnership will be classified
as a partnership for federal income tax purposes (or else a
disregarded entity where there are not at least two separate
beneficial owners).
A publicly traded partnership is a partnership whose interests
are traded on an established securities market or are readily
tradable on a secondary market (or a substantial equivalent). A
publicly traded partnership is generally treated as a
corporation for federal income tax purposes, but will not be so
treated if, for each taxable year beginning after
December 31, 1987 in which it was classified as a publicly
traded partnership, at least 90% of the partnership’s gross
income consisted of specified passive income, including real
property rents (which includes rents that would be qualifying
income for purposes of the 75% gross income test, with certain
modifications that make it easier for the rents to qualify for
the 90% passive income
S-27
exception), gains from the sale or other disposition of real
property, interest, and dividends (the “90% passive income
exception”).
Treasury regulations, referred to as PTP regulations,
provide limited safe harbors from treatment as a publicly traded
partnership. Pursuant to one of those safe harbors (the
“private placement exclusion”), interests in a
partnership will not be treated as readily tradable on a
secondary market or the substantial equivalent thereof if
(1) all interests in the partnership were issued in a
transaction or transactions that were not required to be
registered under the Securities Act of 1933, as amended, and
(2) the partnership does not have more than
100 partners at any time during the partnership’s
taxable year. For the determination of the number of partners in
a partnership, a person owning an interest in a partnership,
grantor trust, or S corporation that owns an interest in
the partnership is treated as a partner in the partnership only
if (1) substantially all of the value of the owner’s
interest in the entity is attributable to the entity’s
direct or indirect interest in the partnership and (2) a
principal purpose of the use of the entity is to permit the
partnership to satisfy the 100-partner limitation. Each
Partnership (excluding the operating partnership, which has more
than 100 partners) should qualify for the private placement
exclusion.
The operating partnership does not qualify for the private
placement exclusion. While units of the operating partnership
are not and will not be traded on an established securities
market, and while the exchange rights of limited partners of the
operating partnership are restricted by the agreement of limited
partnership in ways that we believe, taking into account all of
the facts and circumstances, prevent the limited partners from
being able to buy, sell or exchange their limited partnership
interests in a manner such that the limited partnership
interests would be considered “readily tradable on a
secondary market or the substantial equivalent thereof”
under the PTP regulations, no complete assurance can be
provided that the IRS will not successfully assert that the
operating partnership is a publicly traded partnership.
As noted above, a publicly traded partnership will be treated as
a corporation for federal income tax purposes unless at least
90% of such partnership’s gross income for each taxable
year in which the partnership is a publicly traded partnership
consists of “qualifying income” under
Section 7704 of the Code. “Qualifying income”
under Section 7704 of the Code includes interest,
dividends, real property rents, gains from the disposition of
real property, and certain income or gains from the exploitation
of natural resources. In addition, qualifying income under
Section 7704 of the Code generally includes any income that
is qualifying income for purposes of the 95% gross income test
applicable to REITs. We believe the operating partnership has
satisfied the 90% qualifying income test under Section 7704
of the Code in each year since its formation and will continue
to satisfy that exception in the future. Thus, the operating
partnership has not and will not be taxed as a corporation.
There is one significant difference, however, regarding rent
received from related party tenants. For a REIT, rent from a
tenant does not qualify as rents from real property if the REIT
and/or one
or more actual or constructive owners of 10% or more of the REIT
actually or constructively own 10% or more of the tenant. Under
Section 7704 of the Code, rent from a tenant is not
qualifying income if a partnership
and/or one
or more actual or constructive owners of 5% or more of the
partnership actually or constructively own 10% or more of the
tenant.
Accordingly, we will need to monitor compliance with both the
REIT rules and the publicly traded partnership rules. The
operating partnership has not requested, nor does it intend to
request, a ruling from the IRS that it will be treated as a
partnership for federal income tax purposes. In the opinion of
Pringle & Herigstad, which is based on the provisions
of the limited partnership agreement of the operating
partnership and on certain factual assumptions and
representations made by us, the operating partnership has since
its formation and will continue to be taxed as a partnership
rather than a corporation. Pringle & Herigstad’s
opinion is not binding on the IRS or the courts.
We have not requested, and do not intend to request, a ruling
from the Internal Revenue Service that the Partnerships will be
classified as partnerships (or disregarded entities, if the
entity has only one owner or member) for federal income tax
purposes. If for any reason a Partnership were taxable as a
corporation, rather than as a partnership, for federal income
tax purposes, we would not be able to qualify as a REIT. See
“– Requirements for Qualification –
Income Tests” and “– Requirements for
Qualification – Asset Tests.” In addition, any
change in a Partnership’s status for tax purposes might be
treated as a taxable event, in which case we might incur tax
liability without any related cash distribution. See
“– Annual Distribution Requirements.”
Further, items of income and deduction of such Partnership would
not pass through to its partners, and its partners would be
treated as shareholders for tax purposes. Consequently, such
Partnership would be required to pay income tax at corporate
rates on its net income, and distributions to its partners would
constitute dividends that would not be deductible in computing
such Partnership’s taxable income.
S-28
Income Taxation
of the Partnerships and Their Partners
Partners, Not the Partnerships, Subject to
Tax. A partnership is not a taxable entity for
federal income tax purposes. We will therefore take into account
our allocable share of each Partnership’s income, gains,
losses, deductions, and credits for each taxable year of the
Partnership ending with or within our taxable year, even if we
receive no distribution from the Partnership for that year or a
distribution less than our share of taxable income. Similarly,
even if we receive a distribution, it may not be taxable if the
distribution does not exceed our adjusted tax basis in our
interest in the Partnership.
Partnership Allocations. Although a
partnership agreement generally will determine the allocation of
income and losses among partners, allocations will be
disregarded for tax purposes if they do not comply with the
provisions of the federal income tax laws governing partnership
allocations. If an allocation is not recognized for federal
income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners’ interests in
the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic
arrangement of the partners with respect to such item. Each
Partnership’s allocations of taxable income, gain, and loss
are intended to comply with the requirements of the federal
income tax laws governing partnership allocations.
Tax Allocations With Respect to Contributed
Properties. Income, gain, loss, and deduction
attributable to (a) appreciated or depreciated property
that is contributed to a partnership in exchange for an interest
in the partnership or (b) property revalued on the books of
a partnership must be allocated in a manner such that the
contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of
such unrealized gain or unrealized loss, referred to as
“built-in gain” or “built-in loss,” is
generally equal to the difference between the fair market value
of the contributed or revalued property at the time of
contribution or revaluation and the adjusted tax basis of such
property at that time, referred to as a book-tax difference.
Such allocations are solely for federal income tax purposes and
do not affect the book capital accounts or other economic or
legal arrangements among the partners. The U.S. Treasury
Department has issued regulations requiring partnerships to use
a “reasonable method” for allocating items with
respect to which there is a book-tax difference and outlining
several reasonable allocation methods. Unless we as general
partner select a different method, our operating partnership
will use the traditional method for allocating items with
respect to which there is a book-tax difference.
Basis in Partnership Interest. Our adjusted
tax basis in any partnership interest we own generally will be:
|
|
|
| |
n
|
the amount of cash and the basis of any other property we
contribute to the partnership;
|
| |
| |
n
|
increased by our allocable share of the partnership’s
income (including tax-exempt income) and our allocable share of
indebtedness of the partnership; and
|
| |
| |
n
|
reduced, but not below zero, by our allocable share of the
partnership’s loss, the amount of cash and the basis of
property distributed to us, and constructive distributions
resulting from a reduction in our share of indebtedness of the
partnership.
|
Loss allocated to us in excess of our basis in a partnership
interest will not be taken into account until we again have
basis sufficient to absorb the loss. A reduction of our share of
partnership indebtedness will be treated as a constructive cash
distribution to us, and will reduce our adjusted tax basis.
Distributions, including constructive distributions, in excess
of the basis of our partnership interest will constitute taxable
income to us. Such distributions and constructive distributions
normally will be characterized as long-term capital gain.
Depreciation Deductions Available to
Partnerships. The initial tax basis of property
is the amount of cash and the basis of property given as
consideration for the property. A partnership in which we are a
partner generally will depreciate property for federal income
tax purposes under the alternative depreciation system of
depreciation, referred to as ADS. Under ADS, the partnership
generally will depreciate (1) furnishings and equipment
over a nine year recovery period using a straight line method
and a mid-month convention, (2) buildings and improvements
over a
40-year
recovery period using a straight line method and a mid-month
convention, and (3) land improvements such as landscaping
and parking lots over a
20-year
recovery period using a straight line method. The
partnership’s initial basis in properties acquired in
exchange for units of the partnership should be the same as the
transferor’s basis in such properties on the date of
acquisition. Although the law is not entirely clear, the
partnership generally will depreciate such property for federal
income tax purposes over the same remaining useful lives and
under the same methods used by the transferors. The
partnership’s tax depreciation deductions will be allocated
among the partners in accordance with their respective interests
in the partnership, except to the extent that the partnership is
required under the federal income tax laws governing partnership
allocations to use a method for allocating tax depreciation
deductions attributable to contributed or revalued properties
that results in our receiving a disproportionate share of such
deductions.
S-29
Sale of a Partnership’s
Property. Generally, any gain realized by a
Partnership on the sale of property held for more than one year
will be long-term capital gain, except for any portion of the
gain treated as depreciation or cost recovery recapture. Any
gain or loss recognized by a Partnership on the disposition of
contributed or revalued properties will be allocated first to
the partners who contributed the properties or who were partners
at the time of revaluation, to the extent of their built-in gain
or loss on those properties for federal income tax purposes. The
partners’ built-in gain or loss on contributed or revalued
properties is the difference between the partners’
proportionate share of the book value of those properties and
the partners’ tax basis allocable to those properties at
the time of the contribution or revaluation. Any remaining gain
or loss recognized by the Partnership on the disposition of
contributed or revalued properties, and any gain or loss
recognized by the Partnership on the disposition of other
properties, will be allocated among the partners in accordance
with their percentage interests in the Partnership.
Our share of any Partnership gain from the sale of inventory or
other property held primarily for sale to customers in the
ordinary course of the Partnership’s trade or business will
be treated as income from a prohibited transaction subject to a
100% tax. Income from a prohibited transaction may have an
adverse effect on our ability to satisfy the gross income tests
for REIT status. See “– Requirements for
Qualification – Income Tests.” We do not
presently intend to acquire or hold, or to allow any Partnership
to acquire or hold, any property that is likely to be treated as
inventory or property held primarily for sale to customers in
the ordinary course of our, or the Partnership’s, trade or
business.
State and Local
Tax
We and our shareholders may be subject to state and local tax in
various states and localities, including those in which we or
they transact business, own property or reside. The tax
treatment of us and our shareholders in such jurisdictions may
differ from the federal income tax treatment described above.
Consequently, prospective shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on
an investment in our common shares.
S-30
Robert W. Baird & Co. Incorporated is acting as
representative of the underwriters named below. Subject to the
terms and conditions stated in the underwriting agreement dated
the date of this prospectus supplement, each underwriter named
below has agreed to purchase, and we have agreed to sell to that
underwriter, the number of common shares set forth opposite the
underwriter’s name.
| |
|
|
|
|
|
Underwriter
|
|
Number
of Shares
|
|
|
|
|
Robert W. Baird & Co. Incorporated
|
|
|
3,300,000
|
|
|
D.A. Davidson & Co.
|
|
|
2,100,000
|
|
|
J.J.B. Hilliard, W.L. Lyons, Inc.
|
|
|
600,000
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,000,000
|
|
|
|
|
|
|
|
The underwriting agreement provides that the obligation of the
underwriters to purchase the common shares in this offering is
subject to approval of legal matters by counsel and to other
conditions. The underwriters are obligated to purchase all the
common shares (other than those covered by the over-allotment
option described below) if they purchase any of the common
shares.
The underwriters have advised us that they propose to offer some
of the common shares to the public at the public offering price
set forth on the cover page of this prospectus and to certain
dealers at the public offering price less a concession not in
excess of $0.337 per share. The underwriters may allow, and
dealers may re-allow, a concession not in excess of $0.10 per
share to some other dealers. After the offering, the offering
price and other selling terms may be changed by the underwriters.
We have granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to
900,000 additional common shares at the public offering
price less the underwriting discount. The underwriters may
exercise the option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To
the extent the option is exercised, each underwriter must
purchase a number of additional common shares approximately
proportionate to that underwriter’s initial purchase
commitment.
We and our executive officers and trustees have agreed that, for
a period of 90 days from the date of this prospectus, we
and they will not, without the prior written consent of Robert
W. Baird & Co. Incorporated, dispose of or hedge any
common shares or any securities convertible into or exchangeable
for our common shares, subject to certain exceptions set forth
in each
lock-up
agreement. Robert W. Baird & Co. Incorporated, in its
sole discretion, may release any of the securities subject to
these
lock-up
agreements at any time without notice.
Our common shares trade on the NASDAQ under the symbol
“IRETS.”
The following table shows the underwriting discount that we are
to pay in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the
underwriters’ option to purchase additional common shares:
| |
|
|
|
|
|
|
|
|
|
|
|
No
Exercise
|
|
|
Full
Exercise
|
|
|
|
|
Per Share
|
|
$
|
10.20
|
|
|
$
|
10.20
|
|
|
Total
|
|
$
|
3,366,000
|
|
|
$
|
3,870,900
|
|
In connection with this offering, Robert W. Baird &
Co. Incorporated, on behalf of the underwriters, may purchase
and sell our 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 underwriters in the 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 underwriters’
over-allotment option. In determining the source of shares to
close out the covered syndicate short position, the underwriters
will consider, among other things, the price of our common
shares available for purchase in the open market as compared to
the price at which they may purchase our common shares through
the over-allotment option. Transactions to close out the covered
syndicate short position involve either purchases of the shares
in the open market after the distribution has been completed or
the exercise of the over-allotment option. The underwriters will
not make “naked” short sales of common shares in
excess of the number of shares represented by the
underwriters’ over-allotment option. Stabilizing
transactions consist of bids for, or purchases of, common shares
in the open market while the offering is in progress.
S-31
The underwriters also may impose a penalty bid. Penalty bids
permit the underwriters to reclaim a selling concession from a
syndicate member when Robert W. Baird & Co.
Incorporated repurchases common shares originally sold by that
syndicate member in order to cover syndicate short positions or
to make stabilizing purchases.
Any of these activities may have the effect of preventing or
retarding a decline in the market price of our common shares.
They may also cause the price of our common shares to be higher
than the price that would otherwise exist in the open market in
the absence of these transactions. The underwriters may conduct
these transactions in the NASDAQ or in the over-the-counter
market, or otherwise. If the underwriters commence any of these
transactions, they may discontinue them at any time.
We estimate that our total expenses of this offering will be
approximately $150,000. Additionally, we have agreed to
reimburse the underwriters up to an aggregate of $50,000 in
expenses relating to this offering.
Certain of the underwriters have performed investment banking
and advisory services for us from time to time for which they
have received customary fees and expenses. The underwriters may,
from time to time, engage in transactions with, and perform
services for, us in the ordinary course of business.
A prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters. Other
than the prospectus in electronic format, the information on the
underwriters’ website and any information contained in any
other website maintained by the underwriters is not part of this
prospectus or the registration statement for which this
prospectus forms a part, has not been approved or endorsed by us
or the underwriters and should not be relied upon by investors.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act or
to contribute to payments the underwriters may be required to
make because of any of those liabilities.
The validity of our Shares offered by this prospectus
supplement, the federal and state tax aspects of the
organization and operation of us and IRET Properties and other
legal matters will be passed upon for us by Pringle &
Herigstad, P.C., Minot, North Dakota and
Fulbright & Jaworski L.L.P., Minneapolis, Minnesota.
Certain legal matters in connection with this offering will be
passed upon for the underwriters by Hunton & Williams
LLP.
The consolidated financial statements, the related financial
statement schedules, and management’s report on the
effectiveness of internal control over financial reporting
incorporated in this prospectus supplement by reference from our
Annual Report on
Form 10-K
for the year ended April 30, 2007, have been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their reports, which are
incorporated herein by reference, and have been so incorporated
in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
Where
You Can Find More Information
We are subject to the reporting requirements of the Securities
Exchange Act of 1934, and file annual, quarterly and periodic
reports, proxy statements and other information with the SEC.
Our SEC filings may be found on our website at www.iret.com. The
SEC also maintains a web site
(http://www.sec.gov)
on which our reports, proxy statements and other information are
made available. You may also read and copy any document we file
with the SEC at the public reference facilities maintained by
the SEC at 100 F Street, N.E., Washington, D.C.
20549. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
facilities.
Our common shares of beneficial interest are listed on the
NASDAQ and, as a result, we also file our reports, proxy
statements and other information with NASDAQ.
We filed with the SEC a Registration Statement on
Form S-3
under the Securities Act with respect to the securities offered
by this prospectus supplement. This prospectus supplement, which
constitutes part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement,
certain parts of which have been omitted in accordance with the
rules and regulations of the SEC. Reference is hereby made to
the Registration Statement and the exhibits to the Registration
Statement for further information with respect to our company
and the securities offered pursuant to this prospectus
supplement.
S-32
PROSPECTUS
Investors Real Estate Trust
$150,000,000
Shares of Beneficial Interest
Preferred Shares of Beneficial
Interest
We may from time to time offer and sell:
(i) our shares of beneficial interest, no par value, and
(ii) in one or more classes or series, our preferred shares
of beneficial interest, no par value, all with an aggregate
public offering price of up to $150,000,000, on terms to be
determined at the time of the offering. In this prospectus, we
refer to our shares of beneficial interest as our common shares,
we refer to our preferred shares of beneficial interest as our
preferred shares and we refer to our common shares and our
preferred shares collectively as our securities. Our securities
may be offered, separately or together, in amounts, at prices
and on terms to be set forth in one or more supplements to this
prospectus (each, a prospectus supplement). The aggregate public
offering price and terms of the securities will be determined by
market conditions at the time the securities are offered.
The specific terms of any securities we sell and
the terms on which we are offering such securities will be set
forth in a prospectus supplement. The specific terms may include
limitations on direct or beneficial ownership and restrictions
on transfer of the securities, in each case as may be
appropriate to preserve our status as a real estate investment
trust for federal income tax purposes. The applicable prospectus
supplement will also contain information, where applicable,
about federal income tax considerations relating to, and any
listing on a securities exchange of, the securities offered by
the prospectus supplement. The applicable prospectus supplement
may also add to, update or change information contained in this
prospectus. You should carefully read this prospectus and any
applicable prospectus supplement, together with the addition
information described under the heading “Where You Can Find
More Information,” before you invest in any of our
securities.
We may sell the securities offered by this
prospectus directly, through agents designated by us from time
to time, or to or through underwriters or dealers. If any
agents, underwriters or dealers are involved in the sale of any
of our securities, their names and any applicable purchase
price, fee, commission or discount arrangements, between or
among them, will be set forth, or will be calculable from the
information set forth, in the applicable prospectus supplement.
None of our securities may be sold without
delivery of a prospectus supplement.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved
these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is April 2, 2004.
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE
The documents listed below have been filed by us
under the Securities Exchange Act of 1934 with the Securities
and Exchange Commission and are incorporated by reference in
this prospectus:
|
|
|
| |
• |
Our Annual Report on Form 10-K for the
fiscal year ended April 30, 2003;
|
| |
| |
• |
Our Quarterly Report on Form 10-Q for the
quarterly period ended July 31, 2003;
|
| |
| |
• |
Our Quarterly Report on Form 10-Q for the
quarterly period ended October 31, 2003;
|
| |
| |
• |
Our Quarterly Report on Form 10-Q for the
quarterly period ended January 31, 2004;
|
| |
| |
• |
Our Current Report on Form 8-K, filed with
the Securities and Exchange Commission on June 27, 2003;
|
| |
| |
• |
Our Current Report on Form 8-K, filed with
the Securities and Exchange Commission on July 24, 2003;
|
| |
| |
• |
Our Current Report on Form 8-K, filed with
the Securities and Exchange Commission on January 7, 2003,
and amended on March 8, 2004;
|
| |
| |
• |
The description of our common shares contained in
our Registration Statement on Form 10 (File
No. 0-14851), dated July 29, 1986, as amended by the
Amended Registration Statement on Form 10, dated
December 17, 1986, and the Second Amended Registration
Statement on Form 10, dated March 12, 1987.
|
We also incorporate by reference into this
prospectus all documents that we file with the Securities and
Exchange Commission pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934 following the
date of this prospectus and prior to the termination of the sale
of our securities offered by this prospectus.
This means that important information about us
appears or will appear in these documents and will be regarded
as appearing in this prospectus. To the extent that information
appearing in a document filed later is inconsistent with prior
information, the later statement will control and the prior
information, except as modified or superseded, will no longer be
a part of this prospectus.
We will provide copies of all documents that are
incorporated by reference into this prospectus and any
applicable prospectus supplement (not including the exhibits
other than exhibits that are specifically incorporated by
reference) without charge to each person who so requests in
writing or by calling us at the following address and telephone
number:
Investors Real Estate Trust
12 South Main Street
Minot, N.D. 58701
Attn: Michael A. Bosh, Secretary and General
Counsel
(701) 837-4738
i
IRET
We are a self-advised equity real estate
investment trust or REIT organized under the laws of North
Dakota. Our business consists of owning and operating
income-producing real properties. Our investments include
multi-family residential properties and commercial properties,
with such properties located primarily in the upper Midwest
states of Minnesota and North Dakota.
Our multi-family residential properties include
apartment buildings, complexes and communities. Our commercial
properties include office buildings, retail stores and centers,
industrial facilities and health care properties, such as
clinics and assisted living centers. These commercial properties
are typically leased to tenants under long term lease
arrangements.
We operate in a manner intended to enable us to
qualify as a REIT under the Internal Revenue Code. We operate in
connection with an umbrella partnership real estate investment
trust or an UPREIT, of which we are the general partner, and we
conduct our day-to-day business operations through our operating
partnership, IRET Properties, a North Dakota Limited
Partnership. Our principal executive office is located at 12
South Main, Minot, North Dakota 58701 and our telephone number
is (701) 837-4738.
USE OF PROCEEDS
Unless otherwise described in the applicable
prospectus supplement, we intend to use the net proceeds from
any sale of our securities for general business purposes,
including the acquisition, development, renovation, expansion or
improvement of income-producing real estate properties. Pending
such use, the net proceeds may be invested in short-term
income-producing investments, such as United States Treasury
Bonds with terms of six months or less.
DESCRIPTION OF COMMON SHARES
General. Our Third
Restated Declaration of Trust authorizes the issuance of an
unlimited number of our common shares. As of January 15,
2004, (i) there were 40,777,066 of our common shares
outstanding and 11,382,713 of our common shares to be issued
upon conversion of previously issued limited partnership units,
(ii) we had no classes or series of shares other than our
common shares, and (iii) there were no warrants, options or
other contractual arrangements, other than the limited
partnership units, requiring the issuance of our common shares
or any other shares.
The description of our common shares set forth
below is in all respects subject to, and qualified in its
entirety by reference to, the applicable provisions of our Third
Restated Declaration of Trust, including any applicable
amendments, and our Second Restated Trustees’ Regulations
(Bylaws), including any applicable amendments. The description
of our common shares is also subject to any terms specified in
any applicable prospectus supplement. All of our common shares
offered by this prospectus will be duly authorized, fully paid
and nonassessable.
Voting Rights.
Subject to the provisions of our Third Restated Declaration of
Trust regarding the restriction on the transfer of our common
shares, our common shares have non-cumulative voting rights at
the rate of one vote per common share on all matters submitted
to the shareholders, including the election of members of our
Board of Trustees.
1
Our Third Restated Declaration of Trust generally
provides that whenever any action is to be taken by the holders
of our common shares, such action will be authorized by a
majority of the holders of our common shares present in person
or by proxy at a meeting at which a quorum is present, except as
otherwise required by law, our Third Restated Declaration of
Trust or our Second Restated Trustees’ Regulations
(Bylaws). Our Third Restated Declaration of Trust further
provides the following:
|
|
| |
(i) that the following actions will be
authorized by the affirmative vote of the holders of our common
shares holding common shares possessing a majority of the voting
power of our common shares then outstanding and entitled to vote
on such action:
|
|
|
|
| |
• |
our termination;
|
| |
| |
• |
our merger with or into another entity;
|
| |
| |
• |
our consolidation with one or more other entities
into a new entity;
|
| |
| |
• |
the disposition of all or substantially all of
our assets; and
|
| |
| |
• |
the amendment of the Third Restated Declaration
of Trust.
|
|
|
| |
(ii) that a member of our Board of Trustees
may be removed with or without cause by the holders of our
common shares by the affirmative vote of not less than
two-thirds of our common shares then outstanding and entitled to
vote on such matter.
|
Our Third Restated Declaration of Trust also
permits our Board of Trustees, by a two-thirds vote and without
any action by the holders of our common shares, to amend our
Third Restated Declaration of Trust from time to time as
necessary to enable us to continue to qualify as a real estate
investment trust under the Internal Revenue Code.
Dividend, Distribution, Liquidation and Other
Rights. Subject to the preferential
rights of any preferred shares that we may issue in the future
and the provisions of the Third Restated Declaration of Trust
regarding the restriction on the transfer of our common shares,
holders of our common shares are entitled to receive dividends
on their common shares if, as and when authorized and declared
by the Board of Trustees and to share ratably in our assets
legally available for distribution to our shareholders in the
event of our liquidation, dissolution or winding up after
payment of, or adequate provision for, all known debts and
liabilities. Our common shares have equal dividend,
distribution, liquidation and other rights. Our common shares
have no preference, conversion, exchange, sinking fund or
redemption rights.
Ownership and Transfer
Restrictions. Our common shares are
fully transferable and alienable subject only to certain
restrictions set forth in our Third Restated Declaration of
Trust that are intended to help preserve our status as a REIT
for federal income tax purposes. Then, more specifically, our
Third Restated Declaration of Trust provides that any
transaction, other than a transaction entered into through the
NASDAQ National Market or other similar exchange, that would
result in (i) a person owning in excess of the ownership
limit, which as of the date of this prospectus is 9.8%, in
number or value, of our outstanding securities, (ii) less
than 100 people owning our securities, (iii) us being
“closely held” within the meaning of
Section 856(h) of the Internal Revenue Code, (iv) 50%
or more of the fair market value of our securities being held by
persons other than “United States persons,” as defined
in Section 7701(a)(30) of the Internal Revenue Code, or
(v) our disqualification as a REIT under Section 856
of the Internal Revenue Code, will be void ab initio. If any
such transaction is not void ab initio, then the securities in
excess of the ownership limit, that cause us to be closely held,
that result in 50% or more of the fair market value of our
securities being held by persons other than United States
persons or that result in our disqualification as a REIT, would
automatically be exchanged for an equal number of excess shares,
and these excess shares will be transferred to an excess share
trustee for the exclusive benefit of the charitable
beneficiaries named by our Board of Trustees.
In such event, any dividends on excess shares
will be paid to the excess share trust for the benefit of the
charitable beneficiaries. The excess share trustee will be
entitled to vote the excess shares, if applicable, on any
matter. The excess share trustee may only transfer the excess
shares held in the excess
2
share trust as follows: (i) at the direction
of our Board of Trustees to a person whose ownership of our
securities would not violate the ownership limit; (ii) if
securities were transferred to the excess share trustee due to a
transaction or event that would have caused a violation of the
ownership limit or would have caused us to be closely held, the
excess share trustee will transfer the excess shares to the
person who makes the highest offer for the excess shares, pays
the purchase price and whose ownership will not violate the
ownership limit or cause us to be closely held; and
(iii) if excess shares were transferred to the excess share
trustee due to a transaction or event that would have caused
persons other than United States persons to own more than 50% of
the value of our securities, the excess share trustee will
transfer the excess shares to the United States person who makes
the highest offer for the excess shares, pays the purchase price
and whose ownership will not violate the ownership limit or
cause us to be closely held.
When the excess share trustee makes any transfer,
the person whose shares were exchanged for excess shares will
receive (i) the lesser of (A) the price paid by such
person or, if such person did not give value for the securities,
the market price of the securities on the day the securities
were exchanged for excess shares, and (B) the price
received by the excess share trust for securities, minus
(ii) any dividends received by the person whose shares were
exchanged for excess shares that such person was under an
obligation to pay over to the excess share trustee but has not
repaid at the time of the distribution of proceeds, and minus
(iii) any compensation for or expense of the excess share
trustee.
Transfer Agent and
Registrar. We act as our own transfer
agent and registrar with respect to our common shares.
DESCRIPTION OF PREFERRED SHARES
Our Third Restated Declaration of Trust
authorizes the issuance of an unlimited number of preferred
shares. No preferred shares were outstanding as of the date of
this prospectus. Our Board of Trustees has the authority, under
our Third Restated Declaration of Trust, to establish by
resolution more than one class or series of preferred shares and
to fix the number and relative rights and preferences of such
different classes or series of preferred shares without any
further vote or action by our shareholders. Unless otherwise
designated in our Third Restated Declaration of Trust, all
series of our preferred shares will constitute a single class of
our preferred shares.
The following description of our preferred shares
sets forth certain general terms and provisions of the preferred
shares to which any prospectus supplement may relate. The
statements below describing our preferred shares are in all
respects subject to, and qualified in their entirety by
reference to, our Third Restated Declaration of Trust, our
Second Restated Trustees’ Regulations (Bylaws), any
applicable designating amendment to our Third Declaration of
Trust establishing terms of a class or series of our preferred
shares and any applicable prospectus supplement. Our preferred
shares, when issued and delivered against payment for such
shares, will be fully paid and nonassessable.
General
As our Board of Trustees has the power to
establish the rights and preferences of each class or series of
our preferred shares, our Board of Trustees may afford the
holders of any class or series of our preferred shares rights
and preferences, voting or otherwise, senior to the rights of
holders of our common shares. The issuance of classes or series
of preferred shares could have the effect of delaying or
preventing a change of control that might involve a premium
price for shareholders or otherwise be in their best interest.
3
The rights and preferences of each class or
series of our preferred shares will be fixed by a designating
amendment relating to the class or series. A prospectus
supplement, relating to each class or series, will specify the
terms of our preferred shares as follows:
|
|
|
| |
• |
the title and stated value of our preferred
shares;
|
| |
| |
• |
the number of our preferred shares offered, the
liquidation preference per share and the offering price of our
preferred shares;
|
| |
| |
• |
the dividend rate(s), period(s) and/or payment
date(s) or method(s) of calculation applicable to our preferred
shares;
|
| |
| |
• |
the date from which dividends on our preferred
shares will accumulate, if applicable;
|
| |
| |
• |
the procedures for any auction and remarketing,
if any, for our preferred shares;
|
| |
| |
• |
the provision for a sinking fund, if any, for our
preferred shares;
|
| |
| |
• |
the provision for redemption, if applicable, of
our preferred shares;
|
| |
| |
• |
any listing of our preferred shares on any
securities exchange or association;
|
| |
| |
• |
the transfer agent and registrar for our
preferred shares;
|
| |
| |
• |
the terms and conditions, if applicable, upon
which our preferred shares will be convertible into our common
shares, including the conversion price (or manner of
calculation) and conversion period;
|
| |
| |
• |
a discussion of certain material federal income
tax considerations applicable to our preferred shares;
|
| |
| |
• |
the relative ranking and preferences of our
preferred shares as to dividend rights and rights upon our
liquidation, dissolution or winding up;
|
| |
| |
• |
any limitation on issuance of any class or series
of our preferred shares ranking senior to or on a parity with
the class or series of preferred shares as to dividend rights
and rights upon our liquidation, dissolution or winding up;
|
| |
| |
• |
any limitations on direct or beneficial ownership
and restrictions on transfer of our preferred shares, in each
case as may be appropriate to preserve our status as a
REIT; and
|
| |
| |
• |
any other specific terms, preferences, rights,
limitations or restrictions of our preferred shares.
|
Rank
Unless otherwise specified in the applicable
prospectus supplement, our preferred shares will, with respect
to rights to the payment of dividends and distribution of our
assets and rights upon our liquidation, dissolution or winding
up, rank (i) senior to our common shares and all other
equity securities the terms of which provide that such equity
securities are junior to our preferred shares; (ii) on a
parity with all equity securities other than those referred to
in clauses (i) and (iii); and (iii) junior to all
equity securities the terms of which provide that such equity
securities will rank senior to our preferred shares.
Dividends
Holders of our preferred shares will be entitled
to receive, when, as and if authorized by our Board of Trustees
and declared by us, out of our assets legally available for
payment, cash dividends at rates and on dates as will be set
forth in the applicable prospectus supplement. Each dividend
will be payable to holders of record as they appear in our
records on the record dates as will be fixed by our Board of
Trustees.
Dividends on any class or series of our preferred
shares may be cumulative or non-cumulative, as provided in the
applicable prospectus supplement. Dividends, if cumulative, will
accumulate from and after the date set forth in the applicable
prospectus supplement. If our Board of Trustees fails to
authorize a dividend payable on a dividend payment date on any
class or series of our preferred shares for which dividends are
noncumulative, then the holders of that class or series of our
preferred shares will have no
4
right to receive a dividend in respect of the
dividend period ending on that dividend payment date, and we
will have no obligation to pay the dividend accrued for that
period, whether or not dividends on that class or series are
declared payable on any future dividend payment date.
If any class or series of our preferred shares
are outstanding, no full dividends will be authorized or paid or
set apart for payment on any other class or series of our
preferred shares ranking, as to dividends, on a parity with or
junior to that class or series of our preferred shares for any
period unless (i) with respect to classes or series of our
preferred shares having a cumulative dividend, full cumulative
dividends have been or contemporaneously are authorized and paid
or authorized and a sum sufficient for the payment thereof set
apart for payment for all past dividend periods and the then
current dividend period, or (ii) with respect to classes or
series of our preferred shares not having a cumulative dividend,
full dividends have been or contemporaneously are authorized and
paid or authorized and a sum sufficient for the payment thereof
set aside for payment,
When dividends are not paid in full (or a sum
sufficient for their full payment is not so set apart) upon any
class or series of our preferred shares and any other class or
series of our preferred shares ranking on a parity as to
dividends with that class or series of our preferred shares, all
dividends declared upon that class or series of preferred shares
and any other class or series of our preferred shares ranking on
a parity as to dividends with those preferred shares will be
authorized pro rata so that the amount of dividends authorized
per share on that class or series of preferred shares and that
other class or series of our preferred shares will in all cases
bear to each other the same ratio that accrued and unpaid
dividends per share on that class or series of our preferred
shares (which will not include any accumulation in respect of
unpaid dividends for prior dividend periods if those preferred
shares do not have a cumulative dividend) and that other class
or series of our preferred shares bear to each other. No
interest, or sum of money in lieu of interest, will be payable
in respect of any dividend payment or payments on our preferred
shares of that series that may be in arrears.
