| CARRAMERICA REALTY CORP Item 1A Risk Factors In addition to the other information in this document, you should consider carefully the following risk factors in evaluating an investment in our securities |
| Any of these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect on our financial condition and the performance of our business |
| Our performance and share value are subject to risks associated with the real estate industry We derive a substantial majority of our operating and net income from the ownership and operation of office buildings |
| If we do not generate income sufficient to meet our operating expenses, including debt service and capital expenditures necessary to maintain or improve our properties, our financial performance, the value of our real estate assets and our ability to pay distributions to our securityholders, and consequently the value of our securities, will be adversely affected |
| We are susceptible to, among others, the following real estate industry risks: • Downturns in the national, regional and local economic conditions where our properties are located, which generally will negatively impact the demand for office space and rental rates; • Local conditions such as an oversupply of office properties, including space available by sublease, or a reduction in demand for high rise and other office properties, making it more difficult for us to lease space at attractive rental rates, or at all; 13 ______________________________________________________________________ [14]Table of Contents • Competition from other available office properties, which could cause us to lose current or prospective tenants to other properties or cause us to reduce our rental rates; • Changes in market rental rates and our ability to fund repair and maintenance costs; • Our ability to fund the cost of tenant improvements, leasing commissions and other costs associated with leasing or re-letting space; • Earthquakes and other natural disasters, terrorist acts, civil disturbances or acts of war which may result in uninsured or underinsured losses; • Our ability to collect rent from tenants; and • Our ability to pay for adequate maintenance, insurance, utility, security and other operating costs, including real estate taxes and debt service payments, that are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from a property |
| Expected shortfalls in cash flow from operations could require us to draw on our line of credit or dispose of properties in order to meet our anticipated obligations and also may cause us to slow our development activity and/or limit our ability to declare and pay dividends at their current rate We anticipate that our cash flow from operations will be adversely affected in 2006 by declining rental rates in certain of our markets with expiring leases, particularly in Northern California, rent abatement features in many of the new leases at our properties and, most significantly, our estimated tenant-related and other capital expenditures associated with new leases |
| We anticipate that, in order to maintain our expected quarterly dividend, we will be required to fund a shortfall of cash from operations of approximately dlra75 to dlra90 million in 2006 |
| In order to satisfy this shortfall, we currently expect to be required to borrow under our line of credit and/or dispose of properties we otherwise would choose not to sell |
| Any borrowings under our line of credit to fund these shortfalls would reduce the amount of funds available for other purposes, such as potential acquisitions, capital improvements or development activities |
| In addition, our ability to borrow under our line of credit to fund these anticipated levels of tenant and other capital expenditures and to pay our expected dividend may be limited by the terms of our debt covenants |
| During 2006, we expect to approach the limit of our unencumbered leverage ratio which restricts unsecured debt outstanding to no more than 60prca of unencumbered assets |
| As of December 31, 2005, our unencumbered leverage ratio was 56dtta7prca |
| Our unencumbered leverage ratio is most significantly impacted by the performance of our operating properties and net borrowings required to fund capital expenditures and pay our dividend as a result of insufficient operating cash flow |
| Incurring additional unsecured debt to acquire additional unencumbered assets does not impact our unencumbered leverage ratio as significantly as incurring additional debt for other purposes |
| The tangible fair market value of our unencumbered properties is calculated by applying capitalization rates stipulated in our line of credit of 8dtta5prca—9dtta0prca to current operating income |
| Therefore, our unencumbered leverage ratio could increase if the operating income of our unencumbered properties decreases |
| Additionally, the ratio will increase as we acquire properties which have operating income which is lower than 8dtta5prca—9dtta0prca of the amount invested |
| The additional debt required to fund our expected shortfall may result in us exceeding this limit |
| Declines in overall economic activity, particularly in our Northern California, Washington, DC Metro Area, Southern California and Seattle core markets, could adversely affect our operating results For several years, a weak economic climate affected the office real estate markets |
| Rental rates on space that was re-leased in 2005 decreased an average of 16dtta9prca in comparison to rates that were in effect under expiring leases |
| While market rental rates have stabilized and are improving in many of our markets, rental rates on in-place leases in certain markets, particularly in our Northern California market, remain significantly above current market rental rates |
| We estimate that market rental rates on leased space expiring in 2006 will be, on average, approximately 10prca-12prca lower than straight-lined rents on expiring leases |
| We have 2dtta5 million square feet of space on which leases are currently scheduled to expire in 2006, including 1dtta0 million square feet of space in Northern California where we expect the largest rollover of rents on expiring leases |
| 14 ______________________________________________________________________ [15]Table of Contents We are particularly subject to the economic risks in our Northern California but also in our Washington, DC Metro Area, Southern California and Seattle core markets |
| A downturn in the economies of these markets, or the impact of a continued national economic downturn on these markets, could result in reduced demand for office space and decreasing rental rates |
| One of the factors contributing to the decline in occupancy for our office properties was the increased level of early lease terminations |
| Future rental income may be affected by future lease terminations as we are unlikely to be able to collect upon termination the full contracted amount payable under the leases as well as the additional cost of re-leasing the space |
| Further decreases in occupancy rates and/or further declines in rental rates, particularly in our Northern California, Washington, DC Metro Area, Southern California and Seattle core markets, may adversely affect our revenues and results of operations in subsequent periods, which could have a material adverse effect on our liquidity and financial condition, our ability to make distributions to our securityholders and result in a decline in the market value of our securities |
| We may be unable to renew leases or relet space on similar terms, or at all, as leases expire or are terminated, or may expend significant capital in our efforts to relet space From 2006 through 2010, leases representing approximately 60dtta5prca of our rentable square feet at our currently stabilized properties will expire, with leases on over 9dtta6prca of our rentable square feet expiring in each of those years |
| We may not be able to renew leases with our existing tenants or we may be unable to relet space to new tenants if our current tenants do not renew their leases or terminate their leases early |
| Even if our tenants renew their leases or we are able to relet the space, the terms and other costs of renewal or reletting, including the cost of required renovations, increased tenant improvement allowances, leasing commissions, declining rental rates and other potential concessions may be less favorable or more costly than the terms of our current leases or than we anticipate and could require the expenditure of significant amounts of capital |
| If we are unable to renew leases or relet space in a reasonable time, or if rental rates decline or tenant improvement, leasing commissions and other costs increase, it could have a material adverse effect on our results of operations, liquidity and financial condition and result in a decline in the value of our securities |
| Our properties face significant competition which may impede our ability to retain tenants or re-let space when existing tenants vacate We face significant competition from other owners, operators and developers of office properties, many of which own properties similar to ours in the markets in which we operate |
| Such competition may affect our ability to attract and retain tenants and reduce the rents we are able to charge |
| These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to rent space at lower rental rates than we or in their owners providing greater tenant improvement allowances or other leasing concessions |
| This combination of circumstances could adversely affect our results of operations, liquidity and financial condition, which could cause a decline in the value of our securities |
| We face potential adverse effects from tenant delinquencies, bankruptcies or insolvencies The bankruptcy or insolvency or other failure to pay of our tenants is likely to adversely affect the income produced by our properties |
| If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord |
| If a tenant files for bankruptcy, we may not be able to evict the tenant solely because of such bankruptcy or failure to pay |
| A court, however, may authorize a tenant to reject and terminate its lease with us |
| In such a case, our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease |
| In addition, certain amounts paid to us within 90 days prior to the tenant’s bankruptcy filing could be required to be returned to the tenant’s bankruptcy estate |
| In other circumstances, where a tenant’s financial condition has become impaired, we may agree to partially or wholly terminate the lease in advance of the termination date in consideration for a lease termination fee that is likely less than the agreed rental amount |
| Without regard to the manner in which the lease termination occurs, we are likely to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space 15 ______________________________________________________________________ [16]Table of Contents to a new tenant |
| In any of the foregoing circumstances, our results from operations, liquidity and financial condition could be adversely affected, which could result in a decline in the value of our securities |
| New developments and acquisitions may fail to perform as expected We continue to develop and acquire office properties |
| New office property developments are subject to a number of risks, including construction delays, complications in obtaining necessary zoning, occupancy and other governmental permits, cost overruns, financing risks, and the possible inability to meet expected occupancy and rent levels |
| If any of these problems occur, development costs for a project may increase, and there may be costs incurred for projects that are not completed |
| In deciding whether to acquire or develop a particular property, we make certain assumptions regarding the expected future performance of that property |
| We may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position, or may be unable to increase occupancy at a newly acquired property as quickly as expected, or at all |
| If newly acquired properties or development projects are not completed in the timing or at the costs expected or do not perform as expected, our results of operations, liquidity and financial condition may be adversely affected, which could result in a decline in the value of our securities |
| We may not be successful in identifying and consummating suitable acquisitions of office properties meeting our criteria Our ability to acquire office properties on favorable terms may be constrained by competition from other investors with significant capital, including other publicly traded REITs and institutional investors |
| Competition from these other potential acquirers may result in increased bidding, which may ultimately increase the price we must pay for a property or may result in us being unable to acquire property at all |
| Failure to identify or consummate suitable acquisitions could adversely affect our ability to reinvest proceeds from property dispositions and thereby affect our results of operations and reduce the price of our securities |
| Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial and investment conditions is limited |
| The real estate market is affected by many forces, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control |
| We cannot predict whether we will be able to sell any property for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us |
| We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property |
| We may be required to expend funds to correct defects or to make improvements before a property can be sold |
| We cannot assure you that we will have funds available to correct those defects or to make those improvements |
| Our use of debt subjects us to various financing risks We regularly borrow money to finance our operations, particularly the acquisition and development of properties |
| We generally incur unsecured debt, although in some cases we will incur mortgage debt that is secured by one or more of our office buildings |
| In the future, our financial condition could be materially and adversely affected by our use of debt financing, in part due to the following risks: • No Limitation on Debt Incurrence |
| Our organizational documents do not limit the amount of debt we can incur |
| Our leverage could have important consequences to our securityholders, including affecting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes and making us more vulnerable to a downturn in business or the economy generally |
| In addition, as a result of the financial and operating covenants described below, our leverage could reduce our flexibility in conducting our business and planning for, or reacting to, changes in our business and in the real estate industry |
| Any such reduction in our ability to obtain 16 ______________________________________________________________________ [17]Table of Contents additional financing or our flexibility to conduct our business could adversely affect our financial condition and results of operations |
| This could result in a decline in the market value of our securities |
| If our properties do not perform as expected, the cash flow from our properties may not be sufficient to make required principal and interest payments on our debt |
| An unsecured lender could also attempt to foreclose on some of our assets in order to receive payment |
| • Inability to Refinance Debt |
| In most cases, very little of the principal amount that we borrow is repaid prior to the maturity of the loan |
| We generally expect to refinance that debt when it matures, although in some cases we may pay off the loan |
| If principal amounts due at maturity cannot be refinanced as a result of general economic downturns, if our credit rating is downgraded, if our properties do not perform as expected, or otherwise, or extended or paid with proceeds of other capital transactions, such as property sales or new equity capital, our cash flow could be insufficient to repay all maturing debt |
| Prevailing interest rates or other factors at the time of a refinancing (such as possible reluctance of lenders to make commercial real estate loans) may result in higher interest rates and increased interest expense which could adversely affect our results of operations, liquidity, financial condition, ability to service debt and make distributions to our securityholders |
| Our credit facilities and the indentures under which our senior unsecured indebtedness are issued contain financial and operating covenants, including coverage ratios and other limitations on our ability to incur secured and unsecured indebtedness, sell all or substantially all of our assets and engage in mergers, consolidations and certain acquisitions |
| Failure to meet our financial covenants could result from, among other things, changes in our results of operations or general economic changes |
