As filed with the Securities and Exchange Commission on July 8, 2005
File No. 333-125184
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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BNP RESIDENTIAL PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 56-1574675
(State of incorporation) (I.R.S. Employer
Identification No.)
301 South College Street, Suite 3850
Charlotte, North Carolina 28202
(704) 944-0100
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
With Copies to:
Philip S. Payne, Chairman and Robert H. Bergdolt, Esq.
Chief Financial Officer Michael S. O'Sullivan, Esq.
BNP Residential Properties, Inc. DLA Piper Rudnick Gray Cary US LLP
301 South College Street, Suite 3850 4700 Six Forks Road, Suite 200
Charlotte, North Carolina 28202 Raleigh, North Carolina 27609
(704) 944-0100 (919) 786-2000
(Address, including zip code, and telephone number, including
area code, of agent for service)
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this registration statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
1,173,898 shares of Common Stock
BNP RESIDENTIAL PROPERTIES, INC.
This prospectus relates to the offer and sale (i) by us of 39,270
shares of common stock that we are offering and may sell in exchange for the
same number of units in BNP Residential Properties Limited Partnership, which is
the operating partnership through which we conduct substantially all of our
business, (ii) by selling stockholders of 626,050 shares of our common stock,
which shares we may issue upon redemption of a like number of units in the
operating partnership and (iii) by selling stockholders of 508,578 outstanding
shares of our common stock.
The registration of the shares to which this prospectus relates does
not necessarily mean that any of such shares will be issued by us or sold by the
selling stockholders. We will not receive any cash proceeds from the sale of the
shares of common stock offered by this prospectus. We will bear the costs
relating to the registration of this offering, which we estimate will be
approximately $58,000.
The selling stockholders may offer their shares through public or
private transactions, on or off the American Stock Exchange, at prevailing
market prices or at privately negotiated prices. The selling stockholders may
make sales directly to purchasers or through brokers, agents, dealers or
underwriters. The selling stockholders will bear all commissions and other
compensation paid to brokers in connection with the sale of their shares.
Our common stock is traded on the American Stock Exchange under the
symbol "BNP." On July 1, 2005, the last reported sale price for our common stock
on the American Stock Exchange was $16.01 per share.
------------------------
Investing in our common stock involves certain risks. You should
carefully read and consider the risk factors included in this prospectus
(beginning on page 4), in any prospectus supplement, and in our periodic reports
and other information that we file with the SEC before buying our securities.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. It is illegal for any person to tell you
otherwise.
We have not authorized any person to make a statement that differs from
this prospectus. If any person does make a statement that differs from this
prospectus, you should not rely on it. This prospectus is not an offer to sell
these securities, nor is it an offer to buy these securities, in any
jurisdiction where the offer or sale is not permitted. The information in this
prospectus is complete and accurate as of its date, but the information may
change after that date.
The date of this prospectus is July 8, 2005.
Table of Contents
BNP Residential Properties, Inc.......................................3
Risk Factors..........................................................4
Use of Proceeds......................................................12
Selling Stockholders.................................................13
Plan of Distribution.................................................14
Description of Common Stock..........................................16
Description of Preferred Stock.......................................20
Partnership Agreement of the Operating Partnership...................21
Federal Income Tax Considerations....................................25
Experts..............................................................48
Legal Matters........................................................49
Where You Can Find More Information..................................49
BNP Residential Properties, Inc.
BNP Residential Properties, Inc. is a real estate investment trust
focused on owning and operating apartment communities. We currently own and
operate 33 apartment communities containing 8,384 apartment units, including
three properties containing 713 apartments for which we are the general partner.
We also own 40 restaurant properties, which are leased on a triple-net basis to
a restaurant operator.
We are structured as an UPREIT, or umbrella partnership real estate
investment trust. We are the sole general partner and own a controlling interest
in BNP Residential Properties Limited Partnership, the operating partnership.
All of our operations are conducted through the operating partnership.
Our mailing address and telephone number are:
BNP Residential Properties, Inc.
301 South College Street, Suite 3850
Charlotte, North Carolina 28202
(704) 944-0100
3
Risk Factors
Before you invest in our securities, you should be aware that there are
various risks, including those described below. You should consider carefully
these risk factors together with all of the other information included in this
prospectus before you decide to purchase our securities.
Some of the information in this prospectus may contain forward-looking
statements. You can identify such statements by our use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state
other "forward-looking" information. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this prospectus. The risk factors noted in this section and other
factors noted throughout this prospectus, including certain risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward-looking statement.
A decline in revenues from, or a sale of, our Hardee's restaurant properties
could adversely affect our financial condition and results of operations.
A significant portion of our assets is invested in Hardee's restaurant
properties that are leased on a triple-net basis to Boddie-Noell Enterprises,
Inc. The master lease for our restaurant properties requires Boddie-Noell
Enterprises to pay us annual rent equal to the greater of a specified minimum
rent or 9.875% of food sales. If Boddie-Noell Enterprises renews the master
lease, after December 31, 2007, it has the right to terminate the lease on up to
five restaurants per year by offering to purchase them under specified terms.
In addition, we entered into a separate agreement that allowed
Boddie-Noell Enterprises to purchase, under specified terms, up to seven
restaurant properties deemed non-economic for no less than net carrying value.
The original lease was for 47 restaurant properties; since 1999, we have sold
seven restaurants deemed non-economic to Boddie-Noell Enterprises for total
proceeds of $4,373,000, which equaled the net carrying value of the properties.
The minimum rent on the remaining 40 restaurants is $3.8 million per
year. From 1987 through 1995, Boddie-Noell Enterprises paid us more than the
then-current minimum rent, which was $3.5 million per year. However, from 1992,
when our restaurant related revenues peaked at $5.3 million, through 2002,
restaurant sales declined each year. In 2003, Hardee's introduced the
"Thick-Burger" product line and began seeing significant sales increases with
same-store sales at our restaurant properties increasing by 2.4%. These
increases continued into 2004 with same-store sales for 2004
4
improving by 8.5% over 2003 levels. Even with the recent same-store sales
increases, from 1996 through 2004 the revenues of our restaurant properties were
below the level requiring payments in excess of the minimum rent. For us to
receive percentage rent in 2005, same-store sales would have to increase by
1.3%. Given the current state of flux in the fast-food industry, we are
uncomfortable making a prediction or relying on the forecasts of others as to
future sales trends for Hardee's. For this reason, we have based our plans and
expectations on continuing to receive the minimum rent in 2005.
In order to protect our stockholders from declining restaurant revenues
from 1992 through 2002, we began to acquire apartment communities in 1993. We
believe that we can more effectively enhance the value of our common stock by
acquiring and operating apartment communities. Accordingly, we focused our
business primarily on the ownership and operation of apartment communities.
As a consequence of this refocused strategy, we may elect to sell our
restaurant properties and reinvest the proceeds in additional apartment
communities. No sale of the restaurants is pending, nor are we making any effort
to actively market the restaurants. We will only divest the restaurants if we
believe doing so will enhance stockholder value.
If we do dispose of the restaurant properties, it is possible that we
may incur a loss on the disposition of the properties. It is also possible that
we may invest such sale proceeds in properties that yield significantly less
than the $3.8 million we currently receive from Boddie-Noell Enterprises.
Further, in the event we were to find a buyer, Boddie-Noell Enterprises
has the right to purchase the restaurants from us on the same terms as that
offer. This right may make it more difficult to find a suitable buyer or could
adversely affect the price we might realize on any such sale.
For the year ended December 31, 2004, the restaurant properties
accounted for 7.5% of our total revenues. All of the restaurant property revenue
comes from Boddie-Noell Enterprises. The inability of Boddie-Noell Enterprises
to pay us rent would adversely affect funds from operations and funds available
for distribution.
Geographic concentration of our properties makes our business vulnerable to
economic downturns in Virginia, North Carolina or South Carolina.
All of our properties are located in Virginia, North Carolina and South
Carolina. Adverse economic developments in these states could adversely impact
the operations of our properties and therefore our profitability. The
concentration of properties in a limited number of markets may expose us to
risks of adverse economic developments that are greater than the risks of owning
properties in many markets. Our revenues and the value of our properties may be
affected by a number of factors, including the local economic climate (which may
be adversely impacted by business layoffs, downsizing or industry slow downs),
changing demographics and other factors.
5
Our apartment communities are subject to multiple operating risks.
Our apartment communities are subject to operating risks common to
apartment communities in general. Such risks include:
o competition from other apartment communities;
o alternative housing, including home ownership, especially during times of low
mortgage interest rates;
o new construction of comparable properties or adverse economic conditions in
the areas in which our apartment communities are located, either of which might
adversely affect apartment occupancy or rental rates;
o increases in operating costs (including real estate taxes), which may not
necessarily be offset by increased rents; and
o the inability or unwillingness of residents to pay rent increases.
The local rental market may limit the extent to which we may increase
rents in response to operating expense increases without decreasing occupancy
rates. Any of the above events could adversely affect our ability to make
distributions.
We have substantial debt obligations, which may reduce our operating performance
and adversely affect our ability to pay distributions.
At March 31, 2005, we had $373.3 million in long-term debt. Payments of
principal and interest on borrowings may leave us with insufficient cash
resources to operate the apartment communities or to pay the distributions we
must pay to maintain our qualification as a REIT. Further, a high debt level
creates an increased risk that we may default on our obligations. If we default,
the banks that lent us funds could foreclose on the properties securing their
loans.
Because we have a substantial amount of debt that bears interest at variable
rates, increases in interest rates would reduce our net income.
At March 31, 2005, $76.6 million of our long-term debt bore interest at
a variable rate. In addition, we may incur additional debt in the future that
also bears interest at variable rates. Variable-rate debt creates higher debt
service requirements if market interest rates increase. Such an increase would
adversely affect our cash flow and the amounts available to pay dividends.
6
If our debt cannot be paid, refinanced or extended at maturity, in addition to
our failure to repay our debt, we may not be able to make distributions to
stockholders at expected levels or at all.
We may obtain financing with "due-on-encumbrance" or "due-on-sale"
clauses in which future refinancing or property sales could cause the maturity
dates of the mortgages to accelerate and the financing to become due
immediately. Thus, we could be required to sell properties on an all-cash basis,
or the purchaser might be required to obtain new financing in connection with a
sale. Alternatively or additionally, we may obtain mortgages that have balloon
payments. Such mortgages involve greater risks than mortgages with principal
amounts amortized over the term of the loan since our ability to repay the
outstanding principal amount at maturity may depend on obtaining adequate
refinancing or selling the property. The efficacy of either option would depend
on economic conditions in general and the value of the underlying properties in
particular. We cannot guarantee that we could refinance or repay any such
mortgages at maturity. Further, a significant decline in the value of the
underlying property could result in a loss of the property through foreclosure.
We may be liable for environmental contamination for which we do not have
insurance and which might have a material adverse effect on our financial
condition and results of operations.
Various federal, state and local laws subject property owners or
operators to liability for the costs of removal or remediation of certain
hazardous substances released on a property. Such laws often impose liability
without regard to whether the owner or operator knew of, or was responsible for,
the release of the hazardous substances. The presence of, or the failure to
remediate properly, hazardous substances may adversely affect occupancy of any
contaminated apartment communities, the ability of Boddie-Noell Enterprises to
operate restaurants and our ability to sell or borrow against contaminated
properties. In addition to the costs associated with investigation and
remediation actions brought by governmental agencies, the presence of hazardous
wastes on a property could result in personal injury or similar claims by
private plaintiffs.
Various laws also impose, on persons who arrange for the disposal or
treatment of hazardous or toxic substances, liability for the cost of removal or
remediation of hazardous substances at the disposal or treatment facility. These
laws often impose liability whether or not the person arranging for the disposal
ever owned or operated the disposal facility.
Boddie-Noell Enterprises has agreed to pay for the costs of complying
with applicable environmental laws, ordinances and regulations on the restaurant
properties. However, the obligation to pay for such costs with respect to our
other properties, or Boddie-Noell Enterprises' inability to pay for such costs
on the restaurant properties, may adversely affect our operating costs and the
value of our properties.
7
Phase I environmental site assessments have been obtained on all of our
owned apartment communities. The purpose of Phase I environmental site
assessments is to identify potential sources of contamination for which a
company may be responsible and to assess the status of environmental regulatory
compliance. All of the restaurant properties were subjected to transaction
screens in December 1995. A transaction screen involves a review of a property
for the purpose of recommending whether we should perform a Phase I
environmental site assessment. A transaction screen is significantly less
thorough in scope than a Phase I environmental site assessment.
