| AMERICAN CAMPUS COMMUNITIES INC Item 1A Risk Factors 7 ITEM 1A RISK FACTORS THE FOLLOWING RISK FACTORS MAY CONTAIN DEFINED TERMS THAT ARE DIFFERENT FROM THOSE USED IN OTHER SECTIONS OF THIS REPORT UNLESS OTHERWISE INDICATED, WHEN USED IN THIS SECTION, THE TERMS "e WE "e AND "e US "e REFER TO AMERICAN CAMPUS COMMUNITIES, INC AND ITS SUBSIDIARIES, INCLUDING AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP, OUR OPERATING PARTNERSHIP, AND THE TERM "e SECURITIES "e REFERS TO SHARES OF COMMON STOCK OF AMERICAN CAMPUS COMMUNITIES, INC AND UNITS OF LIMITED PARTNERSHIP INTEREST IN OUR OPERATING PARTNERSHIP THE FACTORS DESCRIBED BELOW REPRESENT THE COMPANY &apos S PRINCIPAL RISKS OTHER FACTORS MAY EXIST THAT THE COMPANY DOES NOT CONSIDER TO BE SIGNIFICANT BASED ON INFORMATION THAT IS CURRENTLY AVAILABLE OR THAT THE COMPANY IS NOT CURRENTLY ABLE TO ANTICIPATE RISKS RELATED TO OUR PROPERTIES AND OUR BUSINESS OUR RESULTS OF OPERATIONS ARE SUBJECT TO AN ANNUAL LEASING CYCLE, SHORT LEASE-UP PERIOD, SEASONAL CASH FLOWS, CHANGING UNIVERSITY ADMISSION AND HOUSING POLICIES AND OTHER RISKS INHERENT IN THE STUDENT HOUSING INDUSTRY We generally lease our owned properties under 12-month leases, and in certain cases, under ten-month, nine-month or shorter-term semester leases |
| As a result, we may experience significantly reduced cash flows during the summer months at properties leased under leases having terms shorter than 12 months |
| Furthermore, all of our properties must be entirely re-leased each year, exposing us to increased leasing risk |
| In addition, we are subject to increased leasing risk on our properties under construction and future acquired properties based on our lack of experience leasing those properties and unfamiliarity with their leasing cycles |
| Student housing properties are also typically leased during a limited leasing season that usually begins in January and ends in August of each year |
| We are therefore highly dependent on the effectiveness of our marketing and leasing efforts and personnel during this season |
| Changes in university admission policies could adversely affect us |
| For example, if a university reduces the number of student admissions or requires that a certain class of students, such as freshman, live in a university owned facility, the demand for beds at our properties may be reduced and our occupancy rates may decline |
| While we may engage in marketing efforts to compensate for such change in admission policy, we may not be able to effect such marketing efforts prior to the commencement of the annual lease-up period or our additional marketing efforts may not be successful |
| We rely on our relationships with colleges and universities for referrals of prospective student-tenants or for mailing lists of prospective student-tenants and their parents |
| Many of these colleges and universities own and operate their own competing on-campus facilities |
| Any failure to maintain good relationships with these colleges and universities could therefore have a material adverse effect on us |
| If colleges and universities refuse to make their lists of prospective student-tenants and their parents available to us or increase the costs of these lists, there could be a material adverse effect on us |
| Federal and state laws require colleges to publish and distribute reports of on-campus crime statistics, which may result in negative publicity and media coverage associated with crimes occurring on or in the vicinity of our on-campus participating properties |
| Reports of crime or other negative publicity regarding the safety of the students residing on, or near, our properties may have an adverse effect on both our on-campus and off-campus business |
| WE FACE SIGNIFICANT COMPETITION FROM UNIVERSITY-OWNED ON-CAMPUS STUDENT HOUSING, FROM OTHER OFF-CAMPUS STUDENT HOUSING PROPERTIES AND FROM TRADITIONAL MULTIFAMILY HOUSING LOCATED WITHIN CLOSE PROXIMITY TO UNIVERSITIES On-campus student housing has certain inherent advantages over off-campus student housing in terms of physical proximity to the university campus and integration of on-campus facilities into the academic community |
| Colleges and universities can generally avoid real estate taxes and borrow funds at lower interest rates than us and other private sector operators |
| We also compete with national and regional owner-operators of off-campus student housing in a number of markets as well as with smaller local owner-operators |
| 7 Currently, the industry is fragmented with no participant holding a significant market share |
| There are a number of student housing complexes that are located near or in the same general vicinity of many of our owned properties and that compete directly with us |
| Such competing student housing complexes may be newer than our properties, located closer to campus, charge less rent, possess more attractive amenities or offer more services or shorter term or more flexible leases |
| Rental income at a particular property could also be affected by a number of other factors, including the construction of new on-campus and off-campus residences, increases or decreases in the general levels of rents for housing in competing communities, increases or decreases in the number of students enrolled at one or more of the colleges or universities in the market of the property and other general economic conditions |
| We believe that a number of other large national companies with substantial financial and marketing resources may be potential entrants in the student housing business |
| The entry of one or more of these companies could increase competition for students and for the acquisition, development and management of other student housing properties |
| WE MAY BE UNABLE TO SUCCESSFULLY COMPLETE AND OPERATE OUR PROPERTIES OR OUR THIRD PARTY DEVELOPED PROPERTIES We intend to continue to develop and construct student housing in accordance with our growth strategies |
| These activities may also include any of the following risks: o we may be unable to obtain financing on favorable terms or at all; o we may not complete development projects on schedule, within budgeted amounts or in conformity with building plans and specifications; o we may encounter delays or refusals in obtaining all necessary zoning, land use, building, occupancy and other required governmental permits and authorizations; o occupancy and rental rates at newly developed or renovated properties may fluctuate depending on a number of factors, including market and economic conditions, and may reduce or eliminate our return on investment; o we may become liable for injuries and accidents occurring during the construction process and for environmental liabilities, including off-site disposal of construction materials; o we may decide to abandon our development efforts if we determine that continuing the project would not be in our best interests; and o we may encounter strikes, weather, government regulations and other conditions beyond our control |
| Our newly developed properties will be subject to risks associated with managing new properties, including lease-up and integration risks |
| In addition, new development activities, regardless of whether or not they are ultimately successful, typically will require a substantial portion of the time and attention of our development and management personnel |
| Newly developed properties may not perform as expected |
| We anticipate that we will, from time to time, elect not to proceed with ongoing development projects |
| If we elect not to proceed with a development project, the development costs associated therewith will ordinarily be charged against income for the then-current period |
| Any such charge could have a material adverse effect on our results of operations in the period in which the charge is taken |
| We may in the future develop properties nationally, internationally or in geographic regions other than those in which we currently operate |
| We do not possess the same level of familiarity with development in these new markets, which could adversely affect our ability to develop such properties successfully or at all or to achieve expected performance |
| Future development opportunities may not be available to us on terms that meet our investment criteria or we may be unsuccessful in capitalizing on such opportunities |
| Our ability to capitalize on such opportunities will be largely dependent upon external sources of capital that may not be available to us on favorable terms or at all |
| We typically provide guarantees of timely completion of projects that we develop for third parties |
| In certain cases, our contingent liability under these guarantees may exceed our development fee from the project |
| Although we seek to mitigate this risk by, among other things, obtaining similar guarantees from the project contractor, we could sustain significant losses 8 if development of a project were to be delayed or stopped and we were unable to cover our guarantee exposure with the guarantee received from the project contractor |
| WE MAY BE UNABLE TO SUCCESSFULLY ACQUIRE PROPERTIES ON FAVORABLE TERMS Our future growth will be dependent upon our ability to successfully acquire new properties on favorable terms |
| As we acquire additional properties, we will be subject to risks associated with managing new properties, including lease-up and integration risks |
| Newly developed and recently acquired properties may not perform as expected and may have characteristics or deficiencies unknown to us at the time of acquisition |
| Future acquisition opportunities may not be available to us on terms that meet our investment criteria or we may be unsuccessful in capitalizing on such opportunities |
| Our ability to capitalize on such opportunities will be largely dependent upon external sources of capital that may not be available to us on favorable terms or at all |
| Our ability to acquire properties on favorable terms and successfully operate them involves the following significant risks: o our potential inability to acquire a desired property may be caused by competition from other real estate investors; o competition from other potential acquirers may significantly increase the purchase price and decrease expected yields; o we may be unable to finance an acquisition on favorable terms or at all; o we may have to incur significant capital expenditures to improve or renovate acquired properties; o we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations; o market conditions may result in higher than expected costs and vacancy rates and lower than expected rental rates; and o we may acquire properties subject to liabilities but without any recourse, or with only limited recourse, to the sellers, or with liabilities that are unknown to us, such as liabilities for clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of our properties and claims for indemnification by members, directors, officers and others indemnified by the former owners of our properties |
| Our failure to finance property acquisitions on favorable terms, or operate acquired properties to meet our financial expectations, could adversely affect us |
| OUR DEBT LEVEL REDUCES CASH AVAILABLE FOR DISTRIBUTION AND MAY EXPOSE US TO THE RISK OF DEFAULT UNDER OUR DEBT OBLIGATIONS As of December 31, 2005, our total consolidated indebtedness was approximately dlra287dtta3 million (excluding unamortized debt premiums) |
| Our debt service obligations expose us to the risk of default and reduce or eliminate cash resources that are available to operate our business or pay distributions that are necessary to maintain our qualification as a REIT There is no limit on the amount of indebtedness that we may incur except as provided by the covenants in our revolving credit facility |
| We expect to incur additional indebtedness under our revolving credit facility to fund future property development and acquisitions and other working capital needs, which may include the payment of distributions to our security holders |
| The amount available to us and our ability to borrow from time to time under our revolving credit facility is subject to certain conditions and the satisfaction of specified financial covenants |
| Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following: o We may be unable to borrow additional funds as needed or on favorable terms |
| o We may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness |
| o We may be forced to dispose of one or more of our properties, possibly on disadvantageous terms |
| 9 o We may default on our payment or other obligations as a result of insufficient cash flow or otherwise, and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and leases |
| o Foreclosures could create taxable income without accompanying cash proceeds, a circumstance that could hinder our ability to meet the REIT distribution requirements imposed by the Internal Revenue Code |
| WE MAY NOT BE ABLE TO RECOVER PRE-DEVELOPMENT COSTS FOR UNIVERSITY DEVELOPMENTS University systems and educational institutions typically award us development services contracts on the basis of a competitive award process, but such contracts are typically executed following the formal approval of the transaction by the institutionapstas governing body |
| In the intervening period, we may incur significant pre-development and other costs in the expectation that the development services contract will be executed |
| If an institutionapstas governing body does not ultimately approve our selection and the terms of the pending development contract, we may not be able to recoup these costs from the institution and the resulting losses could be material |
| OUR AWARDED PROJECTS MAY NOT BE SUCCESSFULLY STRUCTURED OR FINANCED AND MAY DELAY OUR RECOGNITION OF REVENUES The recognition and timing of revenues from our awarded development services projects will, among other things, be contingent upon successfully structuring and closing project financing as well as the timing of construction |
| The development projects that we have been awarded have at times been delayed beyond the originally scheduled construction commencement date |
| If such delays were to occur with our current awarded projects, our recognition of expected revenues and receipt of expected fees from these projects would be delayed |
| WE MAY ENCOUNTER DELAYS IN COMPLETION OR EXPERIENCE COST OVERRUNS WITH RESPECT TO OUR PROPERTIES THAT ARE UNDER CONSTRUCTION As of December 31, 2005, we were in the process of constructing two owned off-campus properties |
| These properties are subject to the various risks relating to properties that are under construction referred to elsewhere in these risk factors, including the risks that we may encounter delays in completion and that these projects may experience cost overruns |
| These properties may not be completed on time |
| Additionally, if we do not complete the construction of certain of our properties on schedule, we may be required to provide alternative housing to the students with whom we have signed leases |
| We generally do not make any arrangements for such alternative housing for these properties and we would likely incur significant expenses in the event we provide such housing |
| If construction is not completed on schedule, students may attempt to break their leases and our occupancy at such properties for that academic year may suffer |
| OUR GUARANTEES COULD RESULT IN LIABILITIES IN EXCESS OF OUR DEVELOPMENT FEES In third party developments, we typically provide guarantees of the obligations of the developer, including development budgets and timely project completion |
| These guarantees include, among other things, the cost of providing alternate housing for students in the event we do not timely complete a development project |
| These guarantees typically exclude delays resulting from force majeure and also, in third party transactions, are typically limited in amount to the amount of our development fees from the project |
| In certain cases, however, our contingent liability under these guarantees has exceeded our development fee from the project and we may agree to such arrangements in the future |
| Our obligations under alternative housing guarantees typically expire five days after construction is complete |
| Project cost guarantees are normally satisfied within one year after completion of the project |
| UNIVERSITIES HAVE THE RIGHT TO TERMINATE OUR PARTICIPATING GROUND LEASES The ground leases through which we own our on-campus participating properties provide that the university lessor may purchase our interest in and assume the management of the facility, with the purchase price calculated at the discounted present cash value of our leasehold interest |
| The exercise of any such buyout would result in a significant reduction in our portfolio |
| CHANGES IN LAWS AND LITIGATION RISKS COULD AFFECT OUR BUSINESS We are generally not able to pass through to our residents under existing leases real estate taxes, income taxes or other taxes |
| Consequently, any such tax increases may adversely affect our financial 10 condition and limit our ability to satisfy our financial obligations and make distributions to security holders |
| Changes that increase our potential liability under environmental laws or our expenditures on environmental compliance could have the same impact |
| As a publicly traded owner of properties, we may become involved in legal proceedings, including consumer, employment, tort or commercial litigation, that if decided adversely to or settled by us could result in liability that is material to our financial condition or results of operations |
| RISKS RELATED TO THE REAL ESTATE INDUSTRY OUR PERFORMANCE AND VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH REAL ESTATE ASSETS AND WITH THE REAL ESTATE INDUSTRY Our ability to satisfy our financial obligations and make expected distributions to our security holders depends on our ability to generate cash revenues in excess of expenses and capital expenditure requirements |
| Events and conditions generally applicable to owners and operators of real property that are beyond our control may decrease cash available for distribution and the value of our properties |
| These events include: o general economic conditions; o rising level of interest rates; o local oversupply, increased competition or reduction in demand for student housing; o inability to collect rent from tenants; o vacancies or our inability to rent space on favorable terms; o inability to finance property development and acquisitions on favorable terms; o increased operating costs, including insurance premiums, utilities, and real estate taxes; o costs of complying with changes in governmental regulations; o the relative illiquidity of real estate investments; o decreases in student enrollment at particular colleges and universities; o changes in university policies related to admissions; and o changing student demographics |
| In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases, which would adversely affect us |
| POTENTIAL LOSSES MAY NOT BE COVERED BY INSURANCE We carry fire, earthquake, terrorism, business interruption, vandalism, malicious mischief, boiler and machinery, commercial general liability and workers &apos compensation insurance covering all of the properties in our portfolio under various policies |
| We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice |
| There are, however, certain types of losses, such as property damage from generally unsecured losses such as riots, wars, punitive damage awards or acts of God, that may be either uninsurable or not economically insurable |
| Some of our properties are insured subject to limitations involving large deductibles and policy limits that may not be sufficient to cover losses |
| In addition, we may discontinue earthquake, terrorism or other insurance on some or all of our properties in the future if the cost of premiums fro any of these policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss |
| If we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties |
| In addition, if the damaged properties are 11 subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged and require substantial expenditures to rebuild or repair |
| In the event of a significant loss at one or more of our properties, the remaining insurance under our policies, if any, could be insufficient to adequately insure our other properties |
| In such event, securing additional insurance, if possible, could be significantly more expensive than our current policies |
| UNIONIZATION OR WORK STOPPAGES COULD HAVE AN ADVERSE EFFECT ON US We are at times required to use unionized construction workers or to pay the prevailing wage in a jurisdiction to such workers |
| Due to the highly labor intensive and price competitive nature of the construction business, the cost of unionization and/or prevailing wage requirements for new developments could be substantial |
| Unionization and prevailing wage requirements could adversely affect a new developmentapstas profitability |
| Union activity or a union workforce could increase the risk of a strike, which would adversely affect our ability to meet our construction timetables |
| WE COULD INCUR SIGNIFICANT COSTS RELATED TO GOVERNMENT REGULATION AND PRIVATE LITIGATION OVER ENVIRONMENTAL MATTERS Under various environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act ( "e CERCLA "e ), a current or previous owner or operator of real property may be liable for contamination resulting from the release or threatened release of hazardous or toxic substances or petroleum at that property, and an entity that arranges for the disposal or treatment of a hazardous or toxic substance or petroleum at another property may be held jointly and severally liable for the cost to investigate and clean up such property or other affected property |
| Such parties are known as potentially responsible parties ( "e PRPs "e ) |
| Such environmental laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the contaminants, and the costs of any required investigation or cleanup of these substances can be substantial |
| PRPs are liable to the government as well as to other PRPs who may have claims for contribution |
| The liability is generally not limited under such laws and could exceed the propertyapstas value and the aggregate assets of the liable party |
| The presence of contamination or the failure to remediate contamination at our properties may expose us to third party liability for personal injury or property damage, or adversely affect our ability to sell, lease or develop the real property or to borrow using the real property as collateral |
| Environmental laws also impose ongoing compliance requirements on owners and operators of real property |
| Environmental laws potentially affecting us address a wide variety of matters, including, but not limited to, asbestos-containing building materials ( "e ACBM "e ), storage tanks, storm water and wastewater discharges, lead-based paint, wetlands, and hazardous wastes |
| Failure to comply with these laws could result in fines and penalties or expose us to third party liability |
| Some of our properties may have conditions that are subject to these requirements and we could be liable for such fines or penalties or liable to third parties |
| Environmental laws require that ACBMs be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements |
| Also, some of the properties in our portfolio contain, or may have contained, or are adjacent to or near other properties that have contained or currently contain storage tanks for the storage of petroleum products or other hazardous or toxic substances |
| These operations create a potential for the release of petroleum products or other hazardous or toxic substances |
| Third parties may be permitted by law to seek recovery from owners or operators for personal injury associated with exposure to contaminants, including, but not limited to, petroleum products, hazardous or toxic substances, and asbestos fibers |
| Also, some of the properties may contain regulated wetlands that can delay or impede development or require costs to be incurred to mitigate the impact of any disturbance |
| Absent appropriate permits, we can be held responsible for restoring wetlands and be required to pay fines and penalties |
| Some of these lawsuits have resulted in substantial monetary judgments or settlements |
| Insurance carriers have reacted to these liability awards by excluding mold related programs designed to minimize the existence of mold in any of our properties as well as guidelines for promptly addressing and resolving reports of mold to minimize any impact mold might have on residents or the property |
| We do not carry environmental insurance on our properties |
| Environmental liability at any of our properties may have a material adverse effect on our financial condition, results of operations, cash flow, the trading price of our stock or our ability to satisfy our debt service obligations and pay dividends or distributions to our security holders |
| 12 WE MAY INCUR SIGNIFICANT COSTS COMPLYING WITH THE AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons |
| Additional federal, state and local laws also may require modifications to our properties, or restrict our ability to renovate our properties |
| For example, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped |
| We have not conducted an audit or investigation of all of our properties to determine our compliance with present requirements |
| Noncompliance with the ADA or FHAA could result in the imposition of fines or an award or damages to private litigants and also could result in an order to correct any non-complying feature |
| We cannot predict the ultimate amount of the cost of compliance with the ADA, FHAA or other legislation |
| If we incur substantial costs to comply with the ADA, FHAA or any other legislation, we could be materially and adversely affected |
| WE MAY INCUR SIGNIFICANT COSTS COMPLYING WITH OTHER REGULATIONS The properties in our portfolio are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements |
| If we fail to comply with these various requirements, we might incur governmental fines or private damage awards |
| Furthermore, existing requirements could change and require us to make significant unanticipated expenditures that would materially and adversely affect us |
| JOINT VENTURE INVESTMENTS COULD BE ADVERSELY AFFECTED BY OUR LACK OF SOLE DECISION-MAKING AUTHORITY, OUR RELIANCE ON CO-VENTURERS &apos FINANCIAL CONDITION AND DISPUTES BETWEEN OUR CO-VENTURERS AND US We have co-invested, and anticipate that we will continue in the future to co-invest, with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity |
| In connection with joint venture investments, we do not have sole decision-making control regarding the property, partnership, joint venture or other entity |
| Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that our partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions |
| Our partners or co-venturers also may have economic or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our preferences, policies or objectives |
| Such investments also will have the potential risk of impasses on decisions, such as a sale, because neither we nor our partners or co-venturers would have full control over the partnership or joint venture |
| Disputes between us and our partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort exclusively on our business |
| Consequently, actions by or disputes with our partners or co-venturers might result in subjecting properties owned by the partnership, joint venture or other entity to additional risk |
| In addition, we may in certain circumstances be liable for the actions of our partners or co-venturers |
| In addition, all of our properties have been acquired or developed by us or our predecessors within the past nine years and have limited operating histories under current management |
| Consequently, our historical operating results may not be useful in assessing our likely future performance |
| The operating performance of the properties may decline under our management |
| We may not be able to generate sufficient cash from operations to satisfy our financial obligations and make distributions to our security holders |
| We will also be subject to the risks generally associated with the operation of a relatively new business |
| TO QUALIFY AS A REIT, WE MAY BE FORCED TO LIMIT THE ACTIVITIES OF OUR TRS To qualify as a REIT, no more than 20prca of the value of our total assets may consist of the securities of one or more taxable REIT subsidiaries, such as American Campus Communities Services, Inc, our TRS Certain of our activities, such as our third party development, management and leasing services, must be conducted through our TRS for us to qualify as a REIT In addition, certain non-customary services must be provided by a TRS or an independent contractor |
| If the revenues from such activities create a risk that the value of our TRS, based on revenues or otherwise, approaches the 20prca threshold, we will be forced to curtail such activities or take other steps to remain under the 20prca threshold |
| Since the 20prca threshold is based on value, it is possible that the IRS could successfully contend that the value of our TRS exceeds the 20prca threshold even if 13 our TRS accounts for less than 20prca of our consolidated revenues, income or cash flow |
| Our on-campus participating properties and our third party services are held by our TRS Consequently, income earned from our on-campus participating properties and our third party services will be subject to regular federal income taxation and state and local income taxation where applicable, thus reducing the amount of cash available for distribution to our security holders |
| Our TRS is not permitted to directly or indirectly operate or manage a "e hotel, motel or other establishment more than one-half of the dwelling units in which are used on a transient basis "e |
| We believe that our method of operating our TRS will not be considered to constitute such an activity |
| Future Treasury Regulations or other guidance interpreting the applicable provisions might adopt a different approach, or the IRS might disagree with our conclusion |
| In such event we might be forced to change our method of operating our TRS, which could adversely affect us, or our TRS could fail to qualify as a taxable REIT subsidiary, which would likely cause us to fail to qualify as a REIT FAILURE TO QUALIFY AS A REIT WOULD HAVE SIGNIFICANT ADVERSE CONSEQUENCES TO US AND THE VALUE OF OUR SECURITIES We intend to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes under the Internal Revenue Code |
| If we lose our REIT status, we will face serious tax consequences that would substantially reduce or eliminate the funds available for investment and for distribution to security holders for each of the years involved, because: o we would not be allowed a deduction for dividends to security holders in computing our taxable income and such amounts would be subject to federal income tax at regular corporate rates; o we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and o unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified |
| In addition, if we fail to qualify as a REIT, we will not be required to pay dividends to stockholders, and all dividends to stockholders will be subject to tax as ordinary income to the extent of our current and accumulated earnings and profits |
| As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock |
| Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations |
| The complexity of these provisions and of the applicable Treasury Regulations that have been promulgated under the Internal Revenue Code is greater in the case of a REIT that, like us, holds its assets through a partnership or a limited liability company |
| The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the composition of our assets and "e two gross income tests "e : (a) at least 75prca of our gross income in any year must be derived from qualified sources, such as "e rents from real property, "e mortgage interest, dividends from other REITs and gains from sale of such assets, and (b) at least 95prca of our gross income must be derived from sources meeting the 75prca income test above, and other passive investment sources, such as other interest and dividends and gains from sale of securities |
| Also, we must pay dividends to stockholders aggregating annually at least 90prca of our REIT taxable income, excluding any net capital gains |
| In addition, legislation, new regulations, administrative interpretations or court decisions may adversely affect our investors, our ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments |
| Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local taxes on our income or property and, in certain cases, a 100prca penalty tax, in the event we sell property as a dealer or if our TRS enters into agreements with us or our tenants on a basis that is determined to be other than an armapstas length basis |
| TO QUALIFY AS A REIT, WE MAY BE FORCED TO BORROW FUNDS ON A SHORT-TERM BASIS DURING UNFAVORABLE MARKET CONDITIONS In order to qualify as a REIT, we are required under the Internal Revenue Code to distribute annually at least 90prca of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain |
| Our TRS may, in its discretion, retain any income it generates net of any tax liability it incurs on that income without affecting the 90prca distribution requirements to which we are subject as a REIT Net income of our TRS is included in REIT taxable income and increases the amount required to be distributed, only if such amounts are paid out as a dividend by our TRS If our TRS distributes any of its after-tax income to us, that distribution will be included in our REIT taxable income |
| In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100prca of our net taxable income, including any net capital gains |
| Because of these distribution requirements, we may not be able to fund 14 future capital needs, including any necessary acquisition financing, from operating cash flow |
| Consequently, we will be compelled to rely on third party sources to fund our capital needs |
| Any additional indebtedness that we incur will increase our leverage |
| Our access to third party sources of capital depends, in part, on: o general market conditions; o our current debt levels and the number of properties subject to encumbrances; o our current performance and the marketapstas perception of our growth potential; o our cash flow and cash dividends; and o the market price per share of our stock |
| If we cannot obtain capital from third party sources, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt service obligations or make the cash distributions to our security holders, including those necessary to qualify as a REIT OUR CHARTER CONTAINS RESTRICTIONS ON THE OWNERSHIP AND TRANSFER OF OUR STOCK Our charter provides that, subject to certain exceptions, no person or entity may beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Internal Revenue Code, more than 9dtta8prca (by value or by number of shares, whichever is more restrictive) of the outstanding shares of our common stock or more than 9dtta8prca by value of all our outstanding shares, including both common and preferred stock |
| We refer to this restriction as the "e ownership limit "e |
| A person or entity that becomes subject to the ownership limit by virtue of a violative transfer that results in a transfer to a trust is referred to as a "e purported beneficial transferee "e if, had the violative transfer been effective, the person or entity would have been a record owner and beneficial owner or solely a beneficial owner of our stock, or is referred to as a "e purported record transferee "e if, had the violative transfer been effective, the person or entity would have been solely a record owner of our stock |
| The constructive ownership rules under the Internal Revenue Code are complex and may cause stock owned actually or constructively by a group of related individuals and/or entities to be owned constructively by one individual or entity |
| As a result, the acquisition of less than 9dtta8prca of our stock (or the acquisition of an interest in an entity that owns, actually or constructively, our stock) by an individual or entity, could, nevertheless cause that individual or entity, or another individual or entity, to own constructively in excess of 9dtta8prca of our outstanding stock and thereby subject the stock to the ownership limit |
| Our charter, however, requires exceptions to be made to this limitation if our board of directors determines that such exceptions will not jeopardize our tax status as a REIT This ownership limit could delay, defer or prevent a change of control or other transaction that might involve a premium price for our common stock or otherwise be in the best interest of our security holders |
| CERTAIN TAX AND ANTI-TAKEOVER PROVISIONS OF OUR CHARTER AND BYLAWS MAY INHIBIT A CHANGE OF OUR CONTROL Certain provisions contained in our charter and bylaws and the Maryland General Corporation Law may discourage a third party from making a tender offer or acquisition proposal to us |
| If this were to happen, it could delay, deter or prevent a change in control or the removal of existing management |
| These provisions also may delay or prevent the security holders from receiving a premium for their securities over then-prevailing market prices |
| These provisions include: o the REIT ownership limit described above; o authorization of the issuance of our preferred shares with powers, preferences or rights to be determined by our board of directors; o the right of our board of directors, without a stockholder vote, to increase our authorized shares and classify or reclassify unissued shares; o advance-notice requirements for stockholder nomination of directors and for other proposals to be presented to stockholder meetings; and o the requirement that a majority vote of the holders of common stock is needed to remove a member of our board of directors for "e cause "e |
| 15 THE MARYLAND BUSINESS STATUTES ALSO IMPOSE POTENTIAL RESTRICTIONS ON A CHANGE OF CONTROL OF OUR COMPANY Various Maryland laws may have the effect of discouraging offers to acquire us, even if the acquisition would be advantageous to security holders |
| Our bylaws exempt us from some of those laws, such as the control share acquisition provisions, but our board of directors can change our bylaws at any time to make these provisions applicable to us |
| OUR RIGHTS AND THE RIGHTS OF OUR SECURITY HOLDERS TO TAKE ACTION AGAINST OUR DIRECTORS AND OFFICERS ARE LIMITED Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believe to be in our best interests and with the care that an ordinary prudent person in a like position would use under similar circumstances |
| In addition, our charter eliminates our directors &apos and officers &apos liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action |
| Our bylaws require us to indemnify directors and officers for liability resulting from actions taken by them in those capacitates to the maximum extent permitted by Maryland law |
| As a result, we and our security holders may have more limited rights against our directors and officers than might otherwise exist under common law |
| In addition, we may be obligated to fund the defense costs incurred by our directors and officers |