| These covenants may restrict our ability to engage in transactions that would otherwise be in our best interests |
| Failure to comply with any of the covenants under our unsecured credit facility or other debt instruments could result in a default under one or more of our debt instruments |
| This could cause our lenders to accelerate the timing of payments and restrict our ability to make distributions to our security holders and would therefore have a material adverse effect on our business, operations, financial condition or liquidity |
| Our ability to draw on our unsecured credit facility or incur other unsecured debt in the future could be restricted by certain covenants |
| During 2006, we may approach the limit of our unencumbered leverage ratio which restricts unsecured debt outstanding to no more than 60prca of unencumbered assets |
| If our unencumbered leverage ratio increases and surpasses 60prca, it could impact our business and operations, including our ability to incur additional unsecured debt, draw on our unsecured line of credit, which is our primary source of short term liquidity, pay distributions to our security holders, acquire leveraged properties or invest in properties through joint ventures |
| We currently expect to work with our lenders to ensure that we remain in compliance with our covenants |
| As of December 31, 2005, approximately 11dtta6prca of our total financing was subject to variable interest rates, including our line of credit and debt related to interest rate swap agreements excluding the impact of interest rate cap agreements |
| Because we have not hedged significantly against interest fluctuations, significant increases in interest rates could dramatically increase our costs of borrowing |
| Additionally, interest rates on certain types of our debt are based on the credit rating of our debt by independent agencies, and would be substantially increased in the event that the credit ratings are downgraded |
| We may use derivative financial instruments at times to limit market risk only for hedging purposes, not for speculation or trading purposes |
| Interest rate protection agreements may be used to convert variable rate debt to a fixed rate basis, to convert fixed rate debt to a variable rate basis or to hedge anticipated financing transactions |
| However, these arrangements may expose us to additional risks |
| Although our interest rate risk management policy establishes minimum credit ratings for counterparties, this does not eliminate the risk that a counterparty may fail to honor its obligations |
| Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations |
| In addition, hedging agreements may involve costs, such as transaction fees or breakage costs, if we terminate them |
| Any failure by us to effectively manage our exposure to interest rate risk through hedging agreements or otherwise, and any costs associated with hedging arrangements, could adversely affect our results of operations or financial condition |
| This could cause the market value of our securities to decline |
| • We may need to borrow funds in order to pay distributions necessary to maintain our REIT status |
| In order to maintain our REIT status, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements, even if the then prevailing market conditions are not favorable for these borrowings |
| To qualify as a REIT, we generally must distribute to our stockholders at least 90prca of our REIT taxable income, excluding capital gains |
| In order to eliminate federal income tax, we must distribute 100prca of our net taxable income, including capital gains |
| We may need to incur debt to fund required distributions if our cash flows from operations are insufficient to make such distributions, as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or as a result of the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments |
| Any such incurrence, particularly during unfavorable market conditions, could adversely affect our results of operations or financial condition |
| An earthquake or terrorist act could adversely affect our business Over 53dtta5prca of our property operating income in 2005 was generated by properties located in California, Oregon and the State of Washington, which are high risk geographical areas for earthquakes |
| In addition, a significant portion of our properties is located in Washington, DC and other major urban areas which have, in recent years, been high risk geographical areas for terrorism and threats of terrorism |
| Future earthquakes or acts of terrorism would severely impact the demand for, and value of, our properties and could also directly impact the value of our properties through damage, destruction or loss and could thereafter materially impact the availability or cost of insurance to protect against these events |
| A decrease in demand could make it difficult to review or re-lease our properties at lease rates equal to or above historical rates |
| To the extent that any future earthquakes or terrorist acts otherwise disrupt our tenants’ businesses, it may impact their ability to make timely payments under their existing leases with us which would harm our operating results |
| Although we maintain earthquake and terrorism insurance for our properties and the resulting business interruption, any earthquake or terrorist attack, whether or not insured, could have a material adverse effect on our results of operations, liquidity and financial condition, and result in a decline in the value of our securities |
| Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition and our cash flows Although we believe our properties are adequately covered by insurance, we cannot predict at this time if we will be able to obtain appropriate coverage at a reasonable cost in the future |
| Our insurance costs have fluctuated significantly in recent years |
| In response to the uncertainty in the insurance market following the terrorist attacks of September 11, 2001, the Terrorism Risk Insurance Act of 2002 (“TRIA”) was enacted in November 2002, which established the Terrorism Risk Insurance Program to mandate that insurance carriers offer insurance covering physical damage from terrorist incidents certified by the US government as foreign terrorist acts |
| Under the Terrorism Risk Insurance Program, the federal government shares in the risk of loss associated with certain future terrorist acts |
| The Terrorism Risk Insurance Program was scheduled to expire on December 31, 2005 |
| However, on December 22, 2005, the Terrorism Risk Insurance Extension Act of 2005 (the “Extension Act”) was enacted, which extended the duration of the Terrorism Risk Insurance Program until December 31, 2007, while expanding the private sector role 18 ______________________________________________________________________ [19]Table of Contents and reducing the amount of coverage that the US government is required to provide for insured losses under the program |
| While the underlying structure of TRIA was left intact, the Extension Act makes some adjustments, including increasing the current insurer deductible from 15prca of direct earned premiums to 17dtta5prca for 2006, and to 20prca of such premiums in 2007 |
| For losses in excess of the deductible, the federal government still reimburses 90prca of the insurer’s loss in 2007 |
| The federal share in the aggregate in any program year may not exceed dlra100 billion (the insurers will not be liable for any amount that exceeds this cap) |
| Under the Extension Act, losses incurred as a result of an act of terrorism are required to exceed dlra5dtta0 million before the program is triggered and compensation is paid under the program, but that amount increases to dlra50dtta0 million on April 1, 2006, and to dlra100dtta0 million in 2007 |
| As a result, unless we obtain separate coverage for events that do not meet that threshold (which coverage may not be required by the respective loan documents and may not otherwise be obtainable), such events would not be covered |
| In addition, the recently enacted legislation may subsequently result in increased premiums charged by insurance carriers for terrorism insurance |
| In May 2004, we formed a wholly-owned captive insurance company which provides dlra490 million in coverage against losses due solely to biological, chemical or radioactive contamination arising out of a certified terrorist act |
| In the event of a covered loss in 2006, we expect our captive insurance company to recover 90prca of its losses, less certain deductibles, from the United States government, but it has not reinsured its remaining exposure and may have insufficient capital to fully pay our claim |
| We will be required to fund the remaining 10prca of a covered loss |
| Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property |
| Nevertheless, we might remain obligated for any mortgage debt or other financial obligations related to the property |
| It is also possible that third-party insurance carriers will not be able to maintain reinsurance sufficient to cover any losses that may be incurred |
| In addition, if any of our properties were to experience a catastrophic loss that was insured, there can be no assurance that such coverage will adequately compensate us for any loss, that our coverage would continue after a loss, or that a loss, even if covered, would not have a material adverse effect on our business, financial condition or results of operations |
| It could still seriously disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property |
| Also, due to inflation, changes in codes and ordinances, environmental considerations and other factors, it may not be feasible to use insurance proceeds to replace a building after it has been damaged or destroyed |
| Also, we have to renew our policies in most cases on an annual basis and negotiate acceptable terms for coverage, exposing us to the volatility of the insurance markets, including the possibility of rate increases |
| Any material increase in insurance rates or decrease in available coverage in the future could adversely affect our results of operations and financial condition, which could cause a decline in the market value of our securities |
| Increases in taxes and regulatory compliance costs, including compliance with the Americans with Disabilities Act, may adversely affect our results of operations We may not be able to pass all real estate tax increases through to our tenants |
| Therefore, any tax increases may adversely affect our results of operations |
| Our properties are also subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements |
| Some trade associations, such as the Building Owners and Managers Association and the National Fire Protection Association (NFPA), publish standards that are adopted by government authorities |
| These include standards relating to life, safety and fire protection systems published by the NFPA Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants |
| In addition, we cannot provide any assurance that these requirements will not be changed or that new requirements will not be imposed that would require significant unanticipated expenditures by us and could have an adverse effect on our results of operations |
| Under the Americans with Disabilities Act of 1990 (ADA) and various state and local laws, all public accommodations and commercial facilities must meet certain federal requirements related to access and use by disabled persons |
| Compliance with these requirements could involve removal of structural barriers from certain disabled persons’ entrances |
| Other federal, state and local laws may require modifications to or restrict further 19 ______________________________________________________________________ [20]Table of Contents renovations of our properties with respect to such means of access |
| Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures |
| We have not conducted an audit or investigation of all of our properties to determine our compliance and we cannot predict the ultimate cost of compliance with the ADA or other legislation |
| If one or more of our properties is not in compliance with the ADA or other legislation, then we would be required to incur additional costs to achieve compliance |
| If we incur substantial costs to comply with the ADA or other legislation, our financial condition, results of operation, cash flow, per share trading price of our securities and our ability to satisfy our debt service obligations and to make distributions to our stockholders could be adversely affected |
| Environmental compliance cost and liabilities associated with operating our properties may result in unanticipated expenses and may affect our results of operations Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real property to investigate and clean up hazardous or toxic substances or petroleum product releases at the property |
| In addition, the US Environmental Protection Agency and the US Occupational Safety and Health Administration are increasingly involved in indoor air quality standards, especially with respect to asbestos, mold and medical waste |
| The clean up of any environmental contamination, including asbestos and mold, can be costly |
| The presence of or failure to clean up contamination may adversely affect our ability to sell or lease a property or to borrow using a property as collateral or could prove so costly as to have a material adverse effect on our results of operations, liquidity and financial condition, which could result in our inability to make distributions to our securityholders and result in a decline in the value of our securities |
| We do not have exclusive control over our joint venture investments We have invested, and may invest in the future, in projects or properties as a co-venturer or partner in the development of new properties |
| These investments involve risks not present in a wholly-owned project |
| Risks related to these investments could include: • Absence of control over the development, financing, leasing, management and other aspects of the project; • Possibility that our co-venturer or partner might: • become bankrupt; • have interests or goals that are inconsistent with ours; • take action contrary to our instructions, requests or interests (including those related to our qualification as a REIT for tax purposes); or • otherwise impede our objectives; and • Possibility that we, together with our partners, may be required to fund losses of the investee |
| In addition, most of our joint venture agreements contain provisions, and may contain in the future, that could require us to buy our partner’s interest or sell our interest or the property or project at a time we do not deem favorable for financial or other reasons, including the availability of cash at such time and the impact of tax consequences resulting from any sale |
| Our wholly-owned subsidiary, CarrAmerica Realty Operating Partnership, LP intends to qualify as a partnership for federal income tax purposes, but we cannot guarantee that it will qualify CarrAmerica Realty Operating Partnership, LP intends to qualify as a partnership for federal income tax purposes at such time, if any, that it admits limited partners other than ourselves |
| If classified as a partnership, it generally will not be a taxable entity and will not incur federal income tax liability |
| However, it would be treated as a corporation for federal income tax purposes if it were a “publicly traded partnership,” unless at least 90prca of its income were qualifying income as defined in the tax code |
| A “publicly traded partnership” is a partnership whose partnership interests are traded on an established securities market or are readily tradable on a secondary market (or the substantial equivalent thereof) |
| Although its partnership units will not be traded on an established securities market, because of the redemption right, its units held by limited partners could be viewed as readily tradable on a secondary market (or the substantial equivalent thereof), and there could be no assurance that it would qualify for one of the “safe harbors” under the applicable tax regulations |
| Qualifying income for the 90prca test generally includes passive income, such as real property rents, dividends and interest |
| The income requirements applicable to REITs and the definition of qualifying income for purposes of this 90prca test are similar in most respects |
| We cannot 20 ______________________________________________________________________ [21]Table of Contents guarantee that the partnership would meet this qualifying income test |
| If it were to be taxed as a corporation, it would incur substantial tax liabilities |
| We would then fail to qualify as a REIT for tax purposes, unless we qualified for relief under certain statutory savings provisions, and our ability to raise additional capital would be impaired |
| Certain factors may inhibit changes in control of the Company • Preferred Stock |
| Our charter permits our board of directors to authorize the issuance of preferred stock without stockholder approval |
| Also, any future series of preferred stock may have voting provisions that could delay or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interests of our common stockholders |
| • Ownership Limit |
| In order to assist us in maintaining our qualification as a REIT and for other strategic reasons, our charter contains certain provisions generally limiting the ownership of shares of capital stock by any single stockholder to 9dtta8prca of our outstanding common stock and/or 9dtta8prca of any class or series of preferred stock |
| The federal tax laws include complex stock ownership and attribution rules that apply in determining whether a stockholder exceeds the ownership limits |
| These rules may cause a stockholder to be treated as owning stock that is actually owned by others, including family members and entities in which the stockholder has an ownership interest |
| Our board of directors may waive this restriction with respect to certain stockholders if it is satisfied that ownership in excess of these ownership limits would not jeopardize our status as a REIT and the board otherwise decides that a waiver would be in our interests |
| Capital stock acquired or transferred in breach of the ownership limit will be automatically transferred to a trust for the benefit of a designated charitable beneficiary |
| • Maryland Law Provisions |
| Certain provisions of Maryland law which are applicable to us because we are a Maryland corporation prohibit “business combinations” with any person that beneficially owns ten percent or more of our outstanding voting shares (an “interested stockholder”) or with an affiliate of the interested stockholder |
| These prohibitions last for five years after the most recent date on which the person became an interested stockholder |
| After the five-year period, a business combination with an interested stockholder must be approved by two super-majority stockholder votes unless, among other conditions, our common stockholders receive a minimum price for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its common shares |
| Our board of directors has opted out of these business combination provisions |
| Consequently, the five-year prohibition and the super-majority vote requirements will not apply to a business combination involving us |
| Our board of directors may, however, repeal this election in most cases and cause us to become subject to these provisions in the future |
| Being subject to the provisions could delay or prevent a change in control or other transactions that might involve a premium price or otherwise be in the best interests of our stockholders |
| Third party investors own minority common limited partnership interests in two of our subsidiaries, CarrAmerica Realty, LP and Carr Realty Holdings, LP, partnerships through which we own certain of our assets |
| The rights and privileges afforded these limited partners through their partnership agreements and the possible fiduciary duties owed to them by us and our Board of Directors could limit our ability to enter into a transaction that results in a change of control of us or could otherwise impact the terms on which we may enter into any such transaction, including terms that could impact the total value of any such transaction to the holders of our securities |
| Our success depends on our ability to recruit and retain necessary personnel and our business and growth strategies could be harmed if our senior executives and other key employees terminate their employment with us Our success depends, to a significant extent, on the continued efforts of our senior executives and other key employees, each of whom is important in developing our business and growth strategies and forging our business relationships |
| We do not currently have employment agreements with any of these individuals, and while we believe that we could find replacements, the loss of the leadership, knowledge and experience of these senior executive and other key employees could adversely affect our operations, including by adversely impacting our ability to lease space effectively or identify appropriate acquisition or disposition opportunities |
| In addition, replacing any one or more of these individuals may be difficult or take an extended period of time because of the limited availability of candidates with the breadth and depth of skills and experience necessary to operate and expand successfully a business such as ours |
| If any, one or more of these individuals, left our company and we failed to effectively manage a transition to new personnel, or if we fail to attract and retain qualified and experienced 21 ______________________________________________________________________ [22]Table of Contents personnel on acceptable terms, our business, financial condition and results of operations could adversely be affected |
| The market value of our securities can be adversely affected by many factors As with any public company, a number of factors may adversely influence the public market price of our common stock, many of which are beyond our control |
| These factors include: • Level of institutional interest in us; • Perception of REITs generally and REITs with portfolios similar to ours, in particular, by market professionals; • Attractiveness of securities of REITs in comparison to other companies taking into account, among other things, the higher tax rates imposed on ordinary income dividends paid by REITs to individuals; • Our financial condition and performance; • The market’s perception of our growth potential and potential future cash dividends; • Government action or regulation, including changes in tax law; • Increases in market interest rates, which may lead investors to demand a higher annual yield from our distributions in relation to the price paid for our stock; and • Relatively low trading volume of shares of REITs in general, which tends to exacerbate a market trend with respect to our stock |
| Sales of a substantial number of shares of our stock, or the perception that such sales could occur, also could adversely affect prevailing market prices for our stock |
| In addition to the possibility that we may sell shares of our stock in a public offering at any time, we also may issue shares of common stock upon redemption of units of interest held by third parties in affiliated partnerships that we control, as well as upon exercise of stock options that we grant to our employees and others |
| All of these shares will be available for sale in the public markets from time to time |
| Our status as a REIT We believe that we qualify for taxation as a REIT for federal income tax purposes, and we plan to operate so that we can continue to meet the requirements for taxation as a REIT If we qualify as a REIT, we generally will not be subject to federal income tax on our income that we distribute currently to our shareholders |
| Many of the REIT requirements, however, are highly technical and complex |
| The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control |
| For example, to qualify as a REIT, at least 95prca of our gross income must come from specific passive sources, like rent, that are itemized in the REIT tax laws |
| In determining that we have satisfied this requirement, we have concluded that certain services, such as cafeteria services that we provided to tenants through an independent contractor at certain of our properties under arrangements where we bore part or all of the expenses of such services, were considered customary in the geographic area where such properties are located |
| There can be no assurance that the IRS or a court would agree with such conclusion or other positions we have taken interpreting the REIT requirements |
| We also are required to distribute to our stockholders at least 90prca of our REIT taxable income (excluding capital gains) |
| The fact that we hold some of our assets through partnerships and their subsidiaries further complicates the application of the REIT requirements |
| Even a technical or inadvertent mistake could jeopardize our REIT status |
| Furthermore, Congress and the IRS might make changes to the tax laws and regulations, and the courts might issue new rulings, that make it more difficult, or impossible, for us to remain qualified as a REIT If we fail to qualify as a REIT for federal income tax purposes and do not meet the requirements necessary to avail ourselves of certain statutory relief provisions, we would be subject to federal income tax at regular corporate rates |
| Also, unless the IRS granted us relief under such statutory provisions, we would remain disqualified as a REIT for four years following the year we first failed to qualify |
| If we failed to qualify as a REIT, we would have to pay significant income taxes |
| This likely would have a significant adverse effect on the value of our securities |
| In addition, we would no longer be required to pay any dividends to stockholders |
| Even if we qualify as a REIT for federal income tax purposes, we are required to pay certain federal, state and local taxes on our income and property |
| For example, if we have net income from “prohibited transactions,” that income will be subject to a 100prca tax |
| In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business |
| The determination as to whether a 22 ______________________________________________________________________ [23]Table of Contents particular sale is a prohibited transaction depends on the facts and circumstances related to that sale |
| While we undertake sales of assets that become inconsistent with our long term strategic or return objectives, we do not believe that those sales should be considered prohibited transactions, but there can be no assurance that the IRS would not contend otherwise |
| We also will be subject to corporate-level tax upon the recognition of any built-in gain that exists with respect to assets acquired in tax-deferred, carry-over basis transactions from non-REIT “C” corporations for 10 years following the acquisition |
| This rule was applied, for example, to the gain that existed on certain assets we acquired upon the liquidation of one of our taxable REIT subsidiaries on December 31, 2003 |
| In addition, any net taxable income earned directly by some of our affiliates, including Carr Real Estate Services Inc |
| and CarrAmerica Development Inc, is subject to federal and state corporate income tax |
| In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation |
| For example, a taxable REIT subsidiary is limited in its ability to deduct interest payments made to an affiliated REIT In addition, the REIT has to pay a 100prca penalty tax on some payments that it receives or on some deductions taken by the taxable REIT subsidiaries if the economic arrangements between the REIT, the REIT’s tenants, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties |
| and CarrAmerica Development Inc, have elected to be taxable REIT subsidiaries |
| Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income |
| To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our shareholders |