Except as provided in the immediately preceding
paragraph, unless (i) with respect to classes or series of
our preferred shares having a cumulative dividend, full
cumulative dividends have been or contemporaneously are
authorized and paid or authorized and a sum sufficient for the
payment thereof set apart for payment for all past dividend
periods and the then current dividend period, or (ii) with
respect to classes or series of our preferred shares not having
a cumulative dividend, full dividends have been or
contemporaneously are authorized and paid or authorized and a
sum sufficient for the payment thereof set aside for payment for
the then current dividend period, no dividends (other than in
our common shares or other equity securities ranking junior to
our preferred shares of that class or series as to dividends and
upon our liquidation, dissolution or winding up) will be
authorized or paid or set aside for payment, no other
distribution will be authorized or made upon our common shares
or any other equity securities ranking junior to or on a parity
with our preferred shares of that class or series as to
dividends or upon liquidation, and no common shares or other
equity securities ranking junior to or on a parity with our
preferred shares of such class or series as to dividends or upon
our liquidation, dissolution or winding up will be redeemed,
purchased or otherwise acquired for any consideration (or any
monies be paid to or made available for a sinking fund for the
redemption of any shares) by us (except by conversion into or
exchange for other equity securities ranking junior to our
preferred shares of that class or series as to dividends and
upon our liquidation, dissolution or winding up).
Any dividend payment made on a class or series of
our preferred shares will first be credited against the earliest
accrued but unpaid dividend due with respect to shares of that
class or series which remains payable.
Redemption
If the applicable prospectus supplement so
states, our preferred shares will be subject to mandatory
redemption or redemption at our option, in whole or in part, in
each case on the terms, at the times and at the redemption
prices set forth in that prospectus supplement.
5
The prospectus supplement relating to a class or
series of our preferred shares that is subject to mandatory
redemption will specify the number of our preferred shares that
will be redeemed by us in each year commencing after a date to
be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid
dividends thereon (which will not, if our preferred shares do
not have a cumulative dividend, include any accumulation in
respect of unpaid dividends for prior dividend periods) to the
date of redemption. The redemption price may be payable in cash
or other property, as specified in the applicable prospectus
supplement. If the redemption price for any class or series of
our preferred shares is payable only from the net proceeds of
the issuance of our common shares or other equity securities,
the terms of our preferred shares may provide that, if no such
common shares or other equity securities have been issued or to
the extent the net proceeds from any issuance are insufficient
to pay in full the aggregate redemption price then due, that our
preferred shares will automatically and mandatorily be converted
into our common shares or other equity securities, as
applicable, pursuant to conversion provisions specified in the
applicable prospectus supplement.
None of our preferred shares of any class or
series will be redeemed unless all outstanding shares of that
class or series of our preferred shares are simultaneously
redeemed; provided, however, that the foregoing will not prevent
the purchase or acquisition of our preferred shares of that
class or series pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding shares of that
class or series of our preferred shares.
In addition, unless (i) with respect to
classes or series of our preferred shares having a cumulative
dividend, full cumulative dividends have been or
contemporaneously are authorized and paid or authorized and a
sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the then current dividend period,
or (ii) with respect to classes or series of our preferred
shares not having a cumulative dividend, full dividends have
been or contemporaneously are authorized and paid or authorized
and a sum sufficient for the payment thereof set aside for
payment for the then current dividend period, we will not
purchase or otherwise acquire directly or indirectly any of our
preferred shares of that class or series (except by conversion
into or exchange for common shares or other equity securities
ranking junior to our preferred shares of that class or series
as to dividends and upon our liquidation, dissolution or winding
up).
If fewer than all of the outstanding shares of
any class or series of our preferred shares are to be redeemed,
the number of shares to be redeemed will be determined by us and
those shares may be redeemed pro rata from the holders of record
of those shares in proportion to the number of those shares held
by those holders (with adjustments to avoid redemption of
fractional shares) or any other equitable method determined by
us that will not result in the issuance of any excess shares.
Notice of redemption will be mailed at least
30 days but not more than 60 days before the
redemption date to each holder of record of any class or series
of our preferred shares to be redeemed at the address shown in
our records. Each notice will state:
|
|
|
| |
• |
the redemption date;
|
| |
| |
• |
the number of shares and class or series of our
preferred shares to be redeemed;
|
| |
| |
• |
the redemption price;
|
| |
| |
• |
the place or places where certificates for our
preferred shares are to be surrendered for payment of the
redemption price;
|
| |
| |
• |
that dividends on the shares to be redeemed will
cease to accrue on that redemption date; and
|
| |
| |
• |
the date upon which the holder’s conversion
rights, if any, as to those shares will terminate.
|
If fewer than all of shares of any class or
series of our preferred shares are to be redeemed, the notice
mailed to each holder thereof will also specify the number of
shares to be redeemed from each holder. If notice of redemption
of any of our preferred shares has been given and if the funds
necessary for that redemption have been set apart by us in trust
for the benefit of the holders of any of our preferred shares
6
so called for redemption, then from and after the
redemption date dividends will cease to accrue on those shares,
those shares will no longer be deemed outstanding and all rights
of the holders of those shares will terminate, except the right
to receive the redemption price.
Liquidation Preference
Upon our voluntary or involuntary liquidation,
dissolution or winding up, then, before any distribution or
payment will be made to the holders of our common shares or
other equity securities ranking junior to that class or series
of our preferred shares in the distribution of assets upon our
liquidation, dissolution or winding up, the holders of each
class or series of our preferred shares will be entitled to
receive out of our assets legally available for distribution to
shareholders liquidating distributions in the amount of the
liquidation preference per share (set forth in the applicable
prospectus supplement), plus an amount equal to all dividends
accrued and unpaid on such preferred shares (which will not
include any accumulation in respect of unpaid dividends for
prior dividend periods if that class or series of preferred
shares does not have a cumulative dividend). After payment of
the full amount of the liquidating distributions to which they
are entitled, the holders of that class or series of our
preferred shares will have no right or claim to any of our
remaining assets. If, upon our voluntary or involuntary
liquidation, dissolution or winding up, our legally available
assets are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of that class or series
of our preferred shares and the corresponding amounts payable on
all shares of other classes or series of shares ranking on a
parity with that class or series of our preferred shares in the
distribution of assets upon our liquidation, dissolution or
winding up, then the holders of that class or series of our
preferred shares and all other classes or series of shares will
share ratably in that distribution of assets in proportion to
the full liquidating distributions to which they would otherwise
be respectively entitled.
If liquidating distributions have been made in
full to all holders of shares of that class or series of our
preferred shares, our remaining assets will be distributed among
the holders of our common shares and other equity securities
ranking junior to that class or series of our preferred shares
upon our liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case
according to their respective number of shares. For those
purposes, neither our consolidation or merger with or into any
other corporation, trust or other entity, nor the sale, lease,
transfer or conveyance of all or substantially all of our
property or business, will be deemed to constitute our
liquidation, dissolution or winding up.
Voting Rights
Except as otherwise described below, as otherwise
required by law or as indicated in the applicable prospectus
supplement, holders of our preferred shares will not have any
voting rights. Whenever dividends on any class or series of our
preferred shares are in arrears for six or more quarterly
periods, regardless of whether those quarterly periods are
consecutive, the holders of that class or series of our
preferred shares (voting separately as a class with all other
classes or series of our preferred shares upon which like voting
rights have been conferred and are exercisable) will be entitled
to vote for the election of two additional directors to our
Board of Trustees (and our entire Board of Trustees will be
increased by two trustees) until (i) with respect to
classes or series of our preferred shares having a cumulative
dividend, full cumulative dividends have been or
contemporaneously are authorized and paid or authorized and a
sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the then current dividend period,
or (ii) with respect to classes or series of our preferred
shares not having a cumulative dividend, full dividends have
been or contemporaneously are authorized and paid or authorized
and a sum sufficient for the payment thereof set aside for
payment for the then current dividend period.
7
Unless otherwise provided for any class or series
of our preferred shares, so long as any preferred shares remain
outstanding, we will not, without the affirmative vote or
consent of the holders of at least two-thirds of each class or
series of our preferred shares outstanding at the time, given in
person or by proxy, either in writing or at a meeting (that
class or series voting separately as a class):
|
|
| |
(i) authorize or create, or increase the
authorized or issued amount of, any class or series of our
preferred shares ranking senior to that class or series of our
preferred shares with respect to payment of dividends or the
distribution of assets upon our liquidation, dissolution or
winding up, or reclassify any of our equity securities into
equity securities that rank senior to those preferred shares
with respect to payment of dividends or the distribution of
assets upon our liquidation, dissolution or winding up, or
create, authorize or issue any obligation or equity security
convertible into or evidencing the right to purchase any equity
securities that rank senior to those preferred shares with
respect to payment of dividends or the distribution of assets
upon our liquidation, dissolution or winding up; or
|
| |
| |
(ii) amend, alter or repeal the provisions
of our Third Restated Declaration of Trust, including any
applicable amendments and designating amendments, whether by
merger, consolidation or otherwise, so as to materially and
adversely affect any right, preference, privilege or voting
power of that class or series of our preferred shares; provided,
however, that any increase in the amount of the authorized
preferred shares or the authorization or issuance of any other
equity securities, or any increase in the number of authorized
shares of that class or series of our preferred shares or any
other equity securities, in each case ranking on a parity with
or junior to any class or series of our preferred shares with
respect to payment of dividends and the distribution of assets
upon liquidation, dissolution or winding up, will not be deemed
to materially and adversely affect those rights, preferences,
privileges or voting powers.
|
The foregoing voting provisions will not apply
if, at or prior to the time when the act with respect to which
that vote would otherwise be required to be effected, all
outstanding shares of that class or series of our preferred
shares has been redeemed or called for redemption upon proper
notice and sufficient funds have been irrevocably deposited in
trust to effect that redemption.
Conversion Rights
The terms and conditions, if any, upon which any
class or series of our preferred shares are convertible into our
common shares or other equity securities will be set forth in
the applicable prospectus supplement. Such terms will include
the number of common shares or other equity securities into
which our preferred shares are convertible, the conversion price
(or manner of calculation of the conversion price), the
conversion period, provisions as to whether conversion will be
at our option or at the option of the holders of that class or
series of our preferred shares, the events requiring an
adjustment of the conversion price and provisions affecting
conversion in the event of the redemption of that class or
series of our preferred shares.
Restrictions on Ownership
Our preferred shares are fully transferable and
alienable subject only to certain restrictions to be set forth
in the applicable designating amendment to our Third Restated
Declaration of Trust, which are intended to help preserve our
status as a REIT for federal income tax purposes. Then, more
specifically, such designating amendment will provide that any
transaction in our preferred shares, other than a transaction
entered into through the NASDAQ National Market or other similar
exchange, that would result in (i) a person owning in
excess of the ownership limit, which as of the date of this
prospectus is 9.8%, in number or value, of the outstanding
securities, (ii) less than 100 people owning our
securities, (iii) us being “closely held” within
the meaning of Section 856(h) of the Internal Revenue Code,
(iv) 50% or more of the fair market value of our securities
being held by persons other than “United States
persons,” as defined in Section 7701(a)(30) of the
Internal Revenue Code, or (v) our disqualification as a
REIT under Section 856 of the Internal Revenue Code, will
be void ab initio. If any
8
such transaction is not void ab initio, then the
securities in excess of the ownership limit, that cause us to be
closely held, that result in 50% or more of the fair market
value of our securities being held by persons other than United
States persons or that result in our disqualification as a REIT,
would automatically be exchanged for an equal number of excess
shares, and these excess shares will be transferred to an excess
share trustee for the exclusive benefit of the charitable
beneficiaries named by our Board of Trustees.
In such event, any dividends on excess shares
will be paid to the excess share trust for the benefit of the
charitable beneficiaries. The excess share trustee will be
entitled to vote the excess shares, if applicable, on any
matter. The excess share trustee may only transfer the excess
shares held in the excess share trust as follows: (i) at
the direction of our Board of Trustees to a person whose
ownership of our securities would not violate the ownership
limit; (ii) if securities were transferred to the excess
share trustee due to a transaction or event that would have
caused a violation of the ownership limit or would have caused
us to be closely held, the excess share trustee will transfer
the excess shares to the person who makes the highest offer for
the excess shares, pays the purchase price and whose ownership
will not violate the ownership limit or cause us to be closely
held; and (iii) if excess shares were transferred to the
excess share trustee due to a transaction or event that would
have caused persons other than United States persons to own more
than 50% of the value of our securities, the excess share
trustee will transfer the excess shares to the United States
person who makes the highest offer for the excess shares, pays
the purchase price and whose ownership will not violate the
ownership limit or cause us to be closely held.
When the excess share trustee makes any transfer,
the person whose shares were exchanged for excess shares will
receive (i) the lesser of (A) the price paid by such
person or, if such person did not give value for the securities,
the market price of the securities on the day the securities
were exchanged for excess shares, and (B) the price
received by the excess share trust for securities, minus
(ii) any dividends received by the person whose shares were
exchanged for excess shares that such person was under an
obligation to pay over to the excess share trustee but has not
repaid at the time of the distribution of proceeds, and minus
(iii) any compensation for or expense of the excess share
trustee.
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES
AND PREFERRED SHARE DIVIDENDS
Our ratios of earnings to combined fixed charges
and preferred share dividends for the fiscal years ended
April 30, 2003, 2002, 2001, 2000 and 1999 were 1.42x,
1.46x, 1.41x, 1.46x and 1.50x, respectively. Our ratio of
earnings to combined fixed charges and preferred share dividend
requirements for the six-months ended October 31, 2003, was
1.35x. As of the date of this prospectus, we do not have any
preferred shares outstanding.
For the purpose of computing this ratio, earnings
have been calculated by adding pre-tax income from continuing
operations before adjustments for minority interests in
consolidated subsidiaries, plus fixed charges (excluding
capitalized interest). Fixed charges consist of mortgage and
loan interest expense, whether expensed or capitalized, the
amortization of debt expense and capitalized interest.
CERTAIN TAX CONSIDERATIONS
Considerations Regarding IRET and its
Shareholders
Federal Income Taxation.
Since our organization, we have
operated in a manner intended to qualify us as a REIT under
sections 856-858 of the Internal Revenue Code. Under these
sections of the Internal Revenue Code, a REIT that meets certain
requirements will not be subject to Federal income tax with
respect to income that it distributes to its shareholders.
Rather, all such income will be taxed at the shareholder level.
In order to be considered a REIT for purposes of the Federal
income tax laws, we must continue to meet the requirements of
those sections of the Internal Revenue Code, including the
following:
|
|
| |
(i) At the end of each fiscal quarter, at
least 75% of the value of our total assets must consist of real
estate, cash and cash items (including receivables) and
government securities. As to non-real
|
9
|
|
| |
estate investments, which may not exceed 25% of
our total assets, the securities that we own in any one issuer
(other than a taxable REIT subsidiary) may not represent more
than 5% of the value of our assets or more than 10% of the total
value or voting power of that issuer.
|
| |
| |
(ii) At least 75% of our gross income for
the taxable year must be derived from real estate rents or
mortgages or other specified real estate related activities.
|
| |
| |
(iii) Beneficial ownership of our securities
must be held by 100 or more persons during at least
335 days of each 12-month taxable year. More than 50% of
our outstanding securities may not be owned, directly or
indirectly, by or for, five or fewer individuals, at any time
during the last half of the taxable year.
|
As a REIT, we will not be taxed on that portion
of our taxable income that is distributed to our shareholders,
provided that at least 90% of our taxable income is distributed.
To the extent that there is undistributed taxable income or
undistributed capital gain income, we will be taxed as a
domestic corporation at corporate income tax rates. However, we
may retain some or all of our net capital gain without incurring
double taxation. If we elect to do this, we are taxed on the
amount we designate as retained capital gain at the capital
gains rate generally applicable to corporations. Our
shareholders then must include in their income their
proportionate share of the undistributed capital gain as
long-term capital gain. In this case the shareholder is deemed
to have paid the shareholder’s share of the tax we paid,
and is entitled to a credit for this amount on the
shareholder’s income tax return. In addition, the
shareholder’s basis in the shareholder’s securities is
increased by the amount of the undistributed long-term capital
gains taxed to the shareholder, less the amount of capital gains
tax we paid on those capital gains. As a REIT, we will not be
entitled to carry back or carry forward any net operating losses
with respect to the income taxed to us. So long as we have met
the statutory requirements for taxation as a REIT, distributions
made to our shareholders will be taxed to such shareholders in
the manner described below.
If we do not qualify as a REIT for any taxable
year, we will be taxed as a domestic corporation, and we will
not be able to deduct distributions to our shareholders in
computing our taxable income. Such distributions, to the extent
made out of our current or accumulated earnings and profits,
will be taxable to the shareholders as dividends, but will be
eligible for the dividends received deduction for corporations.
In the opinion of the law firm of
Pringle & Herigstad, P.C., we have conducted our
operations in such a manner as to qualify as a REIT. Treasury
Regulations issued under the Internal Revenue Code require that
the members of our Board of Trustees have continuing exclusive
authority over our management, the conduct of our affairs and,
with certain limitations, the management and disposition of the
property we own. Our Board of Trustees intends to adopt any
amendments to our Third Restated Declaration of Trust that may
be necessary in order for us to continue to operate as a REIT.
Any amendments to our Third Restated Declaration of Trust that
are required in order for us to remain qualified as a REIT may
be made by the Board of Trustees without notice to, or a vote
of, the shareholders.
Taxation of Our Shareholders.
Distributions made to our shareholders
out of current or accumulated earnings and profits will be taxed
to our shareholders as ordinary income. Distributions that are
designated as capital gain dividends will generally be taxed as
long-term capital gains to the extent they do not exceed our
actual net capital gain income for the taxable year.
Distributions to a shareholder in excess of current or
accumulated earnings and profits will be treated as a nontaxable
return of capital to the extent that they do not exceed the
adjusted basis of a shareholder’s securities. If
distributions in excess of current or accumulated earnings and
profits exceed the adjusted basis of a shareholder’s
securities, the distributions will be included in the
shareholder’s income as long-term or short-term capital
gain (assuming the securities are held as a capital asset in the
hands of the shareholder). So long as we are taxed as a REIT
distributions will not be eligible for the dividends received
deduction for corporations.
We will notify shareholders at the end of each
year as to the portions of the distributions that constitute
ordinary income, net capital gain or return of capital. Any
dividend declared by us during the months of October, November
or December of any year payable to a shareholder of record on a
specified date in any such month will be treated as both paid by
us and received by the shareholder on
10
December 31 of such year, even though the
dividend may not actually be paid by us until January of the
following calendar year. The shareholders may not include in
their individual income tax returns any of our operating or
extraordinary losses, whether ordinary or capital.
In addition, as described earlier, if we retain
some or all of our net capital gain and elect to avoid double
tax on these gains, we will be taxed on the amount so designated
at the capital gains rate generally applicable to corporations.
A shareholder then must include the shareholder’s
proportionate share of these undistributed capital gains in
income as long-term capital gain. The shareholders are deemed to
have paid their share of the tax we paid, and they may claim a
credit for this amount on their income tax returns. In addition,
the tax on the shareholder’s securities is increased by the
amount of such undistributed long-term capital gains taxed to
the shareholder, less the amount of capital gains tax we paid on
those capital gains.
In general, any gain or loss upon a sale or
exchange of our securities by a shareholder who has held such
securities as a capital asset will be long-term or short-term,
depending on whether the securities were held for more than one
year; provided, however, that any loss on the sale or exchange
of our securities that have been held by such shareholder for
six months or less will be treated as a long-term capital loss
to the extent that distributions from us are required to be
treated by such shareholders as long-term capital gain.
State and Local Income Taxation.
Since we qualify as a REIT for
purposes of the Federal income tax laws, we generally are not
subject to state income tax on that portion of our taxable
income that is distributed to our shareholders. Shareholders,
however, may be subject to taxation on distributions we make to
them depending on the state or local jurisdiction of residence
of the shareholder. Prospective shareholders should consult
their tax advisors for an explanation of how state and local tax
laws could affect their investment.
Taxation of Pension and Profit Sharing
(including 401(k)) Trusts, IRAs and other Tax-Exempt
Entities. Amounts distributed as
dividends by a qualified REIT generally do not constitute
unrelated business taxable income, or UBTI, when received by a
tax-exempt entity. As a consequence, the dividend income
received from us by a tax-exempt entity, including a qualified
pension or profit sharing (including a 401(k)) trust or an
IRA), should not be UBTI to the tax-exempt entity provided that:
(a) the tax-exempt entity has not held its securities as
“debt-financed property” within the meaning of the
Internal Revenue Code, and (b) the securities are not
otherwise used in an unrelated trade or business of the
tax-exempt entity. If we are considered a “pension-held
REIT,” an additional requirement must be satisfied in order
for dividend income received by a tax-exempt entity that is a
qualified pension or profit sharing (including
401(k)) trust, or a qualified trust, not to be UBTI. This
requirement is that a qualified trust may not hold more than 10%
by value of the interests in us. In general, a REIT is
considered a “pension-held REIT” if it takes advantage
of a special rule in the Internal Revenue Code permitting it to
satisfy the “five or fewer individual ownership
requirement” mentioned above in subparagraph (iii) of
the subsection entitled “Considerations Regarding IRET and
its Shareholders” by treating beneficiaries of a qualified
trust as owners, and the REIT is considered to be
“predominantly held” by qualified trusts. A REIT is
considered to be “predominantly held” by qualified
trusts if: (a) at least one qualified trust holds more than
25% by value of the interests in the REIT; or (b) one or
more qualified trusts, each of which own more than 10% by value
of the interests in the REIT, hold in the aggregate more than
50% by value of the interests in the REIT.
With respect to tax-exempt entities that are
social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts and qualified group
legal services plans exempt from federal income taxation under
Sections 501(c)(7), (9), (17) and (20) of the
Internal Revenue Code, respectively, income from an investment
in us will constitute UBTI unless the organization is able to
deduct amounts set aside or placed in reserve for certain
purposes so as to offset the income generated by its investment
in us. Such prospective investors should consult their tax
advisors concerning these “set-aside” and reserve
requirements.
Reporting to the IRS and Backup Withholding.
We will report to our shareholders and
the Internal Revenue Service the amount of dividends 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, currently
11
at the rate of 28%, with respect to dividends
paid, unless such holder: (i) is a corporation or comes
within certain other exempt categories and, when required,
demonstrates this fact, or (ii) provides a correct taxpayer
identification number, certifies that he or she is exempt from
backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A shareholder that
does not provide us with a correct taxpayer identification
number may be subject to penalties imposed by the Internal
Revenue Service. Any amount paid as backup withholding will be
creditable against the shareholder’s income tax liability.
In addition, we may be required to withhold a portion of capital
gain distributions to any shareholder who fails to certify its
non-foreign status to us.
Tax Treatment of IRET Properties and Its
Limited Partners
The following discussion summarizes certain
federal income tax considerations applicable to IRET’s
investment in IRET Properties. The discussion does not cover
state or local tax laws or any federal tax laws other than
income tax laws.
We will include in our income our share of IRET
Properties’ income and deduct our share of IRET
Properties’ losses only if IRET Properties is classified
for federal income tax purposes as a partnership, rather than as
a corporation, an association taxable as a corporation or a
“publicly traded partnership” within the meaning of
the federal income tax laws.
We have not requested, and do not intend to
request, a ruling from the IRS that IRET Properties will be
classified as a partnership for federal income tax purposes.
Instead, based on certain factual assumptions and
representations we have made and on currently applicable
Treasury Regulations under Section 7701 of the Internal
Revenue Code, Pringle & Herigstad, P.C., is of the
opinion that IRET Properties will be treated for federal income
tax purposes as a partnership. Further, based on certain factual
assumptions and representations we have made, Pringle &
Herigstad, P.C., is of the opinion that IRET Properties
will not be a publicly traded partnership. Unlike a tax ruling,
an opinion of counsel is not binding upon the IRS, and no
assurance can be given that the IRS will not challenge the
status of IRET Properties as a partnership for federal income
tax purposes. If a court sustained such a challenge, IRET
Properties would be treated as a corporation for federal income
tax purposes, as described below. In addition, the opinion of
Pringle & Herigstad, P.C., is based on existing
law. No assurance can be given that administrative or judicial
changes would not modify the conclusions expressed in the
opinion.
If for any reason IRET Properties was taxable as
a corporation, rather than a partnership, for federal income tax
purposes, we would not be able to qualify as a REIT. In
addition, any change in the IRET Properties’ status for tax
purposes might be treated as a taxable event, in which case we
might incur a tax liability without any related cash
distribution. Further, items of income and deduction of IRET
Properties would not pass through to its partners, and its
partners would be treated as shareholders for tax purposes.
Additionally, IRET Properties 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 IRET Properties’
taxable income.
Income Taxation of IRET Properties and its
Partners.
Partners, Not IRET Properties, Subject to Tax.
A partnership is not a taxable entity
for Federal income tax purposes. As such, we will be required to
take into account our allocable share of income, gains, losses,
deductions and credits from IRET Properties for any taxable year
ending within, or with, our taxable year, without regard to
whether we have received, or will receive, any distributions.
Partnership Allocation Income, Losses and
Capital Gain. Although a partnership
agreement generally will determine allocations of income and
losses among partners, such allocations will be disregarded for
tax purposes under Section 704(b) of the Internal Revenue
Code if they do not comply with the provisions of
Section 704(b) of the Internal Revenue Code and the
Treasury Regulations promulgated thereunder. 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
12
economic arrangement of the partners with respect
to such item. IRET Properties’ allocations of taxable
income and loss are intended to comply with the requirements of
Section 704(b) of the Internal Revenue Code and the
Treasury Regulations promulgated thereunder.
Tax Allocations with Respect to Contributed
Property. Pursuant to
Section 704(c) of the Internal Revenue Code, income, gain,
loss and deductions that are attributable to appreciated or
depreciated property 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 Treasury Department has issued
regulations requiring partnerships to use a “reasonable
method” for allocating items affected by
Section 704(c) of the Internal Revenue Code, and outlining
several reasonable allocation methods. IRET Properties plans to
elect to use the traditional method for allocating under
section 704(c) items with respect to the properties it
acquires in exchange for limited partnership units.
