| BRE PROPERTIES INC /MD/ Item 1A RISK FACTORS The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K Risks Due to Investment in Real Estate Decreased revenues or increased operating expenses may cause decreased yields from an investment in real property |
| Real property investments are subject to varying degrees of risk |
| The yields available from investments in real estate depend upon the amount of revenues generated and expenses incurred |
| If properties do not generate revenues sufficient to meet operating expenses, including debt service and capital expenditures, our results from operations and ability to make distributions to our shareholders will be adversely affected |
| The performance of the economy in each of the areas in which the properties are located affects occupancy, market rental rates and expenses |
| These factors consequently can have an impact on revenues from the properties and their underlying values |
| The financial results and labor decisions of major local employers may also have an impact on the revenues from and value of certain properties |
| Other factors may further adversely affect revenues from and values of our properties |
| These factors include the general economic climate, local conditions in the areas in which properties are located such as an oversupply of apartment units or a reduction in the demand for apartment units, the attractiveness of the properties to residents, competition from other multifamily communities and our ability to provide adequate facilities maintenance, services and amenities |
| Our revenues would also be adversely affected if residents were unable to pay rent or we were unable to rent apartments on favorable terms |
| If we were unable to promptly relet or renew the leases for a significant number of apartment units, or if the rental rates upon renewal or reletting were significantly lower than expected rates, then our funds from operations would, and our ability to make expected distributions to our shareholders and to pay amounts due on our debt may, be adversely affected |
| There is also a risk that as leases on the properties expire, residents will vacate or enter into new leases on terms that are less favorable to us |
| Operating costs, including real estate taxes, insurance and maintenance costs, and mortgage payments, if any, do not, in general, decline when circumstances cause a reduction in income from a property |
| We could sustain a loss as a result of foreclosure on the property, if a property is mortgaged to secure payment of indebtedness and we were unable to meet our mortgage payments |
| In addition, applicable laws, including tax laws, interest rate levels and the availability of financing also affect revenues from properties and real estate values |
| If we are unable to implement our growth strategy, or if we fail to identify, acquire or integrate new acquisitions, our results may suffer |
| Our future growth will be dependent upon a number of factors, including our ability to identify acceptable properties for development and acquisition, complete acquisitions and developments on favorable terms, successfully integrate acquired and newly developed properties, and obtain financing to support expansion |
| We cannot assure that we will be successful in implementing our growth strategy, that growth will continue at historical levels or at all, or that any expansion will improve operating results |
| The failure to identify, acquire and integrate new properties effectively could have a material adverse effect on us and our ability to make distributions to our shareholders and to pay amounts due on our debt |
| Development and construction projects may not be completed or completed successfully |
| As a general matter, property development and construction projects typically have a higher, and sometimes substantially higher, level of risk than the acquisition of existing properties |
| We intend to actively pursue 9 ______________________________________________________________________ development and construction of multifamily apartment communities |
| We cannot assure that we will complete development of the properties currently under development or any other development project that we may undertake |
| Risks associated with our development and construction activities may include the following: • development opportunities may be abandoned; • construction costs of multifamily apartment communities may exceed original estimates, possibly making the communities uneconomical; • occupancy rates and rents at newly completed communities may not be sufficient to make the communities profitable; • financing for the construction and development of projects may not be available on favorable terms or at all; • construction and lease-up may not be completed on schedule; and • expenses of operating a completed community may be higher than anticipated |
| In addition, development and construction activities, regardless of whether or not they are ultimately successful, typically require a substantial portion of management’s time and attention |
| Development and construction activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations |
| Investments in newly acquired properties may not perform in accordance with our expectations |
| In the normal course of business, we typically evaluate potential acquisitions, enter into non-binding letters of intent, and may, at any time, enter into contracts to acquire and may acquire additional properties |
| However, we cannot assure that we will have the financial resources to make suitable acquisitions or those properties that satisfy our investment policies will be available for acquisition |
| Acquisitions of properties entail risks that investments will fail to perform in accordance with expectations |
| Estimates of the costs of improvements to bring an acquired property up to standards established for the market position intended for that property might prove inaccurate |
| Other risks may include rehabilitation costs exceeding original estimates, possibly making a project uneconomical; financing not being available on favorable terms or at all; and rehabilitation and lease-up not being completed on schedule |
| In addition, there are general real estate investment risks associated with any new real estate investment, including environmental risks |
| Although we undertake an evaluation of the physical condition of each new investment before it is acquired, certain defects or necessary repairs may not be detected until after the investment is acquired |
| This could significantly increase our total acquisition costs, which could have a material adverse effect on us and our ability to make distributions to our shareholders and pay amounts due on our debt |
| Illiquidity of real estate and reinvestment risk may reduce economic returns to investors |
| Real estate investments are relatively illiquid and, therefore, tend to limit our ability to adjust our portfolio in response to changes in economic or other conditions |
| Additionally, the Internal Revenue Code places certain limits on the number of properties a REIT may sell without adverse tax consequences |
| To affect our current operating strategy, we have in the past raised, and will seek to continue to raise additional funds, both through outside financing and through the orderly disposition of assets that no longer meet our investment criteria |
| Depending upon interest rates, current development and acquisition opportunities and other factors, generally we will reinvest the proceeds in additional multifamily properties, although such funds may be employed in other uses |
| In the markets we have targeted for future acquisition of multifamily properties, there is considerable buying competition from other real estate companies, many of which may have greater resources, experience or expertise than we |
| In many cases, this competition for acquisition properties has resulted in an increase in property prices and a decrease in property yields |
| Due to the relatively low capitalization rates currently prevailing in the pricing of potential 10 ______________________________________________________________________ acquisitions of multifamily properties which meet our investment criteria, we cannot assure that the proceeds realized from the disposition of assets, which no longer meet our investment criteria, can be reinvested to produce economic returns comparable to those being realized from the properties disposed of, or that we will be able to acquire properties meeting our investment criteria |
| If we are unable to reinvest proceeds from the assets that no longer meet our investment criteria, or if properties acquired with such proceeds produce a lower rate of return than the properties disposed of, our results of operations may be materially affected |
| In addition, a delay in reinvestment of such proceeds may have a material adverse effect on us |
| We may seek to structure future dispositions as tax-free exchanges, where appropriate, utilizing the non-recognition provisions of Section 1031 of the Internal Revenue Code to defer income taxation on the disposition of the exchanged property |
| For an exchange of these properties to qualify for tax-free treatment under Section 1031 of the Internal Revenue Code, certain technical requirements must be met |
| Given the competition for properties meeting our investment criteria, it may be difficult for us to identify suitable properties within the applicable time frames in order to meet the requirements of Section 1031 |
| Even if we can structure a suitable tax-deferred exchange, as noted above, we cannot assure that we will reinvest the proceeds of any of these dispositions to produce economic returns comparable to those currently being realized from the properties which were disposed of |
| Substantial competition among multifamily properties and real estate companies may adversely affect our rental revenues and development and acquisition opportunities |
| All of the properties currently owned by us are located in developed areas |
| There are numerous other multifamily properties and real estate companies, many of which have greater financial and other resources than we have, within the market area of each of our properties which compete with us for residents and development and acquisition opportunities |
| The number of competitive multifamily properties and real estate companies in these areas could have a material effect on (1) our ability to rent the apartments and the rents charged, and (2) development and acquisition opportunities |
| The activities of these competitors could cause us to pay a higher price for a new property than we otherwise would have paid or may prevent us from purchasing a desired property at all, which could have a material adverse effect on us and our ability to make distributions to our shareholders and to pay amounts due on our debt |
| Our operations are concentrated in the Western United States; we are subject to general economic conditions in the regions in which we operate |
| Our portfolio is primarily located in the San Francisco Bay Area, Los Angeles/Orange County, San Diego, Sacramento, Seattle, the Denver area and Phoenix |
| Our performance could be adversely affected by economic conditions in, and other factors relating to, these geographic areas, including supply and demand for apartments in these areas, zoning and other regulatory conditions and competition from other properties and alternative forms of housing |
| In that regard, certain of these areas have in the recent past experienced economic recessions and depressed conditions in the local real estate or rental markets |
| To the extent general economic or social conditions in any of these areas further deteriorate or any of these areas experiences natural disasters, the value of the portfolio, our results of operations and our ability to make distributions to our shareholders and to pay amounts due on our debt could be materially adversely affected |
| Our insurance coverage is limited and may not cover all losses to our properties |
| We carry comprehensive liability, fire, mold, extended coverage and rental loss insurance with respect to our properties with certain policy specifications, limits and deductibles |
| While as of December 31, 2005, we carried flood and earthquake insurance for our properties with an aggregate annual limit of dlra150cmam000cmam000, subject to substantial deductibles, we cannot assure that this coverage will be available on acceptable terms or at an acceptable cost, or at all, in the future, or if obtained, that the limits of those policies will cover the full cost of 11 ______________________________________________________________________ repair or replacement of covered properties |
| In addition, there may be certain extraordinary losses (such as those resulting from civil unrest or terrorist acts) that are not generally insured (or fully insured against) or underinsured losses (such as those resulting from claims in connection with the occurrence of mold, asbestos, and lead) because they are either uninsurable or not economically insurable |
| Should an uninsured or underinsured loss occur to a property, we could be required to use our own funds for restoration or lose all or part of our investment in, and anticipated revenues from, the property and would continue to be obligated on any mortgage indebtedness on the property |
| Any such loss could have a material adverse effect on us and our ability to make distributions to our shareholders and pay amounts due on our debt |
| One property, Red Hawk Ranch Apartments, a 453-unit operating community in Fremont, California, requires extensive replacement work to correct damage we believe was caused by construction defects |
| We estimate that the costs of remediation will approximate up to dlra22cmam000cmam000 |
| We are currently pursuing litigation against the third party builder and various sub-contractors |
| If we are not able to recover these costs either through litigation, it would not have a material adverse effect on our results of operations |
| Adverse changes in laws may affect our potential liability relating to our properties and our operations |
| Increases in real estate taxes and income, service and transfer taxes cannot always be passed through to residents or users in the form of higher rents, and may adversely affect our cash available for distribution and our ability to make distributions to our shareholders and to pay amounts due on our debt |
| Similarly, changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions, as well as changes in laws affecting development, construction and safety requirements, may result in significant unanticipated expenditures, which could have a material adverse effect on us and our ability to make distributions to our shareholders and pay amounts due on our debt |
| In addition, future enactment of rent control or rent stabilization laws or other laws regulating multifamily housing may reduce rental revenues or increase operating costs |
| Compliance with laws benefiting disabled persons may require us to make significant unanticipated expenditures or impact our investment strategy |
| A number of federal, state and local laws (including the Americans with Disabilities Act) and regulations exist that may require modifications to existing buildings or restrict certain renovations by requiring improved access to such buildings by disabled persons and may require other structural features which add to the cost of buildings under construction |
| Legislation or regulations adopted in the future may impose further burdens or restrictions on us with respect to improved access by disabled persons |
| The costs of compliance with these laws and regulations may be substantial, and limits or restrictions on construction or completion of certain renovations may limit implementation of our investment strategy in certain instances or reduce overall returns on our investments, which could have a material adverse effect on us and our ability to make distributions to our shareholders and to pay amounts due on our debt |
| We review our properties periodically to determine the level of compliance and, if necessary, take appropriate action to bring such properties into compliance |
| We believe, based on property reviews to date, that the costs of such compliance should not have a material adverse effect on us |
| These conclusions are based upon currently available information and data, and we cannot assure that further review and analysis of our properties, or future legal interpretations or legislative changes, will not significantly increase the costs of compliance |
| The operations of BRE Property Investors LLC are limited |
| Eleven of our properties are held by BRE Property Investors LLC, which is referred to in this Annual Report on Form 10-K as the operating company |
| We are the sole managing member of the operating company and, as of December 31, 2005, held approximately a 92prca equity interest in it |
| Third parties as non-managing members hold the remaining equity interests in the operating company |
| 12 ______________________________________________________________________ Under the terms of the limited liability company agreement governing the operations of the operating company, the operating company is required to maintain certain debt service coverage, debt-to-asset and other financial ratios intended to protect the members’ rights to receive distributions |
| In addition, with respect to the outstanding debt for two properties, the operating company is restricted from repaying its debt or taking certain other specified actions that could have adverse tax consequences for the members |
| Further, we, as the managing member, are restricted from taking certain other specified actions—either absolutely or without the consent of a majority in interest of the non-managing members (or of the non-managing members affected thereby)—including, but not limited to, any actions: • that would make it impossible to carry out the business of the operating company; • that would subject a non-managing member to liability as a managing member; or • that would cause the operating company to institute bankruptcy proceedings or permit an automatic judgment to be entered against it by a creditor |
| The requirement to maintain financial ratios and the restrictions on the actions of the operating company and us as managing member could have a material adverse affect on us and our ability to make distributions to our shareholders and to pay amounts due on our debt |
| Further, under the terms of the operating company’s limited liability company agreement, the operating company must obtain the consent of a majority in interest of the non-managing members in order to: • dispose of two of the properties held by the operating company in a taxable sale or exchange prior to November 18, 2007, or • dissolve the operating company other than in certain limited circumstances specified in the operating company’s limited liability company agreement, such as a sale of all or substantially all of our assets, or any merger, consolidation or other combination by us with or into another person, or reclassification, recapitalization or change of our outstanding equity interests |
| These restrictions on our ability to dispose of a portion of our properties and to dissolve the operating company, even when such a disposition or dissolution of the operating company would be in our best interest, could have a material adverse effect on us and our ability to make distributions to our shareholders and to pay amounts due on our debt |
| The operating company also must distribute all available cash (as defined in the operating company’s limited liability company agreement) on a quarterly basis as follows: first, a priority distribution to members (other than us) until each member has received, cumulatively on a per operating company unit basis, distributions equal to the cumulative dividends declared with respect to one share of BRE common stock over the corresponding period (subject to adjustment from time to time as applicable to account for stock dividends, stock splits and similar transactions affecting BRE common stock); and second, the balance to us |
| If the operating company’s available cash in any quarterly period is insufficient to permit distribution of the full amount of the priority distribution described above for that quarter, we are required to make a capital contribution to the operating company in an amount equal to the lesser of: • the amount necessary to permit the full priority distribution, or • an amount equal to the sum of any capital expenditures made by the operating company plus the sum of any payments made by the operating company on account of any loans to or investments in, or any guarantees of the obligations of, BRE or our affiliates for that quarterly period |
| 13 ______________________________________________________________________ We may not voluntarily withdraw from the operating company or transfer all or any portion of our interest in the operating company without the consent of all of the non-managing members, except in certain limited circumstances, such as a sale of all or substantially all of our assets, or any merger, consolidation or other combination by us with or into another person, or any reclassification, recapitalization or change of our outstanding equity interests |
| Such restrictions on our withdrawal as the managing member of the operating company, and on our ability to transfer our interest in the operating company, could have a material adverse effect on us and our ability to make distributions to our shareholders and to pay amounts due on our debt |
| Survey exceptions to certain title insurance policies may result in incomplete coverage in the event of a claim |
| We have not obtained updated surveys for all of the properties we have acquired or developed |
| Because updated surveys were not always obtained, the title insurance policies obtained by us may contain exceptions for matters that an updated survey might have disclosed |
| Such matters might include such things as boundary encroachments, unrecorded easements or similar matters, which would have been reflected on a survey |
| Moreover, because no updated surveys were prepared for some properties, we cannot assure that the title insurance policies in fact cover the entirety of the real property, buildings, fixtures, and improvements which we believe they cover, any of which could have a material adverse effect on us |
| Risks Due to Real Estate Financing We anticipate that future developments and acquisitions will be financed, in whole or in part, under various construction loans, lines of credit, and other forms of secured or unsecured financing or through the issuance of additional debt or equity by us |
| We expect periodically to review our financing options regarding the appropriate mix of debt and equity financing |
| Equity, rather than debt, financing of future developments or acquisitions could have a dilutive effect on the interests of our existing shareholders |
| Similarly, there are certain risks involved with financing future developments and acquisitions with debt, including those described below |
| In addition, if new developments are financed through construction loans, there is a risk that, upon completion of construction, permanent financing for such properties may not be available or may be available only on disadvantageous terms or that the cash flow from new properties will be insufficient to cover debt service |
| If a newly developed or acquired property is unsuccessful, our losses may exceed our investment in the property |
| Any of the foregoing could have a material adverse effect on us and our ability to make distributions to our shareholders and to pay amounts due on our debt |
| We may be unable to renew, repay or refinance our outstanding debt |
| We are subject to the normal risks associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest, the risk that indebtedness on our properties, or unsecured indebtedness, will not be able to be renewed, repaid or refinanced when due or that the terms of any renewal or refinancing will not be as favorable as the existing terms of such indebtedness |
| If we were unable to refinance our indebtedness on acceptable terms, or at all, we might be forced to dispose of one or more of the properties on disadvantageous terms, which might result in losses to us |
| Such losses could have a material adverse effect on us and our ability to make distributions to our shareholders and pay amounts due on our debt |
| Furthermore, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of our revenues and asset value |
| Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements of the Internal Revenue Code |
| Rising interest rates would increase the cost of our variable rate debt |
| We have incurred and expect in the future to incur indebtedness and interest rate hedges that bear interest at variable rates |
| Accordingly, increases in interest rates would increase our interest costs, which could have a 14 ______________________________________________________________________ material adverse effect on us and our ability to make distributions to our shareholders or cause us to be in default under certain debt instruments |
| In addition, an increase in market interest rates may lead holders of our common shares to demand a higher yield on their shares from distributions by us, which could adversely affect the market price for our common stock |
| We may incur additional debt in the future |
| We currently fund the acquisition and development of multifamily communities partially through borrowings (including our lines of credit) as well as from other sources such as sales of properties which no longer meet our investment criteria or the contribution of property to joint ventures which may in turn secure debt |
| Our organizational documents do not contain any limitation on the amount of indebtedness that we may incur |
| Accordingly, subject to limitations on indebtedness set forth in various loan agreements, we could become more highly leveraged, resulting in an increase in debt service, which could have a material adverse effect on us and our ability to make distributions to our shareholders and to pay amounts due on our debt and in an increased risk of default on our obligations |
| The restrictive terms of certain of our indebtedness may cause acceleration of debt payments |
| At December 31, 2005, we had outstanding borrowings of approximately dlra1dtta6 billion |
| Our indebtedness contains financial covenants as to minimum net worth, interest coverage ratios, maximum secured debt, and total debt to capital, among others |
| In the event that an event of default occurs, our lenders may declare borrowings under the respective loan agreements to be due and payable immediately, which could have a material adverse effect on us and our ability to make distributions to our shareholders and to pay amounts due on our debt |
| 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 an agreement is 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 |
| Potential Liability Under Environmental Laws Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances in, on, around or under such property |
| Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances |
| The presence of, or failure to remediate properly, hazardous or toxic substances may adversely affect the owner’s or operator’s ability to sell or rent the affected property or to borrow using the property as collateral |
| Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of hazardous or toxic substances at a disposal or treatment facility, whether or not the facility is owned or operated by the person |
| Certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may also seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances |
| Federal and state laws also regulate the operation and subsequent removal of certain underground storage tanks |
| In connection with the current or former ownership (direct or indirect), operation, management, development and/or control of real properties, we may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines, and claims for injuries to persons and property |
| 15 ______________________________________________________________________ Our current policy is to obtain a Phase I environmental study on each property we seek to acquire and to proceed accordingly |
| We cannot assure, however, that the Phase I environmental studies or other environmental studies undertaken with respect to any of our current or future properties will reveal: • all or the full extent of potential environmental liabilities; • that any prior owner or operator of a property did not create any material environmental condition unknown to us; • that a material environmental condition does not otherwise exist as to any one or more of such properties; or • that environmental matters will not have a material adverse effect on us and our ability to make distributions to our shareholders and to pay amounts due on our debt |
| Certain environmental laws impose liability on a previous owner of property to the extent that hazardous or toxic substances were present during the prior ownership period |
| A transfer of the property does not relieve an owner of such liability |
| Thus, we may have liability with respect to properties previously sold by our predecessors or us |
| Recently there has been an increasing number of lawsuits against owners and managers of multifamily properties alleging personal injury and property damage caused by the presence of mold in residential real estate |
| Some of these lawsuits have resulted in substantial monetary judgments or settlements |
| Insurance carriers have reacted to these liability awards by excluding mold related claims from standard policies and pricing mold endorsements separately |
| We have obtained a separate pollution insurance policy that covers mold-related claims and have adopted 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 the extent not covered by our pollution policy, the presence of significant mold could expose us to liability from residents and others if property damage, health concerns, or allegations thereof, arise |
| 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 continues to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we can not assure you that our disclosure controls and procedures or internal control over financial reporting will be effective in accomplishing all control objectives all of the time |
| Deficiencies, particularly material weaknesses, in 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 operation, financial condition or liquidity |
| Ranking of Securities and Subordination of Claims A portion of our operations is conducted through our subsidiaries, including the operating company |
| Our cash flow and the consequent ability to make distributions and other payments on our equity securities and to service our debt will be partially dependent upon the earnings of our subsidiaries and the distribution of those earnings to us, or upon loans or other payments of funds made by our subsidiaries to us |
| In addition, debt or other arrangements of our subsidiaries may impose restrictions that affect, among other things, our subsidiaries’ ability to pay dividends or make other distributions or loans to us |
| 16 ______________________________________________________________________ Likewise, a portion of our consolidated assets is owned by our subsidiaries, effectively subordinating certain of our unsecured indebtedness to all existing and future liabilities, including indebtedness, trade payables, lease obligations and guarantees of our subsidiaries |
| The operating company has guaranteed amounts due under our unsecured credit facility with a syndicate of banks |
| Likewise, any other of our subsidiaries with assets or net income which, when multiplied by our effective percentage ownership interest in such subsidiary exceeds dlra30cmam000cmam000 or 5prca of our consolidated net income, respectively, is required to guarantee the repayment of borrowings under the credit facility |
| The operating company and other of our subsidiaries may also, from time to time, guarantee other of our indebtedness |
| Therefore, our rights and rights of our creditors, including the holders of other unsecured indebtedness, to participate in the assets of any subsidiary upon the latter’s liquidation or reorganization will be subject to the prior claims of such subsidiary’s creditors, except to the extent that we may ourselves be a creditor with recognized claims against the subsidiary, in which case our claims would still be effectively subordinate to any security interests in or mortgages or other liens on the assets of such subsidiary and would be subordinate to any indebtedness of such subsidiary senior to that held by us |
| Provisions in our Charter and Bylaws That Could Limit a Change in Control or Deter a Takeover In order to maintain our qualification as a REIT, not more than 50prca in value of our outstanding capital stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) |
| In order to protect us against risk of losing our status as a REIT due to a concentration of ownership among our shareholders, our charter provides that any shareholder must, upon demand, disclose to our board of directors in writing such information with respect to such shareholder’s direct and indirect ownership of the shares of our stock as we deem necessary to permit us to comply or to verify compliance with the REIT provisions of the Internal Revenue Code, or the requirements of any other taxing authority |
| Our charter further provides, among other things, that if our board of directors determines, in good faith, that direct or indirect ownership of BRE stock has or may become concentrated to an extent that would prevent us from qualifying as a REIT, our board of directors may prevent the transfer of BRE stock or call for redemption (by lot or other means affecting one or more shareholders selected in the sole discretion of our board of directors) of a number of shares of BRE stock sufficient in the opinion of our board of directors to maintain or bring the direct or indirect ownership of BRE stock into conformity with the requirements for maintaining REIT status |
| These limitations may have the effect of precluding acquisition of control of us by a third party without consent of our board of directors |
| In addition, certain other provisions contained in our charter and bylaws may have the effect of discouraging a third-party from making an acquisition proposal for us and may thereby inhibit a change in control |
| Our charter includes provisions granting our board of directors the authority to issue preferred stock from time to time and to establish the terms, preferences and rights of such preferred stock without the approval of our shareholders, restrictions on our shareholders’ ability to remove directors and fill vacancies on our board of directors, restrictions on unsolicited business combinations and restrictions on our shareholders’ ability to amend our charter |
| Our bylaws contain restrictions on our shareholders’ ability to call special meetings of our board of directors and to take action without a meeting, provisions granting our board of directors the power to amend our bylaws, provisions allowing our board of directors to increase its size, and restrictions on the transfer of shares of our capital stock with respect to the preservation of our REIT status |
| Such provisions may deter tender offers for BRE stock, which offers may be attractive to our shareholders, or deter purchases of large blocks of BRE stock, thereby limiting the opportunity for shareholders to receive a premium for their shares of BRE stock over then-prevailing market prices |
| We believe we have operated and intend to continue operating in a manner that will allow us to qualify as a REIT for federal income tax purposes under the Internal Revenue Code |
| However, we cannot assure you that we 17 ______________________________________________________________________ have in fact operated, or will be able to continue to operate, in a manner so as to qualify, or remain qualified, as a REIT Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations and the determination of various factual matters and circumstances not entirely within our control |
| For example, in order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the composition of our assets and a requirement that at least 95prca of our gross income in any year must be derived from qualifying sources, such as “rents from real property |
| ” Also, we must make distributions to shareholders aggregating annually at least 90prca of our net taxable income, excluding net capital gains |
| In addition, legislation, new regulations, administrative interpretations or court decisions may materially 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 |
| If we fail to qualify as a REIT, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at corporate rates, which would likely have a material adverse effect on us, our share price and our ability to make distributions to our shareholders and to pay amounts due on our debt |
| In addition, unless entitled to relief under certain statutory provisions, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost |
| This treatment would reduce funds available for investment or distribution to our shareholders because of the additional tax liability to us for the year or years involved |
| In addition, we would no longer be required to make distributions to our shareholders |
| To the extent that distributions to our shareholders would have been made in anticipation of qualifying as a REIT, we might be required to borrow funds or to liquidate certain investments to pay the applicable tax |
| Finally, we cannot assure you that new legislation, new regulations, administrative interpretations or court decisions will not change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification |