| AMERICAN LAND LEASE INC Item 1A Risk Factors |
| Our Certificate of Incorporation limits the amount of outstanding shares of common stock that our stockholders may purchase or own |
| Our Certificate of Incorporation limits the amount of outstanding shares of common stock that our stockholders may purchase or own in various ways |
| First, it limits direct or indirect ownership of our common stock by any person to 5prca of the outstanding shares unless our Board of Directors grants an exemption to a 10 ______________________________________________________________________ [55]Table of Contents stockholder |
| Second, our Certificate of Incorporation also prohibits anyone from buying shares if the purchase could adversely affect our REIT status |
| This could happen if a share transaction results in fewer than 100 persons owning all of our shares, or if five or fewer individuals, applying broad attribution rules of the Internal Revenue Code of 1986, as amended, or the “Code,” collectively own 50prca or more of our shares |
| Third, our Certificate of Incorporation limits purchases of our common stock if such purchases would cause us to undergo an ownership change that would limit the availability of our net operating losses |
| Our Certificate of Incorporation also prohibits ownership of our common stock by any person or persons that would cause us to receive income of a nature that would prevent us from satisfying the gross income requirements that apply to REITs |
| If any person is in violation of the ownership provisions described above, the shares of our stock which caused the affected person to violate the ownership requirements would be automatically transferred to a trust for the benefit of a charitable beneficiary and such person will be deemed to never have had an interest in those shares of stock |
| The trust will sell those shares, within a designated period, at which time the affected person will receive the lesser of the price paid for the shares or the price received by the trustee upon the sale |
| If the transfer to the trust should not be effective for any reason, the transaction, such as a purchase of shares, would be treated as void and the affected person, the intended owner, would acquire no rights to those shares |
| Our Certificate of Incorporation may limit the ability of a third party to acquire control of us |
| The ownership limits in our Certificate of Incorporation discussed above may have the effect of precluding the acquisition of control of us by a third party without the consent of our Board of Directors |
| In addition, our Certificate of Incorporation authorizes the Board of Directors to issue up to 3cmam000cmam000 shares of preferred stock |
| Under our Certificate of Incorporation, the Board of Directors has the authority to classify, reclassify and issue shares of preferred stock, including the determination of the preferences, rights, powers and restrictions of the preferred stock |
| The authorization and issuance of preferred stock could have the effect of delaying or preventing someone from taking control of us, even if a change of control were in our stockholders’ best interests |
| There are numerous risks associated with our acquisition activities |
| The selective acquisition of residential land lease communities is a principal component of our growth strategy |
| We compete with other real estate investors, many with greater capital resources than us, for attractive properties that meet our long-term investment goals |
| Such competition increases prices of properties; therefore, we may be unable to identify suitable acquisition opportunities, either as stand-alone assets or as components of operating businesses, or complete transactions in the future |
| In addition, the acquisition of residential land lease communities is subject to the risks that: • we may be unable to obtain acquisition financing on satisfactory terms or at all, in which case we may be unable to sufficiently leverage our capital to achieve our desired results of operations; • once acquired, our residential land lease communities may not perform as projected, and we may be unable to realize projected occupancy and rental rates, in which case these acquisitions may adversely affect our cash flow, net income, funds from operations and net asset value; • we may assume liabilities in connection with these residential land lease communities for which adequate indemnification from the seller or our insurance carriers may not be available; and • we may be unable to successfully integrate the personnel and operations of the business we acquire, in which case we may be unable to effectively operate residential land lease communities owned by these businesses, which may, in turn, adversely affect our returns |
| There are numerous risks associated with our development activities |
| The development and expansion of residential land lease communities is another principal component of our growth strategy |
| When we develop or expand properties, we are subject to the risks that: • costs may exceed original estimates; 11 ______________________________________________________________________ [56]Table of Contents • we may be unable to obtain construction financing on satisfactory terms or at all, in which case we may be unable to develop or expand our properties to achieve our growth objectives; • construction and lease-up may not be completed on schedule, which may adversely affect our cash flow, net income, funds from operations and net asset value; • we may experience difficulties or delays in obtaining necessary zoning, land-use, building, occupancy or other governmental permits and authorizations, which may adversely affect our desired growth rate, expenses, cash flow, net income, funds from operations and net asset value; and • we may be unable to obtain long-term financing upon completion of the development process |
| Our debt service obligations could leave us with insufficient cash resources to meet our other working capital and dividend needs, limit our operational flexibility, or otherwise adversely affect our financial condition |
| Our organizational documents do not limit the amount of debt that we may incur, and our strategy is generally to incur debt to increase the return on our equity |
| As part of our strategy, we most often utilize long-term, fixed-rate debt |
| As of December 31, 2005, we had approximately dlra171dtta3 million of total outstanding debt, consisting of approximately dlra156dtta4 million of secured debt that is secured by mortgage liens on 24 of our properties, and dlra14dtta9 million of secured debt that is secured by the Company’s inventory |
| In addition, our credit facilities contain customary negative covenants and other financial and operating covenants that, among other things, require us to maintain certain financial coverage ratios and restrict our ability to incur additional indebtedness or make distributions to stockholders |
| These restrictions could adversely affect our operations and our ability to make distributions to our stockholders |
| Our substantial indebtedness and the cash flow associated with serving our indebtedness could have important consequences, including the risks that: • payments of principal and interest may leave us with insufficient cash resources to operate our properties or pay distributions required to be paid in order to maintain our qualification as a REIT; • our cash flow from operations may be insufficient to make required payments of principal and interest; • our existing indebtedness may limit our operational flexibility due to financial and other restrictive covenants, including restrictions on incurring other debt; • our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; • we may not be able to refinance existing indebtedness, or the terms of any refinancing may not be as favorable as the terms of existing indebtedness; • if we fail to make required payments of principal and interest on any debt, our lenders could foreclose on the properties securing the debt with a resulting loss of income and asset value to us; and • if balloon maturities cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow may not be sufficient to repay maturing debt |
| We depend on distributions and other payments from our subsidiaries |
| All of our properties are owned, and all of our operations are conducted, by the Operating Partnership and our other subsidiaries |
| As a result, we depend on distributions and other payments from our subsidiaries in order to satisfy our financial obligations and make payments to our investors |
| The ability of our subsidiaries to make such distributions and other payments depends on their earnings and may be subject to statutory or contractual limitations |
| Our ability to pay dividends to holders of common stock depends on the Operating Partnership’s ability first to satisfy its obligations to its creditors and make distributions payable to third party holders of its preferred Units and then to make distributions to holders of our common stock |
| In addition, as an equity investor in our subsidiaries, our right to receive assets upon their liquidation or reorganization will be effectively subordinated to the claims of their creditors |
| From time to time, we may incur debt that is subject to variable interest rates |
| An increase in interest rates could increase our interest expense and adversely affect our cash flow and our ability to service our indebtedness and make distributions |
| At December 31, 2005, 20prca of our aggregate debt was subject to variable rates |
| The base rate for our variable rate debt instruments are based upon either the lender’s prime rate or the 30-day or 90-day London Interbank Offered Rate, or “LIBOR,” plus a spread |
| Our real estate investments are subject to numerous risks that are beyond our control |
| Our ability to make payments to our investors depends on our ability to generate cash from operations in excess of required debt payments and capital expenditures |
| Our cash from operations and the value of our properties may be adversely affected by events or conditions which are beyond our control, including the following material risks: • the general economic climate; • competition from other housing alternatives; • local conditions, such as increases in unemployment, oversupply of housing or a reduction in demand, that might adversely affect occupancy or rental rates; • increases in operating costs, including real estate taxes, due to inflation and other factors, which may not necessarily be offset by increased rents; • changes in governmental regulations and the related costs of compliance; • changes in tax laws and housing laws, including the enactment of rent control laws or other laws regulating housing; • changes in the interest rate levels and the availability of financing used by our tenants to acquire the homes situated on land we lease; • changes in interest rate levels and the availability of financing; • availability of property insurance for our tenants; and • the relative illiquidity of real estate investments as these investments generally can not be sold quickly that limits our ability to respond promptly to changes in economic or market conditions which could cause us to accept lower than market value for our properties |
| We have a significant concentration of properties in Florida and Arizona, and natural disasters or other catastrophic events in these states could adversely affect the value of our properties and our cash flow |
| As of December 31, 2005, we owned 29 properties located in three states, including 19 properties located in Florida and nine properties located in Arizona |
| The occurrence of a natural disaster or other catastrophic event in either of these two states may cause a sudden decrease in the value of our properties |
| While we may obtain insurance policies providing certain coverage against damage from fire, flood, property damage, earthquake, wind storm and business interruption, these insurance policies contain coverage limits, limits on covered property and various deductible amounts that the Company must pay before insurance proceeds are available |
| Such insurance may therefore be insufficient to restore our economic position with respect to damage or destruction to our properties caused by such occurrences |
| Moreover, each of these coverages must be renewed every year and there is the possibility that all or some of the coverages may not be available at a reasonable cost |
| In addition, in the event of such natural disaster or other catastrophic event, the process of obtaining reimbursement for covered losses, including the lag between expenditures incurred by us and reimbursements received from the insurance providers, could adversely affect our economic performance |
| 13 ______________________________________________________________________ [58]Table of Contents Our properties may be subject to environmental liabilities |
| Various federal, state and local laws subject property owners or operators to liability for the costs of removal or rededication of hazardous substances released on a property |
| These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous substances |
| The presence of, or the failure to properly remediate, hazardous substances may adversely affect occupancy at contaminated residential land lease communities and our ability to sell, rent or borrow against contaminated properties |
| In addition to the costs associated with investigation and rededication actions brought by governmental agencies, the presence of hazardous wastes on a property could result in personal injury or similar claims by private plaintiffs |
| Various laws also impose, on persons who arrange for the disposal or treatment of hazardous or toxic substances, liability for the cost of removal or rededication of hazardous substances at the disposal or treatment facility |
| These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility |
| Laws benefiting disabled persons may result in unanticipated expenses |
| A number of federal, state and local laws exist to ensure that disabled persons have reasonable access to public buildings |
| For example, the Americans with Disabilities Act of 1990 requires that all places of public accommodation meet federal requirements related to access and use by disabled persons |
| Common areas on our properties that are used by our tenants on the property, such as clubhouses, may be subject to the Americans with Disabilities Act |
| Likewise, the Fair Housing Amendments Act of 1988 requires that apartment properties first occupied after March 13, 1990, be accessible to the handicapped |
| These laws may require modifications to our properties or restrict renovations of our properties |
| Failure to comply with these laws could result in the imposition of fines, an award of damages to private litigants and/or an order to correct any non-complying feature, which could result in substantial capital expenditures |
| Although we believe that our properties are substantially in compliance with present requirements, incurrence of unanticipated expenses to comply with laws requiring equal access to the disabled may adversely affect our financial condition |
| Our properties may become subject to rent control and other legislation affecting rents which could decrease our revenues |
| We presently expect to maintain residential land lease communities, and may purchase additional properties, in markets that are either subject to rent control laws or in which such legislation may be enacted |
| Enactment of rent control laws has been considered from time to time in jurisdictions in which we operate and are currently in effect at one property that we own, located in New Jersey |
| State and local laws might limit our ability to increase rents on some of our properties, and thereby, limit our ability to recover increases in operating expenses and the costs of capital improvements |
| Our directors and executive officers have influence on us and may exert this influence to affect decisions made by the Company and its stockholders |
| As of February 23, 2006, our executive officers and directors held in the aggregate approximately 17dtta4prca of our common stock, excluding shares of common stock that are issuable upon exercise of stock options and upon redemption of units of the Operating Partnership |
| In addition, as of February 23, 2006, they could acquire an additional 4dtta6prca of our common stock assuming that the outstanding OP Units held by our executive officers and directors, were not redeemed by the Operating Partnership, and the Company issued common stock in lieu of the cash redemption |
| Furthermore, as of February 23, 2006, they could acquire an additional 10dtta4prca of our common stock, assuming all stock options they have been granted are exercised |
| Although there is no current agreement, understanding or arrangement for these stockholders to act together on any matter, if they were to act together in the future these stockholders could be in a position to exercise significant influence and control over any decisions made by the Company and stockholders, including the election of directors |
| 14 ______________________________________________________________________ [59]Table of Contents Our Board of Directors may unilaterally implement changes in our investment and financing policies that may affect the interests of our stockholders |
| Our investment and financing policies, and our policies with respect to other activities, including growth, debt, capitalization, REIT status and operating policies, are determined by the Board of Directors |
| Although the Board of Directors has no present intention to do so, these policies may be amended or revised from time to time at the discretion of the Board of Directors without notice to stockholders or a vote of our stockholders |
| Accordingly, stockholders have no direct control over changes in our policies and changes in our policies may affect them |
| The loss of key executive officers could have an adverse effect on us |
| We are dependent on the efforts of our Chairman and Chief Executive Officer, Terry Considine, our President and Chief Operating Officer, Robert G Blatz, and our Chief Financial Officer and Treasurer, Shannon E Smith |
| The loss of their services could have an adverse effect on our operations |
| We do not currently have employment agreements with, or maintain or contemplate obtaining any “key man” life insurance on, our executive officers |
| Considine does not devote his full time to our business |
| He is employed, and has business interests, outside of our business |
| Each of Mr |
| Smith devotes substantially all of his time to our business |
| If we fail to qualify as a REIT, we would be subject to tax at corporate rates and we would not be able to deduct distributions to our stockholders for tax purposes |
| Adverse consequences of failure to qualify as a REIT Although we believe that we operate in a manner that enables us to meet the requirements for qualification as a REIT for Federal income tax purposes, the rules regarding REIT qualification are highly technical and complex, and no assurance can be given that the Internal Revenue Service, or the “IRS,” will not challenge our qualification, or that we will be able to operate in accordance with the REIT requirements in the future |
| In addition, our ability to qualify may depend in part upon the actions of third parties over which we have no control, or only limited influence |
| For instance, our REIT qualification depends upon the conduct of entities with which we have, or may have in the future, a direct or indirect relationship as lender, lessor, or holder of a non-controlling equity interest |
| If we fail to qualify as a REIT, we would not be allowed a deduction for distributions to stockholders in computing our taxable income and we would be subject to Federal income tax at regular corporate rates |
| Unless we were entitled to relief under the tax law, we could not elect to be taxed as a REIT for four years following the year during which we were disqualified |
| However, if we lose our REIT qualification, our net operating loss that expires between 2007 and 2009 may be available to reduce the amount of income that would otherwise be taxable |
| Possible legislative or other acts affecting REITs could have an adverse effect on us |
| The rules dealing with Federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the US Treasury Department |
| Changes to the tax law could adversely affect our investors |
| We cannot predict with certainty whether, when, in what forms, or with what effective dates, the tax laws applicable to us or our investors will be changed |
| Even if we qualify as a REIT, other tax liabilities could negatively affect us, and we and our subsidiaries may be subject to Federal, state and local income, property, payroll, excise and other taxes that could reduce operating cash flow |
| If we experience an ownership change, our use of net operating losses would be limited |
| We have a net operating loss carryover of approximately dlra64dtta6 million, which is scheduled to expire between 2007 and 2009 |
| 15 ______________________________________________________________________ [60]Table of Contents Under the Code, if a corporation experiences an “ownership change,” the aggregate amount of net operating losses available to offset otherwise taxable income is generally limited each year to an amount equal to the value of the corporation’s stock at the time of the ownership change multiplied by the long-term tax-exempt rate |
| In general, an ownership change occurs if one or more large stockholders, including groups of stockholders in some cases, increase their aggregate percentage interest in us by more than 50 percentage points over a three-year period |
| It is possible that transactions over which we do not have control could cause an ownership change, and result in a limitation on our ability to utilize our net operating losses |
| Our distribution requirements may have the effect of reducing our available cash |
| As a REIT, we are subject to annual distribution requirements which limit the amount of cash we have available for other business purposes, including amounts to fund our growth |
| Dividends payable by REITs generally do not qualify for the reduced tax rates applicable to dividends paid by taxable domestic corporations |
| Legislation enacted in 2003 generally reduces the maximum tax rate for dividends payable to domestic stockholders that are individuals, trusts and estates to 15prca (through 2008) |
| Dividends payable by REITs, however, are generally not eligible for the reduced rates |
| Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common and preferred stock |
| Potential losses may be uninsured |
| We maintain comprehensive liability, fire, flood (where appropriate), extended coverage, and rental loss insurance with respect to the properties that we own with policy specifications, limits, and deductibles customarily carried for similar properties |
| Some types of losses, however, may be either uninsurable or not economically insurable, such as losses due to earthquakes, hurricanes, floods (in some circumstances), riots, or acts of war or terrorism |
| In particular, because many of our properties are located in Florida, we and our tenants may be more susceptible to losses due to hurricanes and floods |
| In the event that one of our communities is subject to a casualty that results in our tenant’s home being destroyed, insurance proceeds may not be sufficient to replace the rental income lost from the expiration of the tenant’s lease term until such time as we are able to originate a new ground lease through our home sales operation |
| Because we have a diversified portfolio of residential land lease communities that we believe presents a target of lower interest relative to alternative targets, and because of our inability to obtain such specialized coverage at rates that correspond to the perceived level of risk, we may elect not to purchase insurance for losses caused by acts of terrorism |
| Should an uninsured loss occur, we could lose both our investment in and anticipated profits and cash flow from affected properties that we own |
| An increase in prevailing interest rates, a decrease in our annual distributions, or an increase in dividends on comparable REIT securities could adversely affect the market price of our common and preferred stock |
| An increase in prevailing interest rates, a modification or elimination of our distributions or an increase in distributions on comparable REIT securities could adversely affect the market price of our common and preferred stock |
| The price of our common and preferred stock may be volatile |
| The trading price of our common and preferred stock may fluctuate widely as a result of a number of factors, many of which are outside our control |
| In addition, the stock market has experienced, from time to time, 16 ______________________________________________________________________ [61]Table of Contents price and volume fluctuations that have affected the market prices of many companies |
| Such broad market fluctuations could adversely affect the market price of our common and preferred stock |
| A significant decline in our common and preferred stock prices could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation |