| AMB PROPERTY CORP Item 1A Risk Factors BUSINESS RISKS Our operations involve various risks that could have adverse consequences to us |
| These risks include, among others: General Real Estate Industry Risks Our performance and value are subject to general economic conditions and risks associated with our real estate assets |
| The investment returns available from equity investments in real estate depend on the amount of income earned and capital appreciation generated by the properties, as well as the expenses incurred in connection with the properties |
| If our properties do not generate income sufficient to meet operating expenses, including debt service and capital expenditures, then our ability to pay dividends to our stockholders could be adversely affected |
| In addition, there are significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) that generally do not decline when circumstances reduce the income from the property |
| Income from, and the value of, our properties may be adversely affected by: • changes in the general economic climate; • local conditions, such as oversupply of or a reduction in demand for industrial space; • the attractiveness of our properties to potential customers; • competition from other properties; • our ability to provide adequate maintenance and insurance; • increased operating costs; • increased cost of compliance with regulations; • the potential for liability under applicable laws (including changes in tax laws); and • disruptions in the global supply chain caused by political, regulatory or other factors including terrorism |
| In addition, periods of economic slowdown or recession in the United States and in other countries, rising interest rates or declining demand for real estate, or public perception that any of these events may occur, would result in a general decrease in rents or an increased occurrence of defaults under existing leases, which 7 _________________________________________________________________ [64]Table of Contents would adversely affect our financial condition and results of operations |
| Future terrorist attacks may result in declining economic activity, which could reduce the demand for and the value of our properties |
| To the extent that future attacks impact our customers, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases |
| Our properties are concentrated predominantly in the industrial real estate sector |
| As a result of this concentration, we would feel the impact of an economic downturn in this sector more acutely than if our portfolio included other property types |
| We may be unable to renew leases or relet space as leases expire |
| As of December 31, 2005, leases on a total of 16dtta2prca of our industrial properties (based on annualized base rent) will expire on or prior to December 31, 2006 |
| We derive most of our income from rent received from our customers |
| Accordingly, our financial condition, results of operations, cash flow and our ability to pay dividends on, and the market price of, our stock could be adversely affected if we are unable to promptly relet or renew these expiring leases or if the rental rates upon renewal or reletting are significantly lower than expected |
| If a tenant experiences a downturn in its business or other type of financial distress, then it may be unable to make timely rental payments or renew its lease |
| Further, our ability to rent space and the rents that we can charge are impacted, not only by customer demand, but by the number of other properties we have to compete with to appeal to customers |
| Actions by our competitors may decrease or prevent increases of the occupancy and rental rates of our properties |
| We compete with other developers, owners and operators of real estate, some of which own properties similar to ours in the same submarkets in which our properties are located |
| If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose potential tenants, and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire |
| As a result, our financial condition, cash flow, cash available for distribution, trading price of our common stock and ability to satisfy our debt service obligations could be materially adversely affected |
| Real estate investments are relatively illiquid, making it difficult for us to respond promptly to changing conditions |
| Real estate assets are not as liquid as certain other types of assets |
| Further, as a real estate investment trust, the Internal Revenue Code regulates the number of properties that we can dispose of in a year, their tax bases and the cost of improvements that we make to the properties |
| In addition, a portion of the properties held directly or indirectly by certain of our subsidiary partnerships were acquired in exchange for limited partnership units in the applicable partnership |
| The contribution agreements for such properties may contain restrictions on certain sales, exchanges or other dispositions of these properties, or a portion thereof, that result in a taxable transaction for specified periods, following the contribution of these properties to the applicable partnership |
| These limitations may affect our ability to sell properties |
| This lack of liquidity and the Internal Revenue Code restrictions may limit our ability to vary our portfolio promptly in response to changes in economic or other conditions and, as a result, could adversely affect our financial condition, results of operations, cash flow and our ability to pay dividends on, and the market price of, our stock |
| We could be adversely affected if a significant number of our tenants are unable to meet their lease obligations |
| Our results of operations, distributable cash flow and the value of our common stock would be adversely affected if a significant number of our tenants were unable to meet their lease obligations to us |
| In the event of a significant number of lease defaults, our cash flow may not be sufficient to pay dividends to our stockholders and repay maturing debt |
| As of December 31, 2005, we did not have any single tenant account for annualized 8 _________________________________________________________________ [65]Table of Contents base rent revenues greater than 3dtta7prca |
| However, in the event of lease defaults by a significant number of our tenants, we may incur substantial costs in enforcing our rights as landlord |
| We may be unable to consummate acquisitions on advantageous terms or acquisitions may not perform as we expect |
| We acquire and intend to continue to acquire primarily industrial properties |
| The acquisition of properties entails various risks, including the risks that our investments may not perform as we expect, that we may be unable to quickly and efficiently integrate our new acquisitions into our existing operations and that our cost estimates for bringing an acquired property up to market standards may prove inaccurate |
| Further, we face significant competition for attractive investment opportunities from other well-capitalized real estate investors, including both publicly-traded real estate investment trusts and private institutional investment funds |
| This competition increases as investments in real estate become increasingly attractive relative to other forms of investment |
| As a result of competition, we may be unable to acquire additional properties as we desire or the purchase price may be significantly elevated |
| In addition, we expect to finance future acquisitions through a combination of borrowings under our unsecured credit facilities, proceeds from equity or debt offerings by us or the operating partnership or its subsidiaries and proceeds from property divestitures, which may not be available and which could adversely affect our cash flow |
| Any of the above risks could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock |
| We may be unable to complete renovation and development projects on advantageous terms |
| As part of our business, we develop new and renovate existing properties |
| The real estate development and renovation business involves significant risks that could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock, which include the following risks: • we may not be able to obtain financing for development projects on favorable terms and complete construction on schedule or within budget, resulting in increased debt service expense and construction costs and delays in leasing the properties and generating cash flow; • we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations; • the properties may perform below anticipated levels, producing cash flow below budgeted amounts; • substantial renovation and new development activities, regardless of their ultimate success, typically require a significant amount of management’s time and attention, diverting their attention from our day-to-day operations; and • upon completion of construction, we may not be able to obtain, or obtain on advantageous terms, permanent financing for activities that we have financed through construction loans |
| Risks Associated With Our International Business Our international growth is subject to special risks and we may not be able to effectively manage our international growth |
| We have acquired and developed, and expect to continue to acquire and develop, properties outside the United States |
| Because local markets affect our operations, our international investments are subject to economic fluctuations in the international locations in which we invest |
| In addition, our international operations are subject to the usual risks of doing business abroad such as revisions in tax treaties or other laws and regulations, including those governing the taxation of our international revenues, restrictions on the transfer of funds, and, in certain parts of the world, uncertainty over property rights and political instability |
| We cannot predict the likelihood that any of these developments may occur |
| Further, we have entered, and may in the future enter, into agreements with non-US entities that are governed by the laws of, and are 9 _________________________________________________________________ [66]Table of Contents subject to dispute resolution in the courts of, another country or region |
| We cannot accurately predict whether such a forum would provide us with an effective and efficient means of resolving disputes that may arise |
| And even if we are able to obtain a satisfactory decision through arbitration or a court proceeding, we could have difficulty enforcing any award or judgment on a timely basis or at all |
| Further, our business has grown rapidly and continues to grow through international property acquisitions and developments |
| If we fail to effectively manage our international growth, then our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock could be adversely affected |
| Acquired properties may be located in new markets, where we may face risks associated with investing in an unfamiliar market |
| We have acquired and may continue to acquire properties in international markets that are new to us |
| When we acquire properties located in these markets, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures |
| We work to mitigate such risks through extensive diligence and research and associations with experienced partners; however, there can be no guarantee that all such risks will be eliminated |
| We are subject to risks from potential fluctuations in exchange rates between the US dollar and the currencies of the other countries in which we invest |
| We are pursuing, and intend to continue to pursue, growth opportunities in international markets |
| As we invest in countries where the US dollar is not the national currency, we are subject to international currency risks from the potential fluctuations in exchange rates between the US dollar and the currencies of those other countries |
| A significant depreciation in the value of the currency of one or more countries where we have a significant investment may materially affect our results of operations |
| We attempt to mitigate any such effects by borrowing under our multi-currency credit facility in the currency of the country we are investing in and, under certain circumstances, by putting in place international currency put option contracts hedging exchange rate fluctuations |
| For leases denominated in international currencies, we may use derivative financial instruments to manage the international exchange risk |
| We cannot, however, assure you that our efforts will successfully neutralize all international currency risks |
| If we do engage in international currency exchange rate hedging activities, any income recognized with respect to these hedges (as well as any international currency gain recognized with respect to changes in exchange rates) may not qualify under the 75prca gross income test or the 95prca gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT General Business Risks Our performance and value are impacted by the local economic conditions of and the risks associated with doing business in California |
| As of December 31, 2005, our industrial properties located in California represented 27dtta6prca of the aggregate square footage of our industrial operating properties and 28dtta5prca of our industrial annualized base rent |
| Our revenue from, and the value of, our properties located in California may be affected by local real estate conditions (such as an oversupply of or reduced demand for industrial properties) and the local economic climate |
| Business layoffs, downsizing, industry slowdowns, changing demographics and other factors may adversely impact California’s economic climate |
| Because of the number of properties we have located in California, a downturn in California’s economy or real estate conditions could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock |
| We carry commercial liability, property and rental loss insurance covering all the properties that we own and manage in types and amounts that we believe are adequate and appropriate given the relative risks applicable to the property, the cost of coverage and industry practice |
| Certain losses, such as those due to 10 _________________________________________________________________ [67]Table of Contents terrorism, windstorms, floods or seismic activity, may be insured subject to certain limitations, including large deductibles or co-payments and policy limits |
| Although we have obtained coverage for certain acts of terrorism, with policy specifications and insured limits that we consider commercially reasonable given the cost and availability of such coverage, we cannot be certain that we will be able to renew coverage on comparable terms or collect under such policies |
| In addition, there are other types of losses, such as those from riots, bio-terrorism or acts of war, that are not generally insured in our industry because it is not economically feasible to do so |
| We may incur material losses in excess of insurance proceeds and we may not be able to continue to obtain insurance at commercially reasonable rates |
| If we experience a loss that is uninsured or that exceeds our insured limits with respect to one or more of our properties, then we could lose the capital invested in the damaged properties, as well as the anticipated future revenue from those properties and, if there is recourse debt, then we would remain obligated for any mortgage debt or other financial obligations related to the properties |
| Moreover, as the general partner of the operating partnership, we generally will be liable for all of the operating partnership’s unsatisfied recourse obligations, including any obligations incurred by the operating partnership as the general partner of co-investment joint ventures |
| Any such losses could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock |
| A number of our properties are located in areas that are known to be subject to earthquake activity |
| Domestic properties located in active seismic areas include properties in the San Francisco Bay Area, Los Angeles, Memphis and Seattle |
| Our largest concentration of such properties is in California where, as of December 31, 2005, we had 253 industrial buildings, aggregating approximately 24dtta3 million square feet and representing 27dtta6prca of our industrial operating properties based on aggregate square footage and 28dtta5prca based on industrial annualized base rent |
| International properties located in active seismic areas include Tokyo and Osaka, Japan and Mexico City, Mexico |
| We carry replacement-cost earthquake insurance on all of our properties located in areas historically subject to seismic activity, subject to coverage limitations and deductibles that we believe are commercially reasonable |
| We evaluate our earthquake insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants |
| A number of our properties are located in areas that are known to be subject to hurricane and/or flood risk |
| We carry replacement-cost hurricane and flood hazard insurance on all of our properties located in areas historically subject to such activity, subject to coverage limitations and deductibles that we believe are commercially reasonable |
| We evaluate our insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants |
| In 2005, various properties that we own or lease in New Orleans, Louisiana and South Florida suffered damage as a result of Hurricanes Katrina and Wilma |
| Although we expect that our insurance will cover losses arising from this damage in excess of the deductibles paid by us and do not believe that such losses would have a material adverse effect on our business, assets or results from operations, we cannot assure you that we will be reimbursed for all losses incurred |
| We are subject to risks and liabilities in connection with properties owned through joint ventures, limited liability companies and partnerships |
| As of December 31, 2005, we owned approximately 54dtta8 million square feet of our properties through several joint ventures, limited liability companies or partnerships with third parties |
| Our organizational documents do not limit the amount of available funds that we may invest in partnerships, limited liability companies or joint ventures and we intend to continue to develop and acquire properties through joint ventures, limited liability companies and partnerships with other persons or entities when warranted by the circumstances |
| Such partners may share certain approval rights over major decisions |
| Partnership, limited liability company or joint venture investments involve certain risks, including: • if our partners, co-members or joint venturers go bankrupt, then we and any other remaining general partners, members or joint venturers would generally remain liable for the partnership’s, limited liability company’s or joint venture’s liabilities; • if our partners fail to fund their share of any required capital contributions, then we may be required to contribute such capital; 11 _________________________________________________________________ [68]Table of Contents • our partners, co-members or joint venturers might have economic or other business interests or goals that are inconsistent with our business interests or goals that would affect our ability to operate the property; • our partners, co-members or joint venturers may have the power to act contrary to our instructions, requests, policies or objectives, including our current policy with respect to maintaining our qualification as a real estate investment trust; • the joint venture, limited liability and partnership agreements often restrict the transfer of a joint venture’s, member’s or partner’s interest or “buy-sell” or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms; • our relationships with our partners, co-members or joint ventures are contractual in nature and may be terminated or dissolved under the terms of the agreements, and in such event, we may not continue to own or operate the interests or assets underlying such relationship or may need to purchase such interests or assets at an above- market price to continue ownership; • disputes between us and our partners, co-members or joint venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable partnership or joint venture to additional risk; and • we may in certain circumstances be liable for the actions of our partners, co-members or joint venturers |
| We generally seek to maintain sufficient control of our partnerships, limited liability companies and joint ventures to permit us to achieve our business objectives, however, we may not be able to do so, and the occurrence of one or more of the events described above could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock |
| We may be unable to complete divestitures on advantageous terms or contribute properties |
| We intend to continue to divest ourselves of properties that do not meet our strategic objectives, provided that we can negotiate acceptable terms and conditions |
| Our ability to dispose of properties on advantageous terms depends on factors beyond our control, including competition from other sellers and the availability of attractive financing for potential buyers of our properties |
| If we are unable to dispose of properties on favorable terms or redeploy the proceeds of property divestitures in accordance with our investment strategy, then our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock could be adversely affected |
| We also anticipate contributing or selling properties to funds and joint ventures |
| If the funds are unable to raise additional capital on favorable terms after currently available capital is depleted or if the value of such properties are appraised at less than the cost of such properties, then such contributions or sales could be delayed or prevented, adversely affecting our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock |
| For example, although we have acquired land for development and made capital commitments in Japan and Mexico, we cannot be assured that we ultimately will be able to contribute such properties to funds or joint ventures as we have planned |
| Contingent or unknown liabilities could adversely affect our financial condition |
| We have and may in the future acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities |
| As a result, if a liability were asserted against us based upon ownership of any of these entities or properties, then we might have to pay substantial sums to 12 _________________________________________________________________ [69]Table of Contents settle it, which could adversely affect our cash flow |
| Unknown liabilities with respect to entities or properties acquired might include: • liabilities for clean-up or remediation of undisclosed environmental conditions; • accrued but unpaid liabilities incurred in the ordinary course of business; • tax liabilities; and • claims for indemnification by the general partners, officers and directors and others indemnified by the former owners of the properties |
| We are dependent on external sources of capital |
| In order to qualify as a real estate investment trust, we are required each year to distribute to our stockholders at least 90prca of our real estate investment trust taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain) and are taxed on our income to the extent it is not fully distributed |
| Consequently, we may not be able to fund all future capital needs, including acquisition and development activities, from cash retained from operations and must rely on third-party sources of capital |
| Further, in order to maintain our REIT status and avoid the payment of income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings |
| These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments |
| Our ability to access private debt and equity capital on favorable terms or at all is dependent upon a number of factors, including, general market conditions, the market’s perception of our growth potential, our current and potential future earnings and cash distributions and the market price of our capital stock |
| Debt Financing Risks We could incur more debt, increasing our debt service |
| It is our policy to incur debt, either directly or through our subsidiaries, only if it will not cause our share of total debt-to-our share of total market capitalization ratio to exceed approximately 45prca |
| Our definition of “our share of total market capitalization” is our share of total debt plus preferred equity liquidation preferences plus market equity |
| See footnote 1 to the Capitalization Ratios table contained in Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Liquidity and Capital Resources” for our definitions of “market equity” and “our share of total debt |
| ” The aggregate amount of indebtedness that we may incur under our policy increases directly with an increase in the market price per share of our capital stock |
| Further, our management could alter or eliminate this policy without stockholder approval |
| If we change this policy, then we could become more highly leveraged, resulting in an increase in debt service that could adversely affect the cash available for distribution to our stockholders |
| We face risks associated with the use of debt to fund acquisitions and developments, including refinancing risk |
| As of December 31, 2005, we had total debt outstanding of dlra3dtta4 billion |
| We guarantee the operating partnership’s obligations with respect to the senior debt securities referenced in our financial statements |
| We are subject to risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest |
| We anticipate that we will repay only a small portion of the principal of our debt prior to maturity |
| Accordingly, we will likely need to refinance at least a portion of our outstanding debt as it matures |
| There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of our existing debt |
| If we are unable to refinance or extend principal payments due at maturity or pay them with proceeds of other capital transactions, then we expect that our cash flow will not be sufficient in all years to pay dividends to our stockholders and to repay all such maturing debt |
| Furthermore, if prevailing interest rates or other factors at 13 _________________________________________________________________ [70]Table of Contents the time of refinancing (such as the reluctance of lenders to make commercial real estate loans) result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase |
| In addition, if we mortgage one or more of our properties to secure payment of indebtedness and we are unable to meet mortgage payments, then the property could be foreclosed upon or transferred to the mortgagee with a consequent loss of income and asset value |
| A foreclosure on one or more of our properties could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock |
| Covenants in our debt agreements could adversely affect our financial condition |
| The terms of our credit agreements and other indebtedness require that we comply with a number of financial and other covenants, such as maintaining debt service coverage and leverage ratios and maintaining insurance coverage |
| These covenants may limit flexibility in our operations, and our failure to comply with these covenants could cause a default under the applicable debt agreement even if we have satisfied our payment obligations |
| As of December 31, 2005, we had certain non-recourse, secured loans, which are cross-collateralized by multiple properties |
| If we default on any of these loans, we may then be required to repay such indebtedness, together with applicable prepayment charges, to avoid foreclosure on all the cross-collateralized properties within the applicable pool |
| Foreclosure on our properties, or our inability to refinance our loans on favorable terms, could adversely impact our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock |
| In addition, our credit facilities and senior debt securities contain certain cross-default provisions, which are triggered in the event that our other material indebtedness is in default |
| These cross-default provisions may require us to repay or restructure the credit facilities and the senior debt securities in addition to any mortgage or other debt that is in default, which could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock |
| Failure to hedge effectively against interest rates may adversely affect results of operations |
| We seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as interest rate cap agreements and interest rate swap agreements |
| These agreements involve risks, such as the risk that the counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes and that a court could rule that such agreements are not legally enforceable |
| Hedging may reduce overall returns on our investments |
| Failure to hedge effectively against interest rate changes may materially adversely affect our results of operations |
| Conflicts of Interest Risks Some of our directors and executive officers are involved in other real estate activities and investments and, therefore, may have conflicts of interest with us |
| Certain of our executive officers and directors own interests in other real-estate related businesses and investments, including retail development projects, office buildings and de minimis holdings of the equity securities of public and private real estate companies |
| Our executive officers’ continued involvement in other real estate-related activities could divert their attention from our day-to-day operations |
| Our executive officers have entered into non-competition agreements with us pursuant to which they have agreed not to engage in any activities, directly or indirectly, in respect of commercial real estate, and not to make any investment in respect of any industrial or retail real estate, other than through ownership of not more than 5prca of the outstanding shares of a public company engaged in such activities or through certain specified investments |
| State law may limit our ability to enforce these agreements |
| We believe that these properties and activities generally do not directly compete with any of our properties |
| However, it is possible that a property in which an executive officer or director, or an affiliate of an executive officer or director, has an interest may compete with us in the future if we were to invest in a property similar in type and in close proximity to that property |
| 14 _________________________________________________________________ [71]Table of Contents We will not acquire any properties from our executive officers, directors or their affiliates unless the transaction is approved by a majority of the disinterested and independent (as defined by the rules of the New York Stock Exchange) members of our board of directors with respect to that transaction |
| Our role as general partner of the operating partnership may conflict with the interests of our stockholders |
| As the general partner of the operating partnership, we have fiduciary obligations to the operating partnership’s limited partners, the discharge of which may conflict with the interests of our stockholders |
| In addition, those persons holding limited partnership units will have the right to vote as a class on certain amendments to the operating partnership’s partnership agreement and individually to approve certain amendments that would adversely affect their rights |
| The limited partners may exercise these voting rights in a manner that conflicts with the interests of our stockholders |
| In addition, under the terms of the operating partnership’s partnership agreement, holders of limited partnership units will have certain approval rights with respect to certain transactions that affect all stockholders but which they may not exercise in a manner that reflects the interests of all stockholders |
| Risks Associated with Government Regulations The costs of compliance with environmental laws and regulations and any related potential liability could exceed our budgets for these items |
| Under various environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of investigation, removal or remediation of certain hazardous or toxic substances or petroleum products at, on, under or in its property |
| The costs of removal or remediation of such substances could be substantial |
| These laws typically impose liability and clean-up responsibility without regard to whether the owner or operator knew of or caused the presence of the contaminants |
| Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred |
| In addition, third parties may sue the owner or operator of a site for damages based on personal injury, property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination |
| Environmental laws in some countries, including the US, also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition |
| These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos |
| In addition, some of our properties are leased or have been leased, in part, to owners and operators of businesses that use, store or otherwise handle petroleum products or other hazardous or toxic substances, creating a potential for the release of such hazardous or toxic substances |
| Further, certain of our properties are on, adjacent to or near other properties that have contained or currently contain petroleum products or other hazardous or toxic substances, or upon which others have engaged, are engaged or may engage in activities that may release such hazardous or toxic substances |
| From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return |
| In such an instance, we underwrite the costs of environmental investigation, clean-up and monitoring into the acquisition cost and obtain appropriate environmental insurance for the property |
| Further, in connection with certain divested properties, we have agreed to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties |
| At the time of acquisition, we subject all of our properties to a Phase I or similar environmental assessments by independent environmental consultants and we may have additional Phase II testing performed upon the consultant’s recommendation |
| These environmental assessments have not revealed, and 15 _________________________________________________________________ [72]Table of Contents we are not aware of, any environmental liability that we believe would have a material adverse effect on our financial condition or results of operations taken as a whole |
| Nonetheless, it is possible that the assessments did not reveal all environmental liabilities and that there are material environmental liabilities unknown to us, or that known environmental conditions may give rise to liabilities that are greater than we anticipated |
| Further, our properties’ current environmental condition may be affected by customers, the condition of land, operations in the vicinity of the properties (such as releases from underground storage tanks) or by unrelated third parties |
| If the costs of compliance with existing or future environmental laws and regulations exceed our budgets for these items, then our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock could be adversely affected |
| Compliance or failure to comply with the Americans with Disabilities Act and other similar regulations could result in substantial costs |
| Under the Americans with Disabilities Act, places of public accommodation must meet certain federal requirements related to access and use by disabled persons |
| Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants |
| If we are required to make unanticipated expenditures to comply with the Americans with Disabilities Act, including removing access barriers, then our cash flow and the amounts available for dividends to our stockholders may be adversely affected |
| Our properties are also subject to various federal, state and local regulatory requirements, such as state and local fire and life-safety requirements |
| We could incur fines or private damage awards if we fail to comply with these requirements |
| While we believe that our properties are currently in material compliance with these regulatory requirements, the requirements may change or new requirements may be imposed that could require significant unanticipated expenditures by us that will affect our cash flow and results of operations |
| Federal Income Tax Risks Our failure to qualify as a real estate investment trust would have serious adverse consequences to our stockholders |
| We elected to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code commencing with our taxable year ended December 31, 1997 |
| We currently intend to operate so as to qualify as a real estate investment trust under the Internal Revenue Code and believe that our current organization and method of operation comply with the rules and regulations promulgated under the Internal Revenue Code to enable us to continue to qualify as a real estate investment trust |
| However, it is possible that we have been organized or have operated in a manner that would not allow us to qualify as a real estate investment trust, or that our future operations could cause us to fail to qualify |
| Qualification as a real estate investment trust requires us to satisfy numerous requirements (some on an annual and others on a quarterly basis) established under highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control |
| For example, in order to qualify as a real estate investment trust, we must derive at least 95prca of our gross income in any year from qualifying sources |
| In addition, we must pay dividends to stockholders aggregating annually at least 90prca of our real estate investment trust taxable income (determined without regard to the dividends paid deduction and by excluding capital gains) and must satisfy specified asset tests on a quarterly basis |
| These provisions and the applicable Treasury regulations are more complicated in our case because we hold our assets through the operating partnership |
| Legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a real estate investment trust or the federal income tax consequences of such qualification |
| However, we are not aware of any pending tax legislation that would adversely affect our ability to qualify as a real estate investment trust |
| If we fail to qualify as a real estate investment trust in any taxable year, then we will be required to pay federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates |
| Unless we are entitled to relief under certain statutory provisions, we would be disqualified from treatment as a real estate investment trust for the four taxable years following the year in which we lost 16 _________________________________________________________________ [73]Table of Contents qualification |
| If we lose our real estate investment trust status, then our net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved |
| In addition, we would no longer be required to make distributions to our stockholders |
| Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction |
| From time to time, we may transfer or otherwise dispose of some of our properties |
| Under the Internal Revenue Code, any gain resulting from transfers of properties that we hold as inventory or primarily for sale to customers in the ordinary course of business would be treated as income from a prohibited transaction subject to a 100prca penalty tax |
| Since we acquire properties for investment purposes, we do not believe that our occasional transfers or disposals of property are properly treated as prohibited transactions |
| However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction |
| The Internal Revenue Service may contend that certain transfers or disposals of properties by us are prohibited transactions |
| While we believe that the Internal Revenue Service would not prevail in any such dispute, if the Internal Revenue Service were to argue successfully that a transfer or disposition of property constituted a prohibited transaction, then we would be required to pay a 100prca penalty tax on any gain allocable to us from the prohibited transaction |
| In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a real estate investment trust for federal income tax purposes |
| Risks Associated With Our Dependence on Key Personnel We depend on the efforts of our executive officers |
| While we believe that we could find suitable replacements for these key personnel, the loss of their services or the limitation of their availability could adversely affect our financial condition, results of operations, cash flow and ability to pay dividends on, and the market price of, our stock |
| We do not have employment agreements with any of our executive officers |
| Risks Associated with Our Disclosure Controls and Procedures and Internal Control over Financial Reporting Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting |
| The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations |
| While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time |
| Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in our stock price, or otherwise materially adversely affect our business, reputation, results of operations, financial condition or liquidity |
| Risks Associated with Ownership of Our Stock Limitations in our charter and bylaws could prevent a change in control |
| Certain provisions of our charter and bylaws may delay, defer or prevent a change in control or other transaction that could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price for the common stock |
| To maintain our qualification as a real estate investment trust for federal income tax purposes, not more than 50prca in value of our outstanding stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the last half of a taxable year after the first taxable year for which a real estate investment trust election is made |
| Furthermore, our common stock must be held by a minimum of 100 persons for at least 335 days of a 12-month taxable year (or a proportionate part of a short tax year) |
| In addition, if we, or an owner of 10prca or more of our stock, actually or constructively owns 10prca or more of one of our customers 17 _________________________________________________________________ [74]Table of Contents (or a tenant of any partnership in which we are a partner), then the rent received by us (either directly or through any such partnership) from that tenant will not be qualifying income for purposes of the real estate investment trust gross income tests of the Internal Revenue Code |
| To help us maintain our qualification as a real estate investment trust for federal income tax purposes, we prohibit the ownership, actually or by virtue of the constructive ownership provisions of the Internal Revenue Code, by any single person, of more than 9dtta8prca (by value or number of shares, whichever is more restrictive) of the issued and outstanding shares of each of our common stock, series L preferred stock, series M preferred stock and series O preferred stock |
| We also prohibit the ownership, actually or constructively, of any shares of our series D, E, F, H, I, J and K preferred stock by any single person so that no such person, taking into account all of our stock so owned by such person, including any common stock or other series of preferred stock, may own in excess of 9dtta8prca of our issued and outstanding capital stock |
| We refer to this limitation as the “ownership limit |
| ” Shares acquired or held in violation of the ownership limit will be transferred to a trust for the benefit of a designated charitable beneficiary |
| Any person who acquires shares in violation of the ownership limit will not be entitled to any dividends on the shares or be entitled to vote the shares or receive any proceeds from the subsequent sale of the shares in excess of the lesser of the price paid for the shares or the amount realized from the sale |
| A transfer of shares in violation of the above limits may be void under certain circumstances |
| The ownership limit may have the effect of delaying, deferring or preventing a change in control and, therefore, could adversely affect our stockholders’ ability to realize a premium over the then-prevailing market price for the shares of our common stock in connection with such transaction |
| Our charter authorizes us to issue additional shares of common and preferred stock and to establish the preferences, rights and other terms of any series or class of preferred stock that we issue |
| Although our board of directors has no intention to do so at the present time, it could establish a series or class of preferred stock that could have the effect of delaying, deferring or preventing a transaction, including a change in control, that might involve a premium price for the common stock or otherwise be in the best interests of our stockholders |
| Our charter and bylaws and Maryland law also contain other provisions that may impede various actions by stockholders without approval of our board of directors, which in turn may delay, defer or prevent a transaction, including a change in control |
| Those provisions in our charter and bylaws include: • directors may be removed only for cause and only upon a two-thirds vote of stockholders; • our board can fix the number of directors within set limits (which limits are subject to change by our board), and fill vacant directorships upon the vote of a majority of the remaining directors, even though less than a quorum, or in the case of a vacancy resulting from an increase in the size of the board, a majority of the entire board; • stockholders must give advance notice to nominate directors or propose business for consideration at a stockholders’ meeting; and • the request of the holders of 50prca or more of our common stock is necessary for stockholders to call a special meeting |
| Those provisions provided for under Maryland law include: • a two-thirds vote of stockholders is required to amend our charter; and • stockholders may only act by written consent with the unanimous approval of all stockholders entitled to vote on the matter in question |
| In addition, our board could elect to adopt, without stockholder approval, certain other provisions under Maryland law that may impede a change in control |
| 18 _________________________________________________________________ [75]Table of Contents The market value of our stock could be substantially affected by various factors |
| As with other publicly traded securities, the trading price of our stock will depend on many factors that are not within our control and may change from time to time, including: • the extent of investor interest in us; • the market for similar securities issued by real estate investment trusts; • the general reputation of real estate investment trusts and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies); • general stock and bond market conditions, including changes in interest rates on fixed income securities, that may lead prospective purchasers of our stock to demand a higher annual yield from future dividends; • terrorist activity may adversely affect the markets in which our securities trade, possibly increasing market volatility and causing the further erosion of business and consumer confidence and spending; • general economic conditions; and • our financial condition, performance and prospects |
| Other factors such as governmental regulatory action and changes in tax laws could also have a significant impact on the future trading price of our stock |
| Earnings, cash dividends, asset value and market interest rates affect the price of our stock |
| As a real estate investment trust the market value of our equity securities, in general, is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash dividends |
| Our equity securities’ market value is based secondarily upon the market value of our underlying real estate assets |
| For this reason, shares of our stock may trade at prices that are higher or lower than our net asset value per share |
| To the extent that we retain operating cash flow for investment purposes, working capital reserves, or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our stock |
| Our failure to meet the market’s expectations with regard to future earnings and cash dividends likely would adversely affect the market price of our stock |
| Further, the distribution yield on the stock (as a percentage of the price of the stock) relative to market interest rates may also influence the price of our stock |
| An increase in market interest rates might lead prospective purchasers of our stock to expect a higher distribution yield, which would adversely affect our stock’s market price |
| Additionally, if the market price of our stock declines significantly, then we might breach certain covenants with respect to our debt obligations, which could adversely affect our liquidity and ability to make future acquisitions and our ability to pay dividends to our stockholders |
| If we issue additional securities, then the investment of existing stockholders will be diluted |
| We have authority to issue shares of common stock or other equity or debt securities, and to cause the operating partnership to issue limited partnership units, in exchange for property or otherwise |
| Existing stockholders have no preemptive right to acquire any additional securities issued by the operating partnership or us and any issuance of additional equity securities could result in dilution of an existing stockholder’s investment |
| We could change our investment and financing policies without a vote of stockholders |
| Subject to our current investment policy to maintain our qualification as a real estate investment trust (unless a change is approved by our board of directors under certain circumstances), our board of directors determines our investment and financing policies, our growth strategy and our debt, capitalization, distribution and operating policies |
| Although our board of directors does not presently intend to revise or amend these strategies and policies, they may do so at any time without a vote of stockholders |
| Any such changes may not 19 _________________________________________________________________ [76]Table of Contents serve the interests of all stockholders and could adversely affect our financial condition or results of operations, including our ability to pay dividends to our stockholders |
| Shares available for future sale could adversely affect the market price of our common stock |
| The operating partnership and AMB Property II, LP had 4cmam396cmam525 common limited partnership units issued and outstanding as of December 31, 2005, which may be exchanged generally one year after their issuance on a one-for-one basis into shares of our common stock |
| In the future, the operating partnership or AMB Property II, LP may issue additional limited partnership units, and we may issue shares of common stock, in connection with the acquisition of properties or in private placements |
| These shares of common stock and the shares of common stock issuable upon exchange of limited partnership units may be sold in the public securities markets over time, pursuant to registration rights that we have granted, or may grant in connection with future issuances, or pursuant to Rule 144 |
| In addition, common stock issued under our stock option and incentive plans may also be sold in the market pursuant to registration statements that we have filed or pursuant to Rule 144 |
| As of December 31, 2005, under our stock option and incentive plans, we had 3cmam872cmam024 shares of common stock reserved and available for future issuance, had outstanding options to purchase 9cmam148cmam437 shares of common stock (of which 7cmam236cmam870 are vested and exercisable) and had 547cmam524 unvested restricted shares of common stock outstanding |
| Future sales of a substantial number of shares of our common stock in the market or the perception that such sales might occur could adversely affect the market price of our common stock |
| Further, the existence of the operating partnership’s limited partnership units and the shares of our common stock reserved for issuance upon exchange of limited partnership units and the exercise of options, and registration rights referred to above, may adversely affect the terms upon which we are able to obtain additional capital through the sale of equity securities |