Neither the transaction screens nor the environmental site assessments
revealed any environmental condition, liability or compliance concern that we
believe would have a material adverse affect on our business, assets or results
of operations. Nor are we aware of any such condition, liability or concern by
any other means. However, it is possible that the transaction screens and the
environmental site assessments relating to any one of the properties did not
reveal all environmental conditions, liabilities, or compliance concerns. It is
also possible that there are material environmental conditions, liabilities or
compliance concerns that arose at a property after the related review was
completed.
Unexpected costs associated with compliance with the Americans with Disabilities
Act and other laws would impair our operating performance.
Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations and commercial facilities must meet certain federal
requirements related to access and use by disabled persons. Compliance with the
ADA requirements could require removal of access barriers. Additional federal,
state and local laws exist that are related to access by disabled persons. These
laws also may require modifications to our properties or restrict renovations of
our properties. For example, the Fair Housing Amendments Act of 1988 (the
"FHAA") requires apartment communities first occupied after March 13, 1991 to be
designed and constructed so as to be accessible to the handicapped.
Non-compliance with the ADA, FHAA and similar laws could result in the
imposition of fines or an award of damages to private litigants. Boddie-Noell
Enterprises is financially responsible for upgrading the restaurant properties
should such properties not be in compliance with the ADA. However, in the event
Boddie-Noell Enterprises fails to upgrade properly the restaurants and there is
a determination that the restaurant properties are not in compliance with the
ADA, we could still face the imposition of fines or an award of damages to
private litigants. If we were required to make unanticipated expenditures to
comply with the ADA or other laws, our cash flow and the amounts available for
distributions to you may be adversely affected.
The Federal Fair Housing Act and state fair housing laws prohibit
discrimination on the basis of certain protected classes. We have a policy
against these kinds of discriminatory behaviors and train our employees to avoid
discrimination and the appearance of discrimination. We cannot assure you that
an employee will not violate
8
our policy against discrimination and violate the fair housing laws. Such a
violation could subject us to legal action and awards of damages.
Because most of our directors have personal interests that could create a
conflict with the interests of our stockholders, we may make decisions that are
not in your best interest.
Of our six directors, five have personal interests that could create a
conflict between what is in the best interest of our security holders and what
is in the best interest of each such director.
o Messrs. Wilkerson and Payne are executive officers of the company;
o Messrs. Chrysson and Gilley own significant stakes in the operating
partnership; and
o Mr. Weidhorn is the managing member of the owner of all of the
outstanding shares of our Series B Cumulative Convertible
Preferred Stock (the "Series B Preferred Stock").
These relationships are discussed in detail under item 13 of our Annual
Report on Form 10-K for the year ended December 31, 2004, which report is
incorporated by reference into this Prospectus. See "Where You Can Find More
Information." Such conflicts of interests could influence board members to take
action that is not in the best interest of our security holders.
If we do not qualify as a REIT, we will be subject to tax as a regular
corporation and face substantial tax liability.
Beginning with our taxable year ended December 31, 1987, we have
elected to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code. We believe that beginning with that taxable year we have been
organized and have operated in a manner that enables us to qualify for taxation
as a REIT, and we intend to continue to operate in such a manner. We can provide
no assurance, however, that we have operated or will operate in a manner so as
to qualify or remain qualified as a REIT. We have not requested, and do not plan
to request, a ruling from the Internal Revenue Service that we qualify as a
REIT.
If we fail to qualify as a REIT, we would not be allowed a deduction
for distributions to stockholders in computing our taxable income and would be
subject to federal income tax at regular corporate rates. We also could be
subject to the federal alternative minimum tax. Unless we are entitled to relief
under specific statutory provisions, we could not elect to be taxed as a REIT
for four taxable years following the year during which we were disqualified.
Therefore, if we lose our REIT status, the funds available for distribution to
you would be reduced substantially for each of the years involved. See "Federal
Income Tax Considerations -- Failure to Qualify."
9
At any time, the federal income tax laws governing REITs or the
administrative interpretations of those laws may be amended. Any of those new
laws or interpretations may take effect retroactively and could adversely affect
us or you as a shareholder.
Complying with REIT requirements may cause us to forego otherwise attractive
opportunities.
As a REIT, we are subject to annual distribution requirements, which
limit the amount of cash we have available for other business purposes,
including amounts to fund our growth. See "Federal Income Tax Considerations --
Annual Distribution Requirements."
Even if we remain qualified as a REIT, we may face other tax liabilities that
reduce our cash flow.
Even if we qualify as a REIT, we and our subsidiaries will be subject
to certain federal, state and local taxes on our income and property that could
reduce operating cash flow.
Our charter does not permit ownership in excess of 9.8% of our capital stock,
and attempts to acquire our capital stock in excess of the 9.8% limit are void
without prior approval from our board of directors.
Our charter limits ownership of our capital stock by any single
stockholder to 9.8% of the outstanding shares. The charter also prohibits anyone
from buying shares if the purchase would cause us to lose our REIT status. This
could happen if a share transaction results in fewer than 100 persons owning all
of our shares or five or fewer persons, applying certain broad attribution rules
of the Internal Revenue Code, owning 50% or more of our shares. If you or anyone
else acquires shares in excess of the ownership limit or in violation of the
ownership requirements of the Internal Revenue Code for REITs, we:
o will consider the transfer to be null and void;
o will not reflect the transaction on our books;
o may institute legal action to enjoin the transaction;
o will not pay dividends or other distributions with respect to those shares;
o will not recognize any voting rights for those shares;
o will consider the shares held in trust for the benefit of the company; and
10
o will either direct the affected person to sell the shares and turn over any
profit to us, or we will redeem the shares. If we redeem the shares, it will be
at a price equal to the lesser of:
(a) the price paid by the transferee of the shares or
(b) the average of the last reported sales prices on
the American Stock Exchange on the 10 trading
days immediately preceding the date fixed for
redemption by our board of directors.
An individual who acquires shares that violate the above rules bears the risk
that (1) he may lose control over the power to dispose of the shares, (2) he may
not recognize profit from the sale of such shares if the market price of the
shares increases and (3) he may be required to recognize a loss from the sale of
such shares if the market price decreases.
Because provisions contained in Maryland law and our governing documents
discourage hostile takeover attempts, investors may be prevented from receiving
a "control premium" for their shares.
Provisions contained in our charter and bylaws, as well as Maryland
general corporation law and the partnership agreement of the Operating
Partnership, discourage hostile takeovers, which may prevent stockholders from
receiving a "control premium" for their shares. These provisions include the
following:
o Ownership Limit. The 9.8% ownership limit discussed above may have
the effect of precluding acquisition of control of us by a third
party without the consent of our board of directors.
o Required Consent of the Operating Partnership for Significant
Corporate Action. A provision in the operating partnership
agreement prohibits us from engaging in certain transactions
that could result in a change of control without the
approval of the holders of a majority of the outstanding units,
including units that we own. While we expect that we
will always hold a majority of the outstanding units, we cannot
guarantee that this will be the case. If we ever own
less than a majority of the outstanding units, this voting
requirement might limit the possibility for an acquisition or
change in control of the company, even if such acquisition or
change in control would be in your (the stockholders')
best interests. As of March 31, 2005, we owned 79% of the
operating partnership common units and 100% of the operating
partnership preferred units.
o Anti-Takeover Protections of Operating Partnership Agreement. The
operating partnership agreement contains provisions relating to
limited partners' redemption rights in the event of certain
changes of control of the
11
company. These provisions require an acquiror to maintain the
operating partnership structure and to maintain a limited
partner's right to continue to hold units with future redemption
rights. Such provision could have the effect of discouraging a
third party from making an acquisition proposal, even if such
proposal were in our stockholders' best interests.
o Poison Pill. We adopted a preferred share purchase rights plan
(sometimes referred to as a "poison pill") in March 1999. The plan
involves the issuance of preferred share purchase rights to all
stockholders. The rights entitle stockholders to purchase capital
stock at a discount if a person or group purchases or makes a
tender offer for 15% or more of our common stock. Our board of
directors may redeem the rights at $.01 per right until the
acquisition of 15% or more of our common stock by a person or
group. The purpose of the poison pill is to ensure that any
potential purchaser of the company must negotiate with our board
before an acquisition. The poison pill may discourage offers for
the company, even those in the best interest of the stockholders.
o Maryland's Unsolicited Takeovers Act. In 1999, the State of
Maryland enacted legislation that enhances the power of Maryland
corporations to protect themselves from unsolicited takeovers.
Among other things, the legislation permits our board, without
stockholder approval, to amend our charter to:
o stagger our board of directors into three classes;
o provide that only remaining directors may fill a vacancy
on the board;
o provide that only the board can fix the size of the board; and
o require that special stockholder meetings may only be called
by holders of a majority of the voting shares entitled to be
cast at the meeting.
If we lose any of our executive officers, our operating performance could
suffer.
We are dependent on the efforts of our executive officers, particularly
D. Scott Wilkerson, Philip S. Payne, Pamela B. Bruno and Eric S. Rohm. While we
believe that we could find replacements for these key personnel, if necessary,
the loss of their services could have an adverse effect on our operations.
Messrs. Wilkerson, Payne and Rohm and Ms. Bruno have entered into employment
contracts with us.
Use of Proceeds
We will not receive any cash proceeds from the sale of any
shares offered hereby. In connection with the issuance of 39,270 shares of
common stock offered by us through this prospectus, we will generally receive
one unit in the operating partnership for each share of common stock. This will
have the effect of increasing our proportionate
12
ownership in the operating partnership. Only the selling stockholders described
below will receive any consideration paid for the other 1,134,628 shares of
common stock that may be sold in this offering.
Selling Stockholders
Among the shares of common stock included in this offering are
1,134,628 shares that may be sold by selling stockholders. We refer to these
shares as the "resale shares." Of the resale shares, only 508,578 shares are
currently outstanding. We may issue the remaining resale shares to the selling
stockholders upon the redemption of 626,050 outstanding units in our operating
partnership. We refer to the initial holders of the resale shares and their
pledgees, donees, distributees, transferees, or other successors-in-interest as
the "selling stockholders."
The selling stockholders may offer and sell from time to time under
this prospectus any and all of the resale shares. Because the selling
stockholders may offer all or some of the resale shares, and because there are
currently no agreements, arrangements or understandings with respect to the sale
of any of the resale shares that will be held by the selling stockholders after
completion of the offering, no estimate can be given as to the principal amount
of the common stock that will be held by the selling stockholders after
completion of the offering.
The following table sets forth, for each selling stockholder, the
amount of our common stock owned and the number of shares of common stock
offered hereby. The number of shares of common stock provided in the following
table includes the number of shares that may be acquired by each selling
stockholder upon redemption of outstanding operating partnership units.
None of the selling stockholders has had any position, office, or other
relationship material to us, with us or any of our affiliates, within the past
three years except as described below:
o each of Paul G. Chrysson and W. Michael Gilley serve as directors of
the company and own significant stakes in the operating partnership;
o B. Mayo Boddie served on our board of directors until May 2004;
o Nicholas B. Boddie, along with other family members including B. Mayo
Boddie, are the sole owners of Boddie-Noell Enterprises, Inc., an
entity to which we lease 40 restaurant properties; and
o Messrs. Boddie were the sole shareholders of Boddie Investment Company,
which we acquired in January 2005.
13
Shares
Name Shares Owned Offered Hereby
B. Mayo Boddie 469,712 254,289
Nicholas B. Boddie 370,489 254,289
Chimney Rock Associates, L.P. 41,752 (1) 2,482 (1)
Paul G. Chrysson 267,612 (1) 1,539 (1)
James G. Chrysson 278,082 (1) 1,539 (1)
Matthew G. Gallins 215,003 (1) 1,539 (1)
W. Michael Gilley 265,991 (1) 1,539 (1)
Dr. James D. Yopp 428,614 (1) 1,539 (1)
Grover F. Shugart 227,419 (1) 227,419 (1)
Brian D. Shugart 168,075 (1) 168,075 (1)
Family Homes, LLC 131,038 (1) 131,038 (1)
Shugart Management, Inc. 89,341 (1) 89,341 (1)
(1) Number of shares shown includes shares that may be issued upon
redemption of outstanding units in our operating partnership even if
not currently redeemable.
Plan of Distribution
This prospectus relates to the offer and sale (i) by us of 39,270
shares of common stock that we are offering and may sell in exchange for the
same number of units in the operating partnership, (ii) by selling stockholders
of 626,050 shares of our common stock, which shares we may issue upon redemption
of a like number of units in the operating partnership and (iii) by selling
stockholders of 508,578 outstanding shares of our common stock. Our common stock
is listed on the American Stock Exchange, trading under the symbol "BNP."
The selling stockholders or the company may distribute the securities
from time to time in one or more transactions at:
o a fixed price;
o at market prices prevailing at the time of sale;
o at prices related to prevailing market prices; or
o at negotiated prices.
The selling stockholders or the company may, from time to time, sell
any or all of the shares of common stock offered under this prospectus:
o through underwriting syndicates represented by one or more managing
underwriters;
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o to or through underwriters or broker-dealers;
o through agents; or
o directly to one or more purchasers.
The selling stockholders may also engage in short sales or in short
sales against the box (including transactions involving short sales by
broker-dealers), puts and calls and other transactions in our securities or
derivatives of our securities and may sell or deliver shares in connection with
these trades. Further, the selling stockholders may sell shares under Rule 144
under the Securities Act, if available, rather than under this prospectus.
The selling stockholders may from time to time pledge or grant a
security interest in some or all of the shares of common stock owned by them,
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock from
time to time under this prospectus. Alternatively, the selling stockholders may
transfer the shares of common stock in other circumstances, in which case the
transferees, pledgees or other successors-in-interest will be the selling
beneficial owners for purposes of this prospectus and may sell the shares of
common stock from time to time under this prospectus. Upon being notified by a
selling stockholder that a donee, pledgee, transferee or other
successor-in-interest intends to sell more than 500 shares, we will file a
prospectus supplement, if required under the Securities Act.
Sales through underwriters may be on a firm commitment or best-efforts
basis. We will describe the name or names of any underwriters, broker-dealers or
agents and the purchase price of the securities in a prospectus supplement
relating to the securities. Furthermore, from time to time, we may engage in
transactions with these underwriters, broker-dealers and agents in the ordinary
course of business.
Upon being notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer or underwriter for the
sale of shares through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker-dealer, we will file a
prospectus supplement, if required under the Securities Act, pursuant to Rule
424(b) under the Securities Act, disclosing: (1) the name of the selling
stockholder and of the participating broker-dealer(s) or underwriter(s), (2) the
number of shares involved, (3) the price at which such shares were or will be
sold, (4) the commissions paid or to be paid or discounts or concessions allowed
to such broker-dealer(s) or underwriter(s), where applicable, (5) that, as
applicable, such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this prospectus and (6)
other facts material to the transaction.
Broker-dealers engaged by the selling stockholders may arrange for
other broker-dealers to participate in sales. Each broker-dealer engaged by the
selling stockholders must be registered or licensed in each state in which such
broker-dealer conducts offers
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and sales of the selling stockholders' shares. The selling stockholders and any
broker-dealers or agents that are involved in selling the shares of common stock
may be deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. Broker-dealers may receive commissions or discounts
from the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. Any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares of common stock (by either the selling stockholders or the
broker-dealers) may be deemed to be underwriting commissions or discounts under
the Securities Act. Discounts, concessions, commissions and similar selling
expenses, if any, attributable to the sale of shares will be borne by the
selling stockholders.
We have agreed to indemnify the selling stockholders against certain
losses, claims, damages and liabilities, including liabilities under the
Securities Act. The selling stockholders may agree to indemnify any agent or
broker-dealer that participates in transactions involving sales of the shares if
liabilities are imposed on that person under the Securities Act. We have agreed
to pay all fees and expenses incident to the registration of the shares of
common stock to be sold by the selling stockholders.
Description of Common Stock
General
Our charter gives us the authority to issue up to 100.0 million shares
of common stock. The par value of the common stock is $.01 per share. Under
Maryland law, stockholders generally are not responsible for a corporation's
debts or obligations. At May 19, 2005, we had 9,244,812 shares of common stock
issued and outstanding. This does not include shares issuable upon the
redemption of any operating partnership units; shares issuable under currently
outstanding options or warrants held by officers, employees and directors;
shares that may be issued under our Dividend Reinvestment and Stock Purchase
Plan; or shares that may be issued upon conversion of outstanding shares of
Series B Preferred Stock.
Our board of directors previously authorized us to issue all of the
currently outstanding common stock. The board has also authorized the issuance
of the stock issuable upon redemption of outstanding operating partnership units
and upon conversion of outstanding shares of Series B Preferred Stock. The
common stock we have previously sold has been fully paid for and is
non-assessable. When we issue stock upon redemption of units or conversion of
Series B Preferred Stock, such stock will also be fully paid for and
non-assessable. Non-assessable means that we cannot ask stockholders for more
money for the stock after they have purchased it.
As a holder of common stock, you will be entitled to receive
distributions based on common stock if our board of directors declares such
distributions. However, your
16
rights to receive distributions are subordinated to the rights of the holders of
our Series B Preferred Stock and may be subordinated to other preferred stock we
may issue in the future. In any liquidation, each outstanding common share
entitles its holder to share (based on the percentage of shares held) in the
assets that remain after we pay our liabilities and any preferential
distributions owed to preferred stockholders. We have paid quarterly
distributions on our common stock since the period ending June 30, 1987, and we
intend to continue to pay quarterly distributions.
Holders of common stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. See " -- Ownership Limitations and
Restrictions on Transfers." There is no cumulative voting in the election of
directors. This means that the holders of a majority of the common stock can
elect all of the directors and the holders of the remaining common stock could
not elect any director.
As a common stockholder in the company, you will have no conversion,
sinking fund or redemption rights or preemptive rights. A conversion feature is
one where a stockholder has the option to convert his shares to a different
security, such as debt or preferred stock. A redemption right is one where a
stockholder will have the right to redeem his shares (for cash or other
securities) at some point in the future. Sometimes a redemption right is paired
with an obligation of the company to create an account into which such company
must deposit money to fund the redemption (i.e., a sinking fund). Preemptive
rights are rights granted to stockholders to subscribe for a percentage of any
other securities we may offer in the future based on the percentage of shares
owned.
We will furnish you with annual reports containing audited consolidated
financial statements. The financial statements will contain an opinion of our
independent public accountants. We will also furnish you quarterly reports for
the first three quarters of each year. These reports will contain unaudited
financial information.
All common stock will have equal distribution, liquidation and voting
rights.
Business Combinations
The Maryland General Corporation Law limits our ability to merge with
another corporation if we will not be the surviving entity in the merger.
Maryland law also limits our ability to sell all or substantially all of our
assets. We can enter into these transactions, however, if our board of directors
adopts a resolution declaring the proposed transaction advisable and a majority
of stockholders entitled to vote approves the transaction.
The practical effect of this limitation is that any action required or
permitted to be taken by our stockholders may only be taken if it is properly
brought before an annual or special meeting of stockholders. Our bylaws further
provide that in order for a stockholder to properly bring any matter before a
meeting, the stockholder must comply with requirements regarding advance notice.
The foregoing provisions could have the
17
effect of delaying until the next annual meeting stockholder actions that the
holders of a majority of our outstanding voting securities favor. These
provisions may also discourage another person from making a tender offer for the
company's common stock, because such person or entity, even if it acquired a
majority of the company's outstanding voting securities, would likely be able to
take action as a stockholder, such as electing new directors or approving a
merger, only at a duly called stockholders meeting.
Maryland law also establishes special requirements with respect to
business combinations between Maryland corporations and interested stockholders
unless exemptions apply. Among other things, the law prohibits for five years a
merger and other similar transactions between a company and an interested
stockholder and requires a supermajority vote for such transactions after the
end of the five-year period. Our charter contains a provision exempting us from
the Maryland business combination statute. However, we cannot assure you that
this charter provision will not be amended or repealed at any point in the
future.
Transfer Agent; Listing of Common Stock
The common stock is listed on the American Stock Exchange. The transfer
agent and registrar for the common stock is Wachovia Bank, N.A.
Classification of Board of Directors, Vacancies and Removal of Directors
Except for the director elected by the holder of our Series B Preferred
Stock, the directors on our board of directors are divided into three classes,
and each of these directors (a "Common Stock Director") serves for a three-year
term. A Common Stock Director may only be removed for cause by the affirmative
vote of two-thirds of our outstanding common stock. The staggered terms of our
directors and the difficulty of removing them may discourage offers for the
company or make an acquisition of the company more difficult, even when an
acquisition is in the best interests of the stockholders.
Our charter and bylaws provide that a majority of the remaining
directors or the stockholders may fill any vacancy on the board of directors.
However, under recently enacted Maryland law, the board of directors can claim
the exclusive right to fill vacancies even though the charter and bylaws provide
otherwise. In addition, our bylaws provide that only the board of directors may
increase or decrease the number of persons serving on the board of directors.
These provisions preclude stockholders from removing incumbent directors, except
for cause and upon a substantial affirmative vote, and from filling the
vacancies created by such removal with their own nominees until the next annual
meeting of stockholders.
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Ownership Limitations and Restrictions on Transfers
To maintain our REIT qualification, five or fewer persons cannot own
50% or more in value of our outstanding capital stock during the last half of a
taxable year. Additionally, at least 100 persons must own the capital stock
during at least 335 days per year. See "Federal Income Tax Considerations --
Requirements for Qualification." To help ensure we meet these tests, our charter
provides that no person may own more than 9.8% of our issued and outstanding
capital stock. For purposes of this provision, the company treats corporations,
partnerships, groups within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934 and other entities as single persons. The board of
directors has discretion to waive this ownership limit upon receipt of an
acceptable opinion of counsel that the waiver would not cause an individual to
be deemed to own more than 9.8% of our capital stock. Attempts to acquire our
capital stock in excess of the 9.8% limit are void without such approval from
our board of directors. All certificates representing shares of capital stock
bear a legend referring to these restrictions.
The restrictions on transferability and ownership will not apply if the
board of directors and the stockholders holding two-thirds of our outstanding
shares of capital stock determine that it is no longer in our best interest to
be a REIT. We have no intention to seek to change our REIT status.
If you own more than 5% of our common stock or preferred stock, you
must file a written notice with us no later than January 30 of each year. This
notice should contain your name and address, the number of shares of common
stock or preferred stock you own and a description of how you hold the shares.
In addition, you will be required, if we ask, to disclose to us in writing any
information we need in order to determine the effect of your ownership of such
shares on our status as a REIT.
These ownership limitations could have the effect of precluding a third
party from obtaining control over the company unless the board of directors and
the stockholders determine that maintaining REIT status is no longer desirable.
Limitations of Liability and Indemnification of Directors and Officers
Maryland corporation law and our charter exculpate each director and
officer in actions by the company or by stockholders in derivative actions from
liability unless the director or officer has received an improper personal
benefit in money, property or service or he has acted dishonestly, as
established by a final judgment of a court.
Our charter also provides that the company will indemnify a present or
former director or officer against expense or liability in an action to the
fullest extent permitted by Maryland law. Maryland law permits a corporation to
indemnify its present and former directors and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses they incur in
connection with any proceeding to
19
which they are a party because of their service as an officer, director or other
similar capacity. However, Maryland law prohibits indemnification if a court
establishes that:
o the act or omission of the director or officer was material to the
matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate dishonesty;
o the director or officer actually received an improper personal benefit
in money, property or services; or
o in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful.
The exculpation and indemnification provisions in the charter have been
adopted to help induce qualified individuals to agree to serve on behalf of the
company by providing a degree of protection from liability for alleged mistakes
in making decisions and taking actions. You should be aware, however, that these
provisions in our charter and Maryland law give you a more limited right of
action than you otherwise would have in the absence of such provisions. We also
maintain a policy of directors and officers liability insurance covering certain
liabilities incurred by our directors and officers in connection with the
performance of their duties.
Amendment of Charter and Bylaws
Our charter may be amended with the affirmative vote of at least a
majority of the shares of capital stock outstanding and entitled to vote
thereon, voting together as a single class. Certain provisions of the charter
may not, however, be amended without the approval of the holders of two-thirds
of the shares of the capital stock of the company outstanding and entitled to
vote, voting together as a single class. Our bylaws generally may be amended by
the Board of Directors or the stockholders.
Description of Preferred Stock
Our charter gives us authority to issue up to 10.0 million shares of
preferred stock. The par value of the preferred stock is $0.01 per share. Under
our charter, our board of directors has the authority to issue one or more
series of preferred stock. Prior to issuing shares of each series, the Maryland
General Corporate Law and our charter require the board of directors to fix the
terms for each series. Such terms could include the right to receive
distributions and liquidation payments before such can be made on the common
stock. As of the date of this prospectus, we have only one class of preferred
stock outstanding, the Series B Preferred Stock.