Under the limited partnership agreement of IRET
Properties, depreciation or amortization deductions will be
allocated among the partners in accordance with their respective
interests. In addition, gain on the sale of a property
contributed to IRET Properties by a limited partner in exchange
for limited partnership units will be specially allocated to
such limited partner to the extent of any built-in gain with
respect to the property. Depending on the allocation method
elected under section 704(c), it is possible that:
(i) we may be allocated lower amounts of depreciation
deductions for tax purposes with respect to contributed
properties than would be allocated to us if such properties were
to have a tax basis equal to their fair market value at the time
of contribution, and (ii) we may be allocated taxable gain
in the event of a sale of such contributed properties in excess
of the economic profit allocated to us as a result of such sale.
These allocations may cause us to recognize taxable income in
excess of cash proceeds, which may adversely affect our ability
to comply with the REIT distribution requirements. This
situation has not occurred in the past, and we do not currently
have any reason to believe it will occur in the future.
The allocation rules also may affect the
calculation of our earnings and profits for purposes of
determining the portion of our distributions that are taxable as
a dividend. The allocations described in this paragraph may
result in a higher portion of our distributions being taxed as a
dividend than would have occurred had we purchased the
properties for cash.
Tax Basis in IRET Properties.
In general, our adjusted tax basis of
our partnership interest in IRET Properties is equal to:
(i) the amount of cash and the basis of any other property
that we contribute to IRET Properties, (ii) increased by
our share of income and indebtedness, and (iii) reduced,
but not below zero, by our share of the loss and the amount of
cash and the basis of any other property distributed to us.
If the allocation of our share of loss would
reduce the adjusted tax basis of our partnership interest in
IRET Properties below zero, the recognition of such loss will be
deferred until such time as the recognition of such loss would
not reduce our adjusted tax basis below zero. To the extent that
cash distributions, or any decrease in our share of the
indebtedness, would reduce our adjusted tax basis below zero,
the excess distributions (after our adjusted tax basis has been
reduced to zero) will constitute taxable income to us. Such
income normally will be characterized as capital gain, and, if
our partnership interest in IRET Properties has been held for
longer than the long-term capital gain holding period, the
income will constitute long-term capital gain.
Sale of Real Estate.
Generally, any gain realized by IRET
Properties on the sale of property held for more than one year
will be long-term capital gain, except for any portion of such
gain that is treated as depreciation or cost recovery recapture.
Any gain recognized on the disposition of a
particular property contributed by a partner in exchange for
limited partnership will be allocated first to such contributing
partner under Section 704(c) of the Internal Revenue Code
to the extent of such contributing partner’s built-in gain.
Any remaining gain will
13
be allocated among the partners in accordance
with their respective ownership percentage interests in IRET
Properties.
PLAN OF DISTRIBUTION
We may sell the securities offered by this
prospectus directly, through agents designated by us from time
to time or to or through underwriters or dealers. If any agents,
underwriters or dealers are involved in the sale of any of our
securities, their names, and any applicable purchase price, fee,
commission or discount arrangements between or among them, will
be set forth, or will be calculable from the information set
forth, in the applicable prospectus supplement. Underwriters may
sell the securities offered by this prospectus to or through
dealers, and those 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.
The securities may be offered and sold at a fixed
price or prices, which may be subject to change, at prices
related to the prevailing market prices at the time of sale, at
negotiated prices or at other prices determined at the time of
sale.
If so indicated in the applicable prospectus
supplement, we may authorize dealers acting as our agents to
solicit offers by certain institutions to purchase the
securities offered by this prospectus from us at the public
offering price set forth in that prospectus supplement pursuant
to delayed delivery contracts providing for payment and delivery
on the date or dates stated and the terms set forth in that
prospectus supplement.
Any underwriting compensation paid by us to
underwriters or agents in connection with the offering of the
securities offered by this prospectus, and any discounts,
concessions or commissions allowed by underwriters to
participating dealers, will be set forth in any applicable
prospectus supplement. Underwriters, dealers and agents
participating in the distribution of the securities offered by
this prospectus 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 offered by this
prospectus may be deemed to be underwriting discounts and
commissions, under the Securities Act of 1933. Underwriters,
dealers and agents may be entitled, under agreements entered
into with us, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the
Securities Act of 1933.
Unless otherwise indicated in the applicable
prospectus supplement, the obligations of the underwriters to
purchase any offered securities will be subject to conditions
precedent and the underwriters will be obligated to purchase all
of the offered securities if any are purchased.
Underwriters, agents and dealers, and their
affiliates, may be customers of, engage in transactions with,
and perform services for us and our subsidiaries in the ordinary
course of business.
LEGAL MATTERS
The validity of the securities offered by this
prospectus, the federal and state tax aspects of the
organization and operation of us and IRET Properties and other
legal matters will be passed upon for us by Pringle &
Herigstad, P.C., Minot, North Dakota.
EXPERTS
The financial statements incorporated into this
prospectus by reference to our Annual Report on Form 10-K
for the fiscal year ended April 30, 2003, have been
included herein in reliance on the reports of Brady
Martz & Associates, P.C., Minot, North Dakota,
independent accountants, given on the authority of that firm as
experts in accounting and auditing.
14
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
Certain statements included in this prospectus
and the documents incorporated into this prospectus by reference
are “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements include statements about our
intention to invest in properties that we believe will increase
in income and value; our belief that the real estate markets in
which we invest will continue to perform well; our belief that
we have the liquidity and capital resources necessary to meet
our known obligations and to make additional real estate
acquisitions and capital improvements when appropriate to
enhance long term growth; and other statements preceded by,
followed by or otherwise including words such as
“believe,” “expect,” “intend,”
“project,” “anticipate,”
“potential,” “may,” “will,”
“designed,” “estimate,” “should,”
“continue” and other similar expressions. These
statements indicate that we have used assumptions that are
subject to a number of risks and uncertainties that could cause
our actual results or performance to differ materially from
those projected.
Although we believe that the expectations
reflected in forward-looking statements are based on reasonable
assumptions, we can give no assurance that these expectations
will prove to have been correct. Important factors that could
cause our actual results to differ materially from the
expectations reflected in our forward-looking statements include:
|
|
|
| |
• |
the economic health of the markets in which we
own and operate multi-family and commercial properties,
specifically the states of Minnesota and North Dakota, or other
markets in which we may invest in the future;
|
| |
| |
• |
the economic health of our commercial tenants;
|
| |
| |
• |
market rental conditions, including occupancy
levels and rental rates, for multi-family residential and
commercial properties;
|
| |
| |
• |
our ability to identify and secure additional
multi-family residential and commercial properties that meet our
criteria for investment;
|
| |
| |
• |
the level and volatility of prevailing market
interest rates and the pricing of our securities;
|
| |
| |
• |
financing risks, such as our inability to obtain
debt or equity financing on favorable terms, or at all;
|
| |
| |
• |
our ability to timely complete and lease-up
properties under construction;
|
| |
| |
• |
compliance with applicable laws, including those
concerning the environment and access by persons with
disabilities; and
|
| |
| |
• |
the availability and cost of casualty insurance
for losses caused by terrorist acts.
|
In light of these uncertainties, the events
anticipated by our forward-looking statements might not occur
and we caution you not to place undue reliance on any of our
forward-looking statements. We undertake no obligation to update
or revise our forward-looking statements, whether as a result of
new information, future events or otherwise, and those
statements speak only as of the date made. The foregoing review
of factors that could cause our actual results to differ
materially from those contemplated in any forward-looking
statements should not be construed as exhaustive.
15
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports,
proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any document we file
at the Securities and Exchange Commission’s public
reference rooms at 450 Fifth Street, N.W.,
Washington, D.C., 20549, and in New York,
New York and Chicago, Illinois. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the public reference rooms. You also may obtain
copies of the documents at prescribed rates by writing to the
Public Reference Section of the Securities Exchange Commission
at 450 Fifth Street, N.W., Room 1024,
Washington, D.C., 20549. Our Securities and Exchange
Commission filings are also available to the public at the
Securities and Exchange Commission’s web site at
http://www.sec.gov and our web site at http://www.irets.com.
Information on our website does not constitute part of this
prospectus.
We have filed with the Securities and Exchange
Commission a Registration Statement on Form S-3, of which
this prospectus is a part, under the Securities Act of 1933 with
respect to the Securities. As permitted by the rules and
regulations of the Securities and Exchange Commission, this
prospectus does not contain all the information you can find in
the Registration Statement or the exhibits to the Registration
Statement.
Statements contained in this prospectus as to the
contents of any contract or other document are not necessarily
complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in
all respects by such reference and the exhibits and schedules
thereto. For further information about us and our securities,
you should refer to the Registration Statement and such exhibits
and schedules, which may be obtained from the Securities and
Exchange Commission at its principal office in
Washington, D.C., upon payment of the fees prescribed by
the Securities and Exchange Commission, and at the Securities
and Exchange Commission’s website.
16
Investors Real Estate
Trust
6,000,000 Common Shares of
Beneficial Interest
Prospectus Supplement
October 17, 2007
Robert W. Baird &
Co.
D.A. Davidson &
Co.
J.J.B. Hilliard, W.L. Lyons,
Inc.