We have issued 909,090 shares of Series B Preferred Stock at a price of
$11.00 per share. Each share of Series B Preferred Stock has a liquidation
preference of $11.00 and an initial dividend yield of 10% through December 2009,
then 12% for two years,
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and thereafter the greater of 14% or 900 basis points over the five-year
Treasury rate. The holders of the Series B Preferred Stock will have the right
to convert each Series B share into one share of the company's common stock
after December 28, 2004 or in certain circumstances, such as a change of control
or if the company calls the Series B stock for redemption. We have the right to
call the Series B Preferred for redemption at any time. If we call the Series B
for redemption, the holders of the Series B Preferred can convert their shares
to common by multiplying the number of shares of Series B Preferred to be
converted by a conversion ratio. The conversion ratio is initially set at
one-to-one and is adjusted for stock splits, stock dividends, and the like, as
well as for certain issuances below $11.00 per share.
If we call the Series B for redemption and the holders of the Series B
do not elect to convert their shares, the redemption price would be the greater
of:
o $11.00 per share or
o the current market price of our common stock times the number of Series
B Preferred shares (adjusted for any changes to the conversion ratio).
The holders of the Series B Preferred Stock are entitled to elect
annually one member of our board of directors but are generally not entitled to
vote on matters submitted to stockholders. Dividends on preferred shares are
subject to declaration by the board of directors. If, however, we fail to pay
dividends on the Series B Preferred Stock for two consecutive quarters, the
holders of the Series B Preferred Stock will be entitled to elect at least
one-third of our directors, and certain company actions will require the
approval of more than two-thirds of the board.
The Series B Preferred Stock is not being registered for issuance or
resale under this prospectus.
Partnership Agreement of the Operating Partnership
We organized the operating partnership under the Delaware Revised
Uniform Limited Partnership Act, as amended. The following summary of the
partnership agreement is qualified by reference to the actual partnership
agreement. We have filed a copy of the partnership agreement as an exhibit to
the registration statement of which this prospectus is a part.
General
We conduct substantially all of our activities through the operating
partnership. The operating partnership is a Delaware limited partnership. As the
sole general partner, we have the exclusive power to manage and conduct the
business of the operating partnership and have the rights and powers permitted
to the general partner of a Delaware limited partnership. In addition to other
rights, investors who hold units in the operating partnership have such rights
and powers as are reserved to limited partners under
21
Delaware law, but have no authority to transact business for, or participate in
the management activities or decisions of, the operating partnership. The
limited partners do not have the right to remove us as the general partner.
The operating partnership agreement provides that we may not, without
the consent of a majority of the holders of units, sell or otherwise dispose of
all or substantially all of the operating partnership's assets (including
through a merger or other combination with another entity). We must hold
substantially all of our property through the operating partnership.
Allocation of Distributions, Profits and Losses
The operating partnership agreement provides, except as noted below,
that the net operating cash of the operating partnership available for
distribution, as well as net sales and refinancing proceeds, will be distributed
from time to time as determined by the company (but not less frequently than
quarterly), pro rata in accordance with the partners' percentage interests.
Profits and losses for tax purposes will also generally be allocated among the
partners in accordance with their percentage interests, subject to compliance
with applicable laws, such as those noted under "Federal Income Tax
Considerations -- Tax Aspects of the Operating Partnership -- Tax Allocations
With Respect To Our Properties."
Transferability of Interests
The operating partnership agreement generally provides that we may not
withdraw from the operating partnership, or transfer or assign our interest in
the operating partnership. The limited partners, on the other hand, generally
may transfer all or a portion of their interests in the operating partnership to
a transferee. No person receiving such a transfer, however, will be admitted to
the operating partnership as a substitute limited partner having the rights of a
limited partner without our consent. Additionally, the transferee must meet
certain other conditions, including agreeing to be bound by the terms and
conditions of the operating partnership agreement.
Additional Capital Contributions; Issuance of Additional Partnership Interests
The operating partnership agreement does not require any limited
partner to make additional capital contributions to the operating partnership.
We, however, are obligated to make certain additional capital contributions to
the operating partnership in connection with the issuance of additional units to
the company.
The operating partnership agreement authorizes us to issue additional
units for any partnership purpose and for such capital contributions and other
consideration as we determine. The issuance of additional units to us, however,
is subject to certain limitations. First, we may not issue additional units to
ourselves unless we issue the
22
additional units to all partners in proportion to their respective partnership
interests. Alternatively, we may issue additional units to ourselves in
connection with our issuing capital stock, provided that the net proceeds of the
capital stock issuance are contributed to the operating partnership as an
additional capital contribution.
If we issue additional capital stock and make a capital contribution to
the operating partnership, the capital contribution must be in an amount equal
to the proceeds we receive from the issuance of the additional capital stock.
The operating partnership will then issue additional units with similar
designations, preferences and rights to the capital stock we issued. For
example, if we issue 6% preferred stock, the operating partnership must issue 6%
preferred units. If additional partnership interests are issued, the partnership
interests of all existing partners of the operating partnership will be diluted
proportionately.
Redemption of Operating Partnership Units
The operating partnership is obligated to redeem each unit at the
request of the holder after a period of at least one year from issuance for cash
equal to the then fair market value of each share of common stock at the time of
such redemption. The company may, however, elect to acquire the unit for one
share of common stock or an amount of cash of the same value. We presently
anticipate that we will elect to issue common stock in connection with each such
redemption, rather than paying cash or having the operating partnership pay
cash. If, however, units are redeemed for cash, such redemption will be at the
fair market value of the units. Our percentage ownership interest in the
operating partnership will increase each time we redeem units. This acquisition
by us will be treated as a sale of the units to us for federal income tax
purposes. When a limited partner tenders his or her units for redemption, his or
her right to receive distributions with respect to the units redeemed will
cease. But he or she will then have rights as a stockholder of the company from
the time of his or her acquisition of common stock, including the payment of
dividends.
Indemnifications and Limitation of Liability
The operating partnership agreement provides that the general partner,
and each person designated or delegated by the general partner, will be
indemnified and held harmless by the operating partnership for any liabilities
or expenses from any claim or proceeding that relates to the operations of the
operating partnership, unless it is established that:
o the act or omission of the person was material to the matter giving
rise to the proceeding and was committed in bad faith or
was the result of active and deliberate dishonesty;
o the person actually received an improper personal benefit in money,
property or services; or
23
o in the case of any criminal proceeding, the person had reasonable
cause to believe that the act or omission was unlawful.
The operating partnership agreement also provides that the general partner will
have no personal liability to the operating partnership and its partners for
monetary damages for any act or omission if the general partner acted in good
faith and with due care and loyalty.
Tax Matters Partner
As provided in the operating partnership agreement, the company is the
tax matters partner of the operating partnership. This means that we make
whatever tax elections must be made under the Internal Revenue Code.
Operations
The operating partnership agreement requires the partnership to be
operated in a manner that will enable the company to satisfy the requirements
for being classified as a REIT and to avoid any federal income tax liability.
Under the operating partnership agreement, the operating partnership
will assume and pay, or reimburse us for payment of, all expenses incurred
relating to the ownership and operation of, or for the benefit of, the operating
partnership, including all expenses of the company.
Term
The term of the operating partnership continues until December 31,
2097, or until sooner dissolved pursuant to the terms of the operating
partnership agreement.
Exercises of Stock Options
If options to acquire common stock that we have granted are exercised,
the operating partnership agreement requires us to contribute to the operating
partnership as an additional contribution the exercise price we receive. For any
given number of shares, we will thus receive less than their fair value
(assuming the option holder exercises when the fair value exceeds the option
price). We will receive from the operating partnership, in exchange for the
proceeds we contribute, additional units equal to the number of shares we
issued, even though we will not be paying the full fair value for those units.
Under the terms of the operating partnership agreement, we will be deemed to
have contributed the fair value of the units.
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Other
The operating partnership agreement provides that substantially all of
our business activities must be conducted through the operating partnership or
subsidiary partnerships or corporations.
The operating partnership is authorized to enter into transactions with
partners or their affiliates, as long as the terms of such transactions are fair
and reasonable and no less favorable to the operating partnership than would be
obtained from an unaffiliated third party.
Federal Income Tax Considerations
The following discussion describes the material federal income tax
consequences relating to our taxation as a REIT and the purchase, ownership and
disposition of our stock.
Because this summary is intended only to address material federal
income tax consequences relating to the ownership and disposition of our stock,
it may not contain all the information that may be important to you. As you
review this discussion, you should keep in mind that:
o the tax consequences to you may vary depending upon your particular
tax situation;
o special treatment under the tax laws may apply that we do not discuss
below, 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;
o this summary generally does not address state, local or non-U.S. tax
considerations;
o this summary deals only with our shareholders that hold stock as "capital
assets" within the meaning of Section 1221 of the Internal Revenue Code;
and
o 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 ownership and disposition of our stock on
your individual tax situation, including any state, local or non-U.S. tax
consequences.
The specific tax attributes of a particular shareholder could have a
material impact on the tax considerations associated with the purchase,
ownership and disposition of common shares. Therefore, it is essential that each
prospective shareholder consult with his or her own tax advisors with regard to
the application of the federal income
25
tax laws to the shareholder's personal tax situation, as well as any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction.
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 and current administrative
interpretations and practices of the Internal Revenue Service (the "Internal
Revenue Service"), including its practices and policies as endorsed in private
letter rulings, which are not binding on the Internal Revenue Service 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.
We have not obtained any rulings from the Internal Revenue Service concerning
the tax treatment of the matters discussed below. Thus, it is possible that the
Internal Revenue Service could challenge the statements in this discussion,
which do not bind the Internal Revenue Service or the courts, and that a court
could agree with the Internal Revenue Service.
Taxation of BNP Residential Properties, Inc. as a REIT
Beginning with our taxable year ended December 31, 1987, we elected to
be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code.
We believe that beginning with that taxable year we have been organized and have
operated in a manner to qualify for taxation as a REIT under the Internal
Revenue Code, and we intend to continue to be organized and operated in such a
manner. However, given the complexity of the REIT qualification requirements, we
cannot provide any assurance that the actual results of our operations have
satisfied or will satisfy the requirements under the Internal Revenue Code for a
particular year.
DLA Piper Rudnick Gray Cary US LLP has acted as tax counsel to us in
connection with this offering and has given the opinion that we have been
organized, and have operated, in conformity with the requirements for
qualification and taxation as a REIT under the Internal Revenue Code for our
taxable year that ended December 31, 2004, and that our present and proposed
method of operation will permit us to continue to so qualify. The opinion from
DLA Piper was based in part on our representations with respect to factual
matters concerning our business operations and our properties. In addition, our
qualification as a REIT is dependent, among other things, upon our meeting the
various qualification tests imposed by the Internal Revenue Code discussed
below, including through annual operating results, asset diversification,
distribution levels, and diversity of stock ownership each year. We have not yet
prepared our tax returns for tax reporting purposes for the taxable year that
ended December 31, 2004. Accordingly, no assurance can be given that we
satisfied the requirements to be a REIT during the taxable year that ended
December 31, 2004. Accordingly, because our satisfaction of such requirements
will depend upon future events, including the final determination of financial
and operational results, no assurance can be given that we will continue to
satisfy the REIT requirements for those taxable years.
26
In any year in which we qualify for taxation as a REIT, we generally
will not be subject to federal income tax on the income we currently distribute
to our stockholders. The REIT provisions of the Internal Revenue Code generally
allow a REIT to deduct distributions paid to its stockholders, substantially
eliminating the federal "double taxation" on earnings that usually results from
investments in a corporation (once at the corporate level when earned and once
again at the stockholder level when distributed). 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," or undistributed net capital gains.
Second, we may be subject to the "alternative minimum tax" on our items
of tax preference.
Third, we will be subject to tax at the highest corporate income tax
rate on net income from "foreclosure property" (generally property we acquire
through foreclosure or after default on a loan secured by the property or a
lease of the property) held primarily for sale to customers in the ordinary
course of business and other non-qualifying income from foreclosure property.
Fourth, if we have net income from prohibited transactions (which are,
in general, certain sales or other dispositions of property, other than
foreclosure property, that is held primarily for sale to customers in the
ordinary course of business but that is not foreclosure property), we will be
subject to a 100% tax on such income.
Fifth, if we fail to satisfy either the 75% or 95% gross income test
(discussed below) but have nonetheless maintained our qualification as a REIT
because certain other requirements have been met, we will be subject to a 100%
tax on the gross income attributable to the greater of: (a) the amount by which
we fail the 75% gross income test or (b) the amount by which we fail the 95%
gross income test, in either case multiplied by a fraction intended to reflect
our profitability.
Sixth, from and after the taxable year ending December 31, 2005, if we
fail to satisfy any of the REIT asset tests (described below) by more than a de
minimis amount, due to reasonable cause, and we nonetheless maintain our REIT
qualification because of specified cure provisions, we will be required to pay a
tax equal to the greater of $50,000 or the highest corporate tax rate multiplied
by the net income generated by the nonqualifying assets.
Seventh, from and after the taxable year ending December 31, 2005, if
we fail to satisfy any provision of the Internal Revenue Code that would result
in our failure to qualify as a REIT (other than a violation of the REIT gross
income or asset tests described below) and the violation is due to reasonable
cause, we may retain our REIT qualification but we will be required to pay a
penalty of $50,000 for each such failure.
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Eighth, if we fail to distribute each year at least the sum of:
(1) 85% of our REIT ordinary income for such year;
(2) 95% of our REIT capital gain net income for such year; and
(3) any undistributed taxable income from prior periods,
then we will be subject to a 4% excise tax on the excess of the required
distribution over the sum of (a) the amounts actually distributed and (b)
retained amounts on which income tax is paid at the corporate level.
Ninth, if we acquire assets from a corporation generally subject to
full corporate-level tax in a transaction in which our initial basis in the
assets is determined by reference to the transferor corporation's basis in the
assets, and we subsequently recognize gain on the disposition of any such asset
during the 10-year period beginning on the date on which we acquired the asset,
then we generally will be subject to tax at the highest regular corporate income
tax 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.
Tenth, subject to certain exceptions, we will be subject to a 100% tax
on transactions with our "taxable REIT subsidiaries" if such transactions are
not at arm's length.
If we fail to qualify for taxation as a REIT in any taxable year, and
the relief provision described herein do not apply, we will be subject to tax on
our taxable income at regular corporate rates. We also may be subject to the
corporate "alternative minimum tax." As a result, our failure to qualify as a
REIT would significantly reduce the cash we have available to distribute to our
shareholders. Unless entitled to statutory relief, we would be disqualified as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether we would be entitled to statutory
relief.
Requirements for Qualification
Our qualification and taxation as a REIT depend on our ability to
satisfy various requirements under the Internal Revenue Code. We are required to
satisfy these requirements on a continuing basis through actual annual operating
and other results. Accordingly, there can be no assurance that we will be able
to continue to operate in a manner so as to remain qualified as a REIT.
Organizational Requirements
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The Internal Revenue Code defines a REIT as a corporation, trust or
association that:
(1) is managed by one or more trustees or directors;
(2) uses transferable shares or transferable certificates to evidence
beneficial ownership;
(3) would be taxable as a domestic corporation but for Sections 856
through 860 of the Internal Revenue Code;
(4) is neither a financial institution nor an insurance company within
the meaning of the applicable provisions of the Internal Revenue
Code;
(5) has at least 100 persons as beneficial owners;
(6) during the last half of each taxable year, is not closely
held, i.e., not more than 50% of the value of its outstanding
stock is owned, directly or indirectly, by five or fewer
"individuals," as defined in the Internal Revenue Code to
include certain entities;
(7) files an election or continues such election to be taxed as a REIT
on its return for each taxable year; and
(8) meets other tests described below, including with respect to the
nature of its assets and income and the amount of its
distributions.
The Internal Revenue Code provides that conditions (1) through (4) must
be met during the entire taxable year and that condition (5) must be met during
at least 335 days of a taxable year of 12 months or during a proportionate part
of a taxable year of less than 12 months. For purposes of condition (6), an
"individual" generally includes a supplemental unemployment compensation benefit
plan, a private foundation, or a portion of a trust permanently set aside or
used exclusively for charitable purposes, but does not include a qualified
pension plan or profit sharing trust. In addition, our Articles of Incorporation
currently include certain restrictions regarding transfer of our capital stock
which are intended to assist us in continuing to satisfy conditions (5) and (6)
noted above. If we comply with all the requirements for ascertaining the
ownership of our outstanding stock in a taxable year and have no reason to know
that we have violated condition (6), we will be deemed to have satisfied
condition (6) for that taxable year.
In addition, a corporation generally may not elect to become a REIT
unless its taxable year is the calendar year. We satisfy this requirement.
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.
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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. A qualified REIT subsidiary of ours
will not be subject to federal corporate income taxation, although it may be
subject to state and local income taxation in some states. Other entities that
are wholly owned by a REIT, including single member limited liability companies,
are also generally disregarded as separate entities for federal income tax
purposes, including for purposes of the REIT income and asset tests. Thus, in
applying the requirements described herein, all assets, liabilities, and items
of income, deduction, and credit of a disregarded entity owned by a REIT will be
treated as assets, liabilities, and items of income, deduction, and credit of
the REIT.
A "taxable REIT subsidiary" of ours is a corporation in which we
directly or indirectly own stock and that elects, together with us, to be
treated as a taxable REIT subsidiary of ours. In addition, if a taxable REIT
subsidiary of ours owns, directly or indirectly, securities representing 35% or
more of the vote or value of a subsidiary corporation, that subsidiary will also
be treated as a taxable REIT subsidiary of ours. A taxable REIT subsidiary is
subject to federal income tax, and state and local income tax where applicable,
as a regular "C" corporation. BNP Residential Properties, Inc. owns direct or
indirect interests in one taxable REIT subsidiary -- BNP Management, Inc.
Generally, a taxable REIT subsidiary can perform some impermissible
tenant services without causing us to receive impermissible tenant services
income under the REIT income tests. However, several provisions regarding the
arrangements between a REIT and its taxable REIT subsidiaries ensure that a
taxable REIT subsidiary will be subject to an appropriate level of federal
income taxation. For example, the Internal Revenue Code limits the ability of a
taxable REIT subsidiary to deduct interest payments in excess of a certain
amount made to the REIT. In addition, we must pay a 100% tax on some payments
that we receive or on certain expenses deducted by the taxable REIT subsidiary
if the economic arrangements between us, our tenants and the taxable REIT
subsidiary are not comparable to similar arrangements among unrelated parties.
Currently, our taxable REIT subsidiary has no assets or operations.
In the case of a REIT that is a partner in a partnership, the REIT will
be deemed to own its proportionate share (based on its capital interest in the
partnership and any debt securities issued by such partnership held by the REIT)
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership retain the same character in the
hands of the REIT. Thus, our proportionate share of the assets, liabilities and
items of income of the Operating Partnership will be treated as our assets,
liabilities and items of income for purposes of applying and meeting the various
REIT requirements. In addition, the Operating Partnership's proportionate share
of the assets, liabilities and items of income with respect to any partnership
(including any limited liability company treated as a partnership) in which it
holds an interest would be
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considered assets, liabilities and items of income of the Operating Partnership
for purposes of applying and meeting the various REIT requirements.
Income Tests
To maintain qualification as a REIT, we must meet two gross income
requirements annually. 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 including
investments in other REITs or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest), and, as described
below, income from certain 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, non-real estate mortgage interest or gain from
the sale or disposition of stock or securities (or from any combination of the
foregoing).
Prior to investing amounts received from issuance of our stock and
certain securities in real property assets, we may invest in liquid assets such
as government securities or certificates of deposit, but earnings from those
types of assets are qualifying income under the 75% gross income test only for
one year from the receipt of proceeds. Accordingly, to the extent that we have
not invested the offering proceeds in properties prior to the expiration of this
one-year period, in order to satisfy the 75% gross income test, we may invest
the offering proceeds in less liquid investments approved by our board of
directors such as certain mortgage-backed securities or shares in other REITs.
We intend to trace offering proceeds received for purposes of determining the
one-year period for "new capital investments." The Internal Revenue Service has
not issued any rulings or regulations under the provisions of the Internal
Revenue Code governing "new capital investments," so there can be no assurance
that the Internal Revenue Service will agree with this method.
Rents we receive or that we are deemed to 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" excludes any amount received directly or
indirectly from any tenant if we own, or are treated as owning, 10% or more of
(i) the total combined voting power of all classes of voting stock of a
corporate tenant, (ii) the total value of shares of all classes of stock of a
corporate tenant, or (iii) the interests in total assets or net profits in any
tenant which is an entity that is not a corporation. Third, rent attributable to
personal property is generally excluded from "rents from real property," except
where such personal property is leased in connection with such 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.
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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 in connection with the
rental of space for occupancy only and are not otherwise considered rendered to
the occupant of the property. Customary services that are not 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 the REIT.
Where, however, 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 or a taxable REIT subsidiary. In the event that an
independent contractor provides such services, the REIT must adequately
compensate any such independent contractor, the REIT must not derive any income
from the independent contractor and neither the independent contractor nor
certain of its stockholders may, directly or indirectly, own more than 35% of
the REIT, taking into consideration the applicable attributed ownership.
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. We also do not
anticipate deriving rent attributable to personal property leased in connection
with real property that exceeds 15% of the total rent attributable to such lease
or receiving rent from related party tenants.
The Operating Partnership provides certain services with respect to our
properties. We believe that these services are usually or customarily rendered
only in connection with the rental of space for occupancy and are not otherwise
rendered to the tenants. Therefore, we believe that the provision of such
customary services will not cause rents received with respect to our properties
to fail to qualify as "rents from real property." Noncustomary services and
services rendered primarily for the tenants' convenience will be provided by an
independent contractor or a taxable REIT subsidiary to avoid jeopardizing the
qualification of rent as "rents from real property."
Fees to perform property management services for apartment properties
that we do not own will not qualify under the 75% or the 95% gross income tests.
Either the REIT or the Operating Partnership also may receive certain other
types of income with respect to our properties that will not qualify for either
of these tests. We, however, believe that the aggregate amount of such fees and
other non-qualifying income in any
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taxable year will not cause us to exceed the limits for non-qualifying income
under the 75% and 95% gross income tests.
If we fail one or both of the 75% and 95% gross income tests for any
taxable year, we may nevertheless qualify as a REIT for that year if we are
eligible for relief under a certain provision of the Internal Revenue Code. This
relief generally will be available if: (1) our failure to meet such gross income
tests is due to reasonable cause and not due to willful neglect; and (2) we
properly disclose this failure to the Internal Revenue Service. As discussed
above in "Federal Income Taxation of BNP Residential Properties, Inc.," even if
this relief provision applies, a 100% tax would be imposed on the greater of the
amount by which we fail the 75% gross income test or the amount by which we fail
the 95% gross income test, in either case multiplied by a fraction intended to
reflect our profitability. We, however, 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 receive exceeds the limits on such income, the
Internal Revenue Service could conclude that our failure to satisfy the tests
was not due to reasonable cause. If these relief provisions do not apply to a
particular set of circumstances, we will not qualify as a REIT.
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. First, at
least 75% of the value of our total assets must be represented by real estate
assets, cash and cash items (including receivables) and government securities.
Second, not more than 25% of the value of our total assets may consist of
securities (other than those securities includible in the 75% asset test).
Third, except for stock or securities of REITs, qualified REIT subsidiaries,
taxable REIT subsidiaries, equity interests in partnerships and other securities
that qualify as "real estate assets" for purposes of the 75% asset test: (1) the
value of any one issuer's securities owned by us may not exceed 5% of the value
of our total assets; (2) we may not own more than 10% of any one issuer's
outstanding voting securities; and (3) we may not own more than 10% of the value
of the outstanding securities of any one issuer. Fourth, no more than 20% of the
value of our total assets may be represented by securities of one or more
taxable REIT subsidiaries.
Securities for purposes of the asset tests may include debt securities.
The 10% value limitation will not apply, however, to (i) any security qualifying
for the "straight debt exception" discussed below, (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 qualifying rents from real property; (v) certain securities
issued by a State or any political subdivision thereof, the District of
Columbia, a foreign governments, 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. For purposes of the 10% value test,
any debt instrument issued
33
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 is derived from sources that would qualify for the
75% REIT gross income test and any debt instrument issued by a partnership
(other than straight debt or other 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. There are special look-through rules for determining
a REIT's share of securities held by a partnership in which the REIT holds an
interest.
The straight debt exception starts with the definition of straight debt
in Section 1361 of the Internal Revenue Code (as modified) but permits certain
contingent payments. The timing of payments of principal or interest may be
contingent if such contingency causes specified limited changes to the debt's
effective yield to maturity or the REIT does not hold more than $1 million (by
face amount or issue price) of the issuer's debt instruments and not more than
12 months of unaccrued interest can be required to be prepaid on such debt
instruments. In addition, the time or amount of payments may be contingent if
such contingency arises only upon default or upon the issuer's exercise of a
prepayment right and such contingencies are consistent with customary commercial
practice.
The straight debt exception will not apply to any securities issued by
a corporation or partnership if the REIT and any controlled taxable REIT
subsidiaries also own securities of such issuer that would not qualify for the
straight debt exception and that are worth more than 1% of the issuer's
outstanding securities.
Our taxable REIT subsidiary has no assets or operations. As of each
relevant testing date prior to the election to treat each corporate subsidiary
of ours or any other corporation in which we own an interest (other than another
REIT or a qualified REIT subsidiary) as a taxable REIT subsidiary, which
election first became available on January 1, 2001, we believe that we did not
own more than 10% of the voting securities of any such entity. In addition, we
believe that as of each relevant testing date prior to the election to treat
each corporate subsidiary of ours or any other corporation in which we own an
interest (other than another REIT or a qualified REIT subsidiary) as a taxable
REIT subsidiary of ours, our pro rata share of the value of the securities,
including debt, of any such corporation or other issuer did not exceed 5% of the
total value of our assets.
With respect to each issuer in which we currently own an interest that
does not qualify as a REIT, a qualified REIT subsidiary or a taxable REIT
subsidiary, we believe that our pro rata share of the value of the securities,
including debt, of any such issuer does not exceed 5% of the total value of our
assets and that we comply with the 10% voting securities limitation and 10%
value limitation with respect to each such issuer. In this regard, however, we
cannot provide any assurance that the Internal Revenue Service might not
disagree with our determinations.
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After initially meeting the asset tests at the close of any quarter, we
will not lose our status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If the
failure to satisfy the asset tests results from an acquisition of securities or
other property during a quarter, we can cure the failure by disposing of a
sufficient amount of non-qualifying assets within 30 days after the close of
that quarter.
For taxable years commencing on or after January 1, 2005, even after
the 30-day cure period, if we fail the 5% securities limitation or either of the
10% securities limitations, we may avoid disqualification as a REIT by disposing
of a sufficient amount of non-qualifying assets to cure the violation if the
value of the assets causing the violation are de minimis (i.e., it does not
exceed the lesser of 1% of our assets at the end of the relevant quarter or
$10,000,000), provided that, in either case, the disposition occurs within six
months following the last day of the quarter in which we first identified the
violation. For violations of any of the REIT asset tests due to reasonable cause
and not willful neglect that are in excess of the de minimis exception described
above, we may avoid disqualification as a REIT after the 30-day cure period by
taking certain steps, including the disposition of sufficient non-qualifying
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 Internal Revenue Service that describes the non-qualifying
assets. 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.
Annual Distribution Requirements
To qualify for taxation as a REIT, we must meet the following annual
distribution requirements.
First, we must make distributions (other than capital gain
distributions) to our stockholders 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 by excluding our net capital gain), and
(2) 90% of the net income, if any, from foreclosure property in excess of
the excise tax on income from foreclosure property, minus b) the sum
of certain items of non-cash income.
We must pay these distributions in the taxable year to which they
relate. Dividends distributed in the subsequent year, however, will be treated
as if distributed in the prior year for purposes of such prior year's 90%
distribution requirement if one of the following two sets of criteria are
satisfied: (1) the dividends were declared in October,
35
November, or December, the dividends were payable to stockholders of record on a
specified date in such a month, and the dividends were actually distributed
during January of the subsequent year; or (2) the dividends were declared before
we timely file our federal income tax return for such year, the dividends were
distributed in the 12-month period following the close of the prior year and not
later than the first regular dividend payment after such declaration, and we
elected on our tax return for the prior year to have a specified amount of the
subsequent dividend treated as if distributed in the prior year. Even if we
satisfy this annual distribution requirement, we will be subject to tax at
regular corporate tax rates to the extent that we do not distribute all of our
net capital gain or "REIT taxable income" as adjusted.
Second, we must distribute during each calendar year at least the
sum of
(1) 85% of our ordinary income for that year,
(2) 95% of our capital gain net income for that year, and
(3) any undistributed taxable income from prior periods.
In the event that we do not satisfy this distribution requirement, we will be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. For these purposes, dividends that are declared in
October, November or December of the relevant taxable year, payable to
stockholders of record on a specified date in such month, and actually
distributed during January of the subsequent year are treated as distributed in
the prior year.
Third, if we dispose of any asset, which is subject to the Built-In
Gain Rules, during the 10-year period beginning on the date on which we acquired
the asset, we will be required to distribute at least 90% of the Built-In Gain
(after tax), if any, recognized on the disposition of the asset.
We intend to make timely distributions sufficient to satisfy the annual
distribution requirements and to avoid the 4% excise tax. In this regard, the
Operating Partnership agreement authorizes us, as general partner, to take such
steps as may be necessary to cause the Operating Partnership to distribute to
its partners an amount sufficient to permit us to meet these distribution
requirements.
In order for us to deduct dividends we distribute to our stockholders,
such distributions must not be "preferential" within the meaning of Section
562(c) of the Internal Revenue Code. Every holder of a particular class of stock
must be treated the same as every other holder of shares of such class, and no
class of stock may be treated otherwise than in accordance with its dividend
rights as a class.
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
36
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 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 such event, we may find
it necessary to borrow funds to pay the required distribution or, if possible,
pay taxable stock 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 Internal Revenue Service under Section 7121 of the
Internal Revenue Code, or an agreement as to tax liability between us and an
Internal Revenue Service district director or a statement by us attached to an
amendment or supplement to our federal income tax return, we may be able to
correct any resulting failure to meet the 90% annual distribution requirement by
paying "deficiency dividends" to our stockholders that relate to the adjusted
year but that are paid in the subsequent year. To qualify as a deficiency
dividend, the distribution must be made within 90 days of the adverse
determination and we also must satisfy certain other procedural requirements. If
the statutory requirements of Section 860 of the Internal Revenue Code are
satisfied, a deduction is allowed for any deficiency dividend subsequently paid
by us to offset an increase in our REIT taxable income resulting from the
adverse determination. We, however, will be required to pay statutory interest
on the amount of any deduction taken for deficiency dividends to compensate for
the deferral of the tax liability.
Earnings and Profits
Throughout the remainder of this discussion, we frequently will refer
to "earnings and profits." Earnings and profits is a concept used extensively
throughout corporate tax law, but it is undefined in the Internal Revenue Code.
Each corporation maintains an "earnings and profits" account that helps to
measure whether a distribution originates from corporate earnings or from other
sources. Distributions generally decrease the earnings and profits while income
generally increases earnings and profits. If a corporation has positive earnings
and profits, the distributions generally will be considered to come from
corporate earnings. If a corporation has no earnings and profits, distributions
generally will be considered a return of capital and then capital gain.
A REIT cannot have, at the close of any taxable year, accumulated
earnings and profits attributable to any non-REIT year and remain qualified as a
REIT. Therefore, in rendering their opinion regarding our qualification as a
REIT, DLA Piper Rudnick Gray Cary US LLP has relied on our representation that,
when we acquired BT Venture Corporation in October 1994, BT Venture Corporation
did not have any accumulated earnings and profits. In the event that BT Venture
Corporation did have accumulated earnings and profits and such earnings and
profits were not distributed in accordance with
37
the applicable REIT provisions, we would have ceased to qualify as a REIT upon
our acquisition of BT Venture Corporation.
Failure to Qualify
From and after the taxable year ending December 31, 2005, if we fail to
satisfy any provision of the Internal Revenue Code that would result in our
failure to qualify as a REIT (other than a violation of the REIT gross income or
asset tests described below) and the violation is due to reasonable cause, we
may retain our REIT qualification but we will be required to pay a penalty of
$50,000 for each such failure.
If we fail to qualify as a REIT in any year and the above 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 stockholders in any year in which we fail to qualify will not
be deductible by us nor will they be required to be made. In such event, to the
extent of positive current or accumulated earnings and profits, all
distributions to stockholders will be dividends that are taxable to individuals
at preferential rates under the Jobs and Growth Relief Reconciliation Act of
2003 through 2008. 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 qualification was lost. It is not possible to
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 incur exceeds the limit on such
income, the Internal Revenue Service could conclude that our failure to satisfy
the tests was not due to reasonable cause.
Taxation of U.S. Stockholders
When we use the term "U.S. Stockholder," we mean a holder of stock
that, for federal income tax purposes:
(1) is a citizen or resident of the United States;
(2) is a corporation (including an entity treated as a corporation
for United States federal income tax purposes) created or
organized in or under the laws of the United States or of any
of its political subdivisions;
(3) is an estate the income of which is subject to federal income
taxation regardless of its source, or
(4) is a trust if a court within the United States is able to
exercise primary supervision over the administration of the
trust and one or more United
38
States persons have the authority to control all substantial
decisions of the trust.
If an entity classified as a partnership for federal income tax purposes holds
our stock, the tax treatment of a partner will depend on the status of the
partner and on the activities of the partnership. Partners of partnerships
holding our stock should consult their tax advisors.
For any taxable year for which we qualify for taxation as a REIT,
amounts distributed to taxable U.S. Stockholders will be taxed as discussed
below.
Distributions Generally
Distributions to U.S. Stockholders, other than capital gain dividends
discussed below, will constitute taxable dividends up to the amount of our
positive current or accumulated earnings and profits. These distributions are
not eligible for the dividends received deduction for corporations. These
distributions will also not constitute "qualified dividend income" under
Internal Revenue Code, meaning that such dividends will be taxed at marginal
rates applicable to ordinary income rather than the special capital gain rates
applicable to qualified dividend income distributed to shareholders who satisfy
applicable holding period requirements. The portion of ordinary dividends made
after December 31, 2002, which represent ordinary dividends we receive from a
TRS, will be designated as "qualified dividend income" to REIT shareholders and
are eligible for preferential tax rates if paid to our non-corporate
shareholders. 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 or 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.
Stockholder's shares of stock and then the distribution in excess of the tax
basis will be taxable as gain realized from the sale of the stock. Dividends we
declare in October, November, or December of any year payable to a stockholder
of record on a specified date in any such month are treated as both paid by us
and received by the stockholders on December 31 of the year, provided that we
actually pay the dividends during January of the following calendar year.
Stockholders are not allowed to include on their own federal income tax returns
any of our tax losses.
Capital Gain Distributions
Distributions to U.S. Stockholders 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 without
regard to the period for which the U.S. Stockholder has held the stock. However,
corporate U.S. Stockholders 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. In the case of
individuals, long-term capital gains are generally taxable at maximum federal
39
rates of 15% (through 2008), except that capital gains attributable to the sale
of depreciable real property held for more than 12 months are subject to a 25%
maximum federal income tax rate to the extent of previously claimed depreciation
deductions.
We may elect to retain and pay federal income tax on any net long-term
capital gain. In this instance, U.S. Stockholders will include in their income
their proportionate share of the undistributed long-term capital gain. The U.S.
Stockholders also will be deemed to have paid their proportionate share of the
tax we paid, which would be credited against such stockholder's U.S. federal
income tax liability (and refunded to the extent it exceeds such liability). In
addition, the basis of the U.S. Stockholders' shares will be increased in an
amount equal to the excess of the amount of capital gain included in its income
over the amount of tax it is deemed to have paid.
Certain Dispositions of Stock
In general, you will realize capital gain or loss on the sale of common
stock equal to the difference between (1) the amount of cash and the fair market
value of any property received on such disposition, and (2) your adjusted tax
basis of such stock. Losses incurred on the sale or exchange of our stock that
you held for less than six months (after applying certain holding period rules)
will be treated as a long-term capital loss to the extent of any capital gain
dividend you received with respect to those shares.
The applicable tax rate will depend on the U.S. Stockholder's holding
period in the asset (generally, if the U.S. Stockholder has held the asset for
more than one year, it will produce long-term capital gain) and the U.S.
Stockholder's tax bracket. The Internal Revenue Service 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 stockholders) to a portion of capital gain realized
by a non-corporate stockholder on the sale of stock that would correspond to our
"unrecaptured Section 1250 gain." U.S. Stockholders should consult with their
own tax advisors with respect to their capital gain tax liability. In general,
any loss recognized by a U.S. Stockholder upon the sale or other disposition of
stock that the U.S. Stockholder has held for six months or less, after applying
the holding period rules, will be treated as long-term capital loss, to the
extent of distributions received by the U.S. Stockholder from us that were
required to be treated as long-term capital gains.
If a U.S. Stockholder has shares of our common stock redeemed by us,
such U.S. Stockholder will be treated as if such U.S. Stockholder sold the
redeemed shares if all of such U.S. Stockholder's shares of our common stock are
redeemed or if such redemption is not essentially equivalent to a dividend
within the meaning of Section 302(b)(1) of the Internal Revenue Code or
substantially disproportionate within the meaning of Section 302(b)(2) of the
Internal Revenue Code. If a redemption is not treated as a sale of the redeemed
shares, it will be treated as a dividend distribution. U.S. Stockholders should
consult with their tax advisors regarding the taxation of any particular
redemption of our shares.
40
Passive Activity Loss and Investment Interest Limitations
Distributions from us and gain from the disposition of our stock will
not be treated as passive activity income and, therefore, U.S. Shareholders will
not be able to apply any "passive 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 limitation.
Net capital gain from the disposition of our stock (or capital gain dividends)
generally will be excluded from investment income unless you elect to have such
gain taxed at ordinary income rates. Stockholders are not allowed to include on
their own federal income tax returns any tax losses of ours.
Treatment of Tax-Exempt Stockholders
Most tax-exempt organizations are not subject to federal income tax
except to the extent of their unrelated business taxable income, which is often
referred to as UBTI. Unless a tax-exempt shareholder holds its common shares as
debt financed property or uses the common shares in an unrelated trade or
business, distributions to the shareholder should not constitute UBTI.
Similarly, if a tax-exempt shareholder sells common shares, the income from the
sale should not constitute UBTI unless the shareholder held the shares as debt
financed property or used the shares in a 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, income from owning or selling common
shares will constitute UBTI unless the organization is able to properly deduct
amounts set aside or placed in reserve so as to offset the income generated by
its investment in common shares. These shareholders should consult their own tax
advisors concerning these set aside and reserve requirements which are set forth
in the Internal Revenue Code.
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. We expect that our ownership limitations will
prevent us from becoming a pension-held REIT, unless our Board of Directors
grants qualified plans waivers from our ownership limitations.
Special Tax Considerations for Non-U.S. Stockholders
The rules governing United States income taxation of non-U.S.
Stockholders (beneficial owners of shares of our common stock that are not U.S.
Stockholders) are complex. We intend the following discussion to be only a
summary of these rules. Prospective non-U.S. Stockholders should consult with
their own tax advisors to determine the impact of federal, state, local and
foreign tax laws on an investment in our stock, including any reporting
requirements.
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In general, non-U.S. Stockholders will be subject to regular federal
income tax with respect to their investment in us if the income from the
investment is "effectively connected" with the non-U.S. Stockholder's conduct of
a trade or business in the United States and, if a tax treaty applies, is
attributable to a permanent establishment in the United States. A corporate
non-U.S. Stockholder 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 must meet
various certification requirements to be exempt from withholding. The following
discussion will apply to non-U.S. Stockholders 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).
A distribution payable out of our current or accumulated earnings and
profits that is 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 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. Stockholder's basis in its common stock (but not below zero)
and then as gain from the disposition of such stock, the tax treatment of which
is described under the rules discussed below with respect to dispositions of
stock.
Distributions by us that are attributable to gain from the sale or
exchange of a United States real property interest will be taxed to a non-U.S.
Stockholder under the Foreign Investment in Real Property Tax Act of 1980, or
"FIRPTA." Such distributions are taxed to a non-U.S. Stockholder as if the
distributions were gains "effectively connected" with a United States trade or
business. Accordingly, a non-U.S. Stockholder will be taxed at the normal
capital gain rates applicable to a U.S. Stockholder (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.
With respect to distributions by us that are attributable to gain from
the sale or exchange of a United States real property interest, a non-U.S.
Stockholder who does not own more than 5% of our common stock at any time during
the taxable year: (i) will be taxed on such capital gain dividend as if the
distribution was an ordinary dividend, (ii) will generally not be required to
report distributions received from us on U.S. federal income tax returns and
(iii) will not be subject to a branch profits tax with respect to such
distribution.
Although the law is not clear on this matter, it appears that amounts
designated by us as undistributed capital gains in respect of the common stock
generally should be treated with respect to non-U.S. Stockholders in the same
manner as actual distributions
42
by us of capital gain dividends. Under that approach, the non-U.S. Stockholder
would be able to offset as a credit against his or her resulting federal income
tax liability an amount equal to his or her proportionate share of the tax paid
by us on the undistributed capital gains and to receive from the Internal
Revenue Service a refund to the extent his or her proportionate share of this
tax paid by us was to exceed his or her actual federal income tax liability.
Although tax treaties may reduce our withholding obligations, we
generally will be required to withhold tax from distributions to non-U.S.
Stockholders, and remit to the Internal Revenue Service, 35% of designated
capital gain dividends that are attributable to gain from the sale or exchange
of a United States real property interest (or, if greater, 35% of the amount of
any distributions that could be designated as capital gain dividends and 30% of
ordinary dividends paid out of earnings and profits. In addition, if we
designate prior distributions as capital gain dividends, subsequent
distributions, up to the amount of such prior distributions that we designated
as capital gain dividends, will be treated as capital gain dividends for
purposes of withholding. 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.
Stockholder exceeds the stockholder's United States tax liability, the non-U.S.
Stockholder may file for a refund of such excess from the Internal Revenue
Service.
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.
Stockholder unless:
o a lower treaty rate applies and the non-U.S. Stockholder files with us
an Internal Revenue Service Form W-8BEN evidencing eligibility for that
reduced treaty rate;
o the non-U.S. Stockholder files with us an Internal Revenue Service
Form W-8ECI claiming that the distribution is income effectively
connected with the non-U.S. Stockholder's trade or business so that
no withholding tax is required; or
o the distributions are treated for FIRPTA withholding tax purposes as
attributable to a sale of a U.S. real property interest, in which case
tax will be withheld at a 35% rate.
Unless our stock constitutes a "U.S. real property interest" within the
meaning of FIRPTA, a sale of common stock by a non-U.S. Stockholder generally
will not be subject to federal income taxation. Our stock will not constitute a
U.S. real property interest if we are a "domestically controlled qualified
investment entity." A REIT is a domestically controlled REIT 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. Stockholders. We currently anticipate that we
will be a domestically controlled qualified investment entity and, therefore,
that the sale of stock will not be subject to taxation under FIRPTA. However,
because the stock will be publicly traded, we cannot assure you that we will be
a domestically
43
controlled qualified investment entity. If we were not a domestically controlled
qualified investment entity, a non-U.S. Stockholder's sale of stock would be
subject to tax under FIRPTA as a sale of a U.S. real property interest unless
the stock were "regularly traded" on an established securities market (such as
the American Stock Exchange) on which the stock will be listed and the selling
stockholder owned no more than 5% of the stock throughout the applicable testing
period. If the gain on the sale of stock were subject to taxation under FIRPTA,
the non-U.S. Stockholder would be subject to the same treatment as a U.S.
Stockholder 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 stock is not a U.S. real property interest, a
nonresident alien individual's gains from the sale of stock 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 stock from a non-U.S. Stockholder will not be required
to withhold under FIRPTA on the purchase price if the purchased stock is
"regularly traded" on an established securities market or if we are a
domestically controlled qualified investment entity. Otherwise, the purchaser of
stock from a non-U.S. Stockholder may be required to withhold 10% of the
purchase price and remit this amount to the Internal Revenue Service. Our stock
currently is a regularly traded security on the American Stock Exchange. 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.
If a non-U.S. Stockholder has shares of our common stock redeemed by
us, such non-U.S. Stockholder will be treated as if such non-U.S. Stockholder
sold the redeemed shares if all of such non-U.S. Stockholder's shares of our
common stock are redeemed or if such redemption is not essentially equivalent to
a dividend within the meaning of Section 302(b)(1) of the Internal Revenue Code
or substantially disproportionate within the meaning of Section 302(b)(2) of the
Internal Revenue Code. If a redemption is not treated as a sale of the redeemed
shares, it will be treated as a dividend distribution. Non-U.S. Stockholders
should consult with their tax advisors regarding the taxation of any particular
redemption of our shares.
Upon the death of a nonresident alien individual, that individual's
stock 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. Stockholders
In general, information reporting requirements will apply to payments
of distributions on our stock and payments of the proceeds of the sale of our
stock, unless an
44
exception applies. Further, under certain circumstances, U.S. Stockholders may
be subject to backup withholding at a rate of 28% for 2005 on payments made with
respect to, or cash proceeds of a sale or exchange of, our common stock. Backup
withholding will apply only if:
(1) the payee fails to furnish his or her taxpayer identification
number (which, for an individual, would be his or her Social
Security Number) to the payor as required;
(2) the Internal Revenue Service notifies the payor that the
taxpayer identification number furnished by the payee is
incorrect;
(3) the Internal Revenue Service has notified the payee that such
payee has failed to properly include reportable interest and
dividends in the payee's return or has failed to file the
appropriate return and the Internal Revenue Service has
assessed a deficiency with respect to such underreporting; or
(4) the payee has failed to certify to the payor, under penalties
of perjury, that the payee is not subject to withholding.
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 liability and may entitle the stockholder to a refund,
provided that the stockholder timely furnishes the required information to the
Internal Revenue Service.
Non-U.S. Stockholders
Generally information reporting will apply to payments of distributions
on our stock and backup withholding at a rate of 28% 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 stock 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.
Stockholder certifies as to its non-U.S. status or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
stockholder 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.
Stockholder of our stock 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. Stockholder's foreign status and has
no actual knowledge to the contrary.
45
Applicable Treasury regulations provide presumptions regarding the
status of stockholders when payments to the stockholders cannot be reliably
associated with appropriate documentation provided to the payer. Under these
Treasury regulations, some stockholders are required to have provided new
certifications with respect to payments made after December 31, 2000. Because
the application of these Treasury regulations varies depending on the
stockholder's particular circumstances, non-U.S. Stockholders should consult
their tax advisors with regards to U.S. information reporting and backup
withholding.
Tax Aspects of the Operating Partnership
General
Substantially all of our investments are held through the operating
partnership. In general, partnerships are "pass-through" entities that are not
subject to federal income tax. Rather, partners are allocated their
proportionate share of the items of income, gain, loss, deduction and credit of
a partnership and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. We include in
our income our proportionate share of the operating partnership's income, gain,
loss, deduction and credit for purposes of the various REIT income tests and in
the computation of our REIT taxable income. In addition, we include our
proportionate share of assets held by the operating partnership in the REIT
asset tests.
Tax Allocations with Respect to our Properties
When property is contributed to a partnership in exchange for an
interest in the partnership, the partnership generally takes a carryover basis
in that property for tax purposes. That carryover basis is equal to the
contributing partner's adjusted basis in the property rather than the fair
market value of the property at the time of contribution. Pursuant to Section
704(c) of the Internal Revenue Code, income, gain, loss and deduction
attributable to such contributed property must be allocated in a manner such
that the contributing partner 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 generally is
equal to the difference between the fair market value of the contributed
property at the time of contribution and the adjusted tax basis of such property
at the time of contribution (a "Book-Tax difference"). Such allocations are
solely for federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners.
The operating partnership has been formed by way of contributions of
appreciated property, and we expect that future contributions to the operating
partnership also will take the form of appreciated property. Consequently, the
operating partnership agreement requires tax allocations to be made in a manner
consistent with Section 704(c) of the Internal Revenue Code.
46
In general, the partners who have contributed their interests in
properties to the operating partnership (the "Contributing Partners") will be
allocated lower amounts of depreciation deductions for tax purposes than such
deductions would be if determined on a pro rata basis. In addition, in the event
of the disposition of any of the contributed assets that have a Book-Tax
Difference, all taxable income attributable to such Book-Tax Difference
generally will be allocated to the Contributing Partners and the Company
generally will be allocated only its share of capital gains attributable to
appreciation, if any, occurring after the closing of the acquisition of such
properties. This will tend to eliminate the Book-Tax Difference over the life of
the operating partnership. However, the special allocation rules of Section
704(c) of the Internal Revenue Code do not always entirely eliminate the
Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed assets
in the hands of the operating partnership may cause us to be allocated lower
depreciation and other deductions and cause Contributing Partners to be
allocated less taxable income. As a result, we could recognize taxable income in
excess of distributed amounts, which might adversely affect our ability to
comply with the REIT distribution requirements and Contributing Partners may
realize income on the distribution of cash because their basis has not been
increased sufficiently from income allocations. See " -- Annual Distribution
Requirements."
With respect to any property purchased by the operating partnership,
such property initially will have a tax basis equal to its fair market value and
Section 704(c) of the Internal Revenue Code will not apply.
Basis in Operating Partnership Interest
Our adjusted tax basis in our interest in the Operating Partnership
generally:
(1) will be equal to the amount of cash and the basis of any other property
that we contributed to the Operating Partnership;
(2) will be increased by (a) our allocable share of the operating
partnership's income and (b) our allocable share of indebtedness of
the operating partnership; and
(3) will be reduced, but not below zero, by our allocable share of
(a) losses suffered by the operating partnership, (b) the
amount of cash distributed to us, and (c) constructive
distributions resulting from a reduction in our share of
indebtedness of the operating partnership.
If the allocation of our distributive share of the operating
partnership's loss exceeds the adjusted tax basis of its partnership interest in
the operating partnership, the recognition of such excess loss will be deferred
until such time and to the extent that it has an adjusted tax basis in our
partnership interest. To the extent that the operating
47
partnership's distributions, or any decrease in our share of the indebtedness of
the operating partnership (such decreases being considered a cash distribution
to the partners) exceed our adjusted tax basis, such excess distributions
(including such constructive distributions) constitute taxable income to us.
Such taxable income normally will be characterized as a capital gain if the
interest in the operating partnership has been held for longer than one year,
subject to reduced tax rates described above (See " -- Taxation of U.S.
Stockholders -- Capital Gain Distributions"). Under current law, capital gains
and ordinary income of corporations generally are taxed at the same marginal
rates.
Sale of the Properties
Our share of gain realized by the operating partnership on the sale of
any property held by the operating partnership as inventory or other property
held primarily for sale to customers in the ordinary course of the operating
partnership's trade or business will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. See " -- Requirements for
Qualification -- Income Tests." Such prohibited transaction income also may have
an adverse effect upon its ability to satisfy the income tests for qualification
as a REIT. Under existing law, whether property is held as inventory or
primarily for sale to customers in the ordinary course of the Operating
Partnership's trade or business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. The
operating partnership intends to hold the properties for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning and operating the properties (and other properties) and to make such
occasional sales of the properties, including peripheral land, as are consistent
with the operating partnership's investment objectives.
State and Local Tax
We may be subject to state and local tax in various states and
localities. Our stockholders also may be subject to state and local tax in
various states and localities. The tax treatment to us and to our stockholders
in such jurisdictions may differ from the federal income tax treatment described
above. Consequently, before you buy our common stock, you should consult your
own tax advisor regarding the effect of state and local tax laws on an
investment in our common stock.
Experts
The consolidated financial statements of BNP Residential Properties, Inc.
appearing in BNP Residential Properties, Inc.'s Annual Report (Form 10-K) for
the year ended December 31, 2004 (including the schedule appearing therein), and
BNP Residential Properties, Inc. management's assessment of the effectiveness of
internal control over financial reporting as of December 31, 2004, included
therein have been audited by Ernst & Young LLP, independent registered public
accounting firm, as set forth in their reports thereon, included therein, and
incorporated herein by reference. Such consolidated financial statements and
management's assessment are incorporated herein by reference in reliance
48
upon such reports given on the authority of such firm as experts in accounting
and auditing.
The Statement of Revenue and Certain Operating Expenses for the Oakwood
Raleigh Apartments (renamed Bridges at Wind River) for the year ended December
31, 2003, Statement of Revenue and Certain Operating Expenses for Carriage Club
Apartments for the year ended December 31, 2003, Statement of Revenue and
Certain Operating Expenses for Fairington Apartments for the year ended December
31, 2003, and Statements of Revenue and Certain Operating Expenses for Savannah
Shores Apartments for the years ended December 31, 2003 and 2002, and the six
months ended June 30, 2004 appearing in BNP Residential Properties, Inc.'s
Annual Report (Form 10-K) for the year ended December 31, 2004 have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon, included therein, and incorporated herein by reference. The Statement
of Revenues and Certain Operating Expenses for the Villages of Chapel Hill
Apartments for the years ended December 31, 2004, 2003 and 2002 appearing in BNP
Residential Properties, Inc.'s Current Report on Form 8-K dated March 31, 2005
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon, included therein, and incorporated herein by reference.
Such Statements of Revenue and Certain Operating Expenses, are incorporated
herein by reference in reliance upon such reports given on the authority of such
firm as experts in accounting and auditing.
Legal Matters
The validity of the securities we may issue in this offering have been
passed upon for us by DLA Piper Rudnick Gray Cary US LLP, Raleigh, North
Carolina.
Where You Can Find More Information
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy the reports, statements or
other information we file at the SEC's Public Reference Room at 100 F. Street,
N.E., Room 1580, Washington, D.C. 20549. You can request copies of these
documents, upon payment of photocopying fees, by writing to the SEC. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the Public
Reference Room. In addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding issuers like the company that file electronically.
This prospectus is part of a registration statement that we have filed
with the SEC. The SEC allows us to "incorporate by reference" the information
that we file with them, which means that we can disclose important information
to you by referring you to those documents. The information incorporated by
reference is considered to be part of this prospectus, and later information
that we file with the SEC will automatically update and supersede this
information. We incorporate by reference the documents listed below:
49
o Our Annual Report on Form 10-K for the year ended December 31, 2004;
o Our Current Report on Form 8-K dated March 31, 2005 and filed with
SEC on April 5, 2005;
o Our Definitive Proxy Statement filed on Schedule 14A filed with the
SEC on April 12, 2005;
o Our Current Report on Form 8-K dated April 21, 2005 and filed with the
SEC on April 25, 2005;
o Our Quarterly Report on Form 10-Q for the period ended March 31, 2005
and filed with the SEC on May 10, 2005;
o Our Current Report on Form 8-K dated May 13, 2005 and filed with SEC
on that date;
o Our Current Report on Form 8-K dated May 17, 2005 and filed with SEC
on May 18, 2005;
o Our Current Report on Form 8-K dated May 19, 2005 and filed with the
SEC on May 31, 2005;
o Our Current Report on Form 8-K/A dated March 31, 2005 and filed with
the SEC on June 13, 2005;
o Our Current Report on Form 8-K dated March 31, 2005 and filed with the
SEC on June 24, 2005; and
o The description of our common stock included in our registration
statement on Form 8-A dated April 27, 1987.
We also incorporate by reference any future filings made with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until this offering is
terminated, including any of these filings made after the date of the initial
registration statement of which this prospectus is a part and prior to
effectiveness of the registration statement.
We will furnish without charge upon written or oral request to each
person to whom a copy of this prospectus is delivered, including any beneficial
owner, a copy of any or all of the documents specifically incorporated by
reference in this prospectus (not including the exhibits to such documents,
unless the exhibits are specifically incorporated by reference in such
documents). Requests should be made to: BNP Residential Properties, Inc., 301
South College Street, Suite 3850, Charlotte, North Carolina 28202, Attn:
Investor Relations. Our telephone number is (704) 944-0100.
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We also maintain an Internet site at http://www.bnp-residential.com at
which there is additional information about our business, but the contents of
that site are not incorporated by reference in or otherwise a part of this
prospectus.
51
PART II. Information Not Required In Prospectus
ITEM 14. Other Expenses of Issuance and Distribution
The following table sets forth estimates of the various expenses to be
paid by the company in connection with the registration of the common stock
offered pursuant to this registration statement.
Securities and Exchange Commission Registration Fee ................$ 2,167
Legal Fees .........................................................$ 35,000
Accounting Fees ....................................................$ 20,000
Total ...........................................................$ 57,167
ITEM 15. Indemnification of Directors and Officers
The company's officers and directors are and will be indemnified
against certain liabilities in accordance with the Maryland General Corporation
Law ("MGCL"), the charter and bylaws of the company and the operating
partnership agreement. The charter requires the company to indemnify its
directors and officers to the fullest extent permitted from time to time by the
MGCL. The MGCL permits a corporation to indemnify its directors and officers,
among others, against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reasons of their service in those or other
capacities unless it is established that the act or omission of the director or
officer was material to the matter giving rise to the proceeding and was
committed in bad faith or was the result of active and deliberate dishonesty, or
the director or officer actually received an improper personal benefit in money,
property or services, or in the case of any criminal proceeding, the director or
officer had reasonable cause to believe that the act or omission was unlawful.
The company also carries insurance for our directors and officers for
liabilities they may incur as a result of their service to the company.
52
ITEM 16. EXHIBITS
Exhibit Index
EXHIBIT NO. DESCRIPTION
---------- -------------------------------------------------------------
4.1* Articles of Incorporation of Registrant as amended by
Articles Supplementary for Series A Junior Participating
Preferred Stock (filed as exhibit 3(i) to the Registrant's
Current Report on Form 8-K, dated as of March 17, 1999).
4.2* Articles Supplementary, Classifying and Designating 909,090
Shares of Series B Cumulative Convertible Preferred Stock,
dated December 28, 2001 (filed as Exhibit 3.1 to the
Registrant's Current Report on Form 8-K, dated as of December
28, 2001).
4.3* Amended and Restated Bylaws of Registrant (filed as Exhibit
3.2 to the Registrant's Current Report on Form 8-K, dated as
of December 28, 2001).
4.4* Rights Agreement, dated as of March 18, 1999, between
Registrant and First Union National Bank, including the form
of Articles Supplementary for Series A Junior Participating
Preferred Stock on Exhibit A, form of Right Certificate on
Exhibit B and the Summary of Rights to Purchase Preferred
Shares on Exhibit C (filed as exhibit to the Registrant's
Current Report on Form 8-K, dated as of March 17, 1999).
5.1** Opinion of DLA Piper Rudnick Gray Cary US LLP regarding the
legality of the shares being registered.
8.1** Opinion of DLA Piper Rudnick Gray Cary US LLP regarding
tax matters.
23.1** Consent of DLA Piper Rudnick Gray Cary US LLP (included as
part of exhibit 5.1 and exhibit 8.1).
23.2** Consent of Ernst & Young LLP, an independent registered public
accounting firm.
23.3** Consent of Ernst & Young LLP, an independent auditor.
23.4* Consent of Sharrard, McGee & Co., P.A., an independent auditor
(filed as exhibit 23.1 to the Registrant's Current Report on
Form 8-K/A, dated as of March 31, 2005).
23.5* Consent of Reznick Fedder & Silverman, an independent auditor
(filed as exhibit 23.2 to the Registrant's Current Report on
Form 8-K/A, dated as of March 31, 2005).
24.1** Power of Attorney
99.1* Form of Second Amended and Restated Agreement of Limited
Partnership of BNP Residential Properties Limited Partnership
(filed as exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998).
99.2* Form of Registration Rights Agreement (filed as exhibit 10.11
to the Registrant's Registration Statement on Form S-2 filed
with the SEC on December 16, 1997 (Reg. No. 333-39803)).
99.3* Registration Rights Agreement by and between Registrant and
Preferred Investment I, LLC, dated December 28, 2001 (filed as
Exhibit 4 to the
53
Registrant's Current Report on Form 8-K, dated as of
December 28, 2001).
99.4* Amendment to Second Amended and Restated Agreement of Limited
Partnership of BNP Residential Properties Limited Partnership
(filed as Exhibit 10.1 to the Registrant's Current Report on
Form8-K dated as of December 28, 2001).
99.5* Purchase Agreement by and among Registrant and the signatories
thereto, dated February 17, 2004 (filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K, dated as of
February 23, 2004).
.........
* Incorporated herein by reference.
** Previously filed
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to the registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
54
Provided, however, that the undertakings set forth in paragraphs
(a)(1)(i) and (a)(1)(ii) do not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained
in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions described under Item 15 above,
or otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
55
Signatures
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this amendment to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Charlotte, State of North Carolina, on
July 8, 2005.
BNP RESIDENTIAL PROPERTIES, INC.
July 8, 2005
/s/ D. Scott Wilkerson
D. Scott Wilkerson
President and Chief Executive Officer
56
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following persons
in the capacities and on the dates indicated.
Name Title Date
/s/ Philip S. Payne Chairman of the Board, Director and July 8, 2005
-------------------
Philip S. Payne Chief Financial Officer
/s/ D. Scott Wilkerson President and Chief Executive Officer July 8, 2005
----------------------
D. Scott Wilkerson and Director
/s/ Stephen R. Blank* Director July 8, 2005
---------------------
Stephen R. Blank
/s/ Paul G. Chrysson* Director July 8, 2005
---------------------
Paul G. Chrysson
/s/ Michael Gilley* Director July 8, 2005
-------------------
W. Michael Gilley
/s/ Peter J. Weidhorn* Director July 8, 2005
----------------------
Peter J. Weidhorn
/s/ Pamela B. Bruno Vice-President, Treasurer and Chief July 8, 2005
--------------------
Pamela B. Bruno Accounting Officer
* By: /s/ Philip S. Payne
Philip S. Payne
Attorney-in-fact
57