| CBL & ASSOCIATES PROPERTIES INC ITEM 1A RISK FACTORS RISKS RELATED TO REAL ESTATE INVESTMENTS Real property investments are subject to various risks, many of which are beyond our control, that could cause declines in the operating revenues and/or the underlying value of one or more of our Properties |
| A number of factors may decrease the income generated by a retail shopping center property, including: |X| National, regional and local economic climates, which may be negatively impacted by plant closings, industry slowdowns, adverse weather conditions, natural disasters, and other factors which tend to reduce consumer spending on retail goods |
| |X| Local real estate conditions, such as an oversupply of, or reduction in demand for, retail space or retail goods, and the availability and creditworthiness of current and prospective tenants |
| |X| Increased operating costs, such as increases in real property taxes, utility rates and insurance premiums |
| |X| Perceptions by retailers or shoppers of the safety, convenience and attractiveness of the shopping center |
| |X| The willingness and ability of the shopping centerapstas owner to provide capable management and maintenance services |
| |X| The convenience and quality of competing retail properties and other retailing options, such as the Internet |
| In addition, other factors may adversely affect the value of our Properties without affecting their current revenues, including: |X| Adverse changes in governmental regulations, such as local zoning and land use laws, environmental regulations or local tax structures that could inhibit our ability to proceed with development, expansion, or renovation activities that otherwise would be beneficial to our Properties |
| |X| Potential environmental or other legal liabilities that reduce the amount of funds available to us for investment in our Properties |
| |X| Any inability to obtain sufficient financing (including both construction financing and permanent debt), or the inability to obtain such financing on commercially favorable terms, to fund new developments, acquisitions, and property expansions and renovations which otherwise would benefit our Properties |
| |X| An environment of rising interest rates, which could negatively impact both the value of commercial real estate such as retail shopping centers and the overall retail climate |
| 12 The loss of one or more significant tenants, due to bankruptcies or as a result of ongoing consolidations in the retail industry, could adversely affect both the operating revenues and value of our Properties |
| Regional malls are typically anchored by well-known department stores and other significant tenants who generate shopping traffic at the mall |
| A decision by an anchor tenant or other significant tenant to cease operations at one or more Properties could have a material adverse effect on those Properties and, by extension, on our financial condition and results of operations |
| The closing of an anchor or other significant tenant may allow other anchors and/or tenants at an affected Property to terminate their leases, to seek rent relief and/or cease operating their stores or otherwise adversely affect occupancy at the Property |
| In addition, key tenants at one or more Properties might terminate their leases as a result of mergers, acquisitions, consolidations, dispositions or bankruptcies in the retail industry |
| The bankruptcy and/or closure of one or more significant tenants, if we are not able to successfully re-tenant the affected space, could have a material adverse effect on both the operating revenues and underlying value of the Properties involved |
| We may incur significant costs related to compliance with environmental laws, which could have a material adverse effect on our results of operations, cash flow and the funds available to us to pay dividends |
| Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in that real property |
| These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances |
| The costs of investigation, removal or remediation of hazardous or toxic substances may be substantial |
| In addition, the presence of hazardous or toxic substances, or the failure to remedy environmental hazards properly, may adversely affect the ownerapstas or operatorapstas ability to sell or rent affected real property or to borrow money using affected real property as collateral |
| Persons or entities that 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 the disposal or treatment facility, whether or not that facility is owned or operated by the person or entity arranging for the disposal or treatment of hazardous or toxic substances |
| Laws exist that impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real property for personal injury associated with exposure to asbestos-containing materials |
| In connection with our ownership, operation, management, development and redevelopment of our Properties, or any other Properties we acquire in the future, we may be potentially liable under these laws and may incur costs in responding to these liabilities, which could have an adverse effect on our results of operations, cash flow and the funds available to us to pay dividends |
| RISKS RELATED TO OUR BUSINESS AND THE MARKET FOR OUR STOCK We may elect not to proceed with certain development projects once they have been undertaken, resulting in charges that could have a material adverse effect on our results of operations for the period in which the charge is taken |
| We intend to pursue development and expansion activities as opportunities arise |
| In connection with any development or expansion, we will incur various risks including the risk that development or expansion opportunities explored by us may be abandoned and the risk that construction costs of a project may exceed original estimates, possibly making the project not profitable |
| Other risks include the risk that we may not be able to refinance construction loans which are generally with full recourse to us, the risk that occupancy rates and rents at a completed project will not meet projections and will be insufficient to make the project profitable, and the risk that we will not be able to obtain anchor, mortgage lender and property partner approvals for certain expansion activities |
| In the event of an unsuccessful development project, our loss could exceed our investment in the project |
| 13 We have in the past elected not to proceed with certain development projects and anticipate that we will do so again from time to time in the future |
| If we elect not to proceed with a development opportunity, the development costs ordinarily will be charged against income for the then-current period |
| Any such charge could have a material adverse effect on our results of operations for the period in which the charge is taken |
| Competition from other retail formats could adversely affect the revenues generated by our properties, resulting in a reduction in funds available for distribution to our stockholders |
| There are numerous shopping facilities that compete with our Properties in attracting retailers to lease space |
| In addition, retailers at our Properties face competition for customers from: |X| Discount shopping centers |X| Outlet malls |X| Wholesale clubs |X| Direct mail |X| Telemarketing |X| Television shopping networks |X| Shopping via the Internet Each of these competitive factors could adversely affect the amount of rents that we are able to collect from our tenants, thereby reducing our revenues and the funds available for distribution to our stockholders |
| Since our shopping center properties are located principally in the Southeastern and Midwestern United States, our financial position, results of operations and funds available for distribution to shareholders are subject generally to economic conditions in these regions |
| Our properties are located principally in the southeastern and midwestern Unites States |
| Our properties located in the southeastern United States accounted for approximately 52dtta6prca of our total revenues from all properties for the year ended December 31, 2005 and currently include 40 Malls, 20 Associated Centers, five Community Centers and one Office Building |
| Our properties located in the midwestern United States accounted for approximately 25dtta9prca of our total revenues from all properties for the year ended December 31, 2005 and currently include 21 Malls and three Associated Centers |
| Our results of operations and funds available for distribution to shareholders therefore will be subject generally to economic conditions in the southeastern and midwestern United States |
| We will continue to look for opportunities to geographically diversify our portfolio in order to minimize dependency on any particular region; however, the expansion of the portfolio through both acquisitions and developments is contingent on many factors including consumer demand, competition and economic conditions |
| Certain of our shopping center properties are subject to ownership interests held by third parties, whose interests may conflict with ours and thereby constrain us from taking actions concerning these properties which otherwise would be in the best interests of the Company and our stockholders |
| We own partial interests in eight malls, six associated centers, three community centers and one office building |
| A property manager affiliated with the managing general partner performs the property management services for these properties and receives a fee for its services |
| The managing partner of each of these three Properties controls the cash flow distributions, although our approval is required for certain major decisions |
| Springdale Center in Mobile, AL and Wilkes-Barre Township Marketplace in Wilkes-Barre Township, PA, are managed by a third party that receives a fee for its services |
| 14 Where we serve as managing general partner of the partnerships that own our properties, we may have certain fiduciary responsibilities to the other partners in those partnerships |
| In certain cases, the approval or consent of the other partners is required before we may sell, finance, expand or make other significant changes in the operations of such properties |
| To the extent such approvals or consents are required, we may experience difficulty in, or may be prevented from, implementing our plans with respect to expansion, development, financing or other similar transactions with respect to such properties |
| With respect to Governorapstas Square, Governorapstas Plaza and Kentucky Oaks we do not have day-to-day operational control or control over certain major decisions, including the timing and amount of distributions, which could result in decisions by the managing general partner that do not fully reflect our interests |
| This includes decisions relating to the requirements that we must satisfy in order to maintain our status as a REIT for tax purposes |
| However, decisions relating to sales, expansion and disposition of all or substantially all of the assets and financings are subject to approval by the Operating Partnership |
| Certain agreements with prior owners of Properties that we have acquired may inhibit our ability to enter into future sale or refinancing transactions affecting such Properties, which otherwise would be in the best interests of the Company and our stockholders |
| Certain Properties that we originally acquired from third parties had unrealized gain attributable to the difference between the fair market value of such Properties and the third parties &apos adjusted tax basis in the Properties immediately prior to their contribution of such Properties to the Operating Partnership pursuant to our acquisition |
| For this reason, a taxable sale by us of any of such Properties, or a significant reduction in the debt encumbering such Properties, could result in adverse tax consequences to the third parties who contributed these properties in exchange for interests in the Operating Partnership |
| Under the terms of these transactions, we have generally agreed that we either will not sell or refinance such an acquired Property for a number of years in any transaction that would trigger adverse tax consequences for the parties from whom we acquired such Property, or else we will reimburse such parties for all or a portion of the additional taxes they are required to pay as a result of the transaction |
| Accordingly, these agreements may cause us not to engage in future sale or refinancing transactions affecting such Properties which otherwise would be in the best interests of the Company and our stockholders, or may increase the costs to us of engaging in such transactions |
| The loss or bankruptcy of a major tenant could negatively affect our financial position and results of operations |
| In the year ended December 31, 2005, no tenant accounted for 5prca or more of revenues except for The Limited Stores Inc |
| ), which accounted for approximately 5dtta6prca of our total revenues |
| The loss or bankruptcy of this key tenant could negatively affect our financial position and results of operations |
| Our financial position, results of operations and funds available for distribution to shareholders could be adversely affected by any economic downturn affecting the operating results at our properties in the Nashville, Tennessee area, which is our single largest market |
| Our properties located in Nashville, TN accounted for 6dtta2prca of our revenues for the year ended December 31, 2005 |
| No other market accounted for more than 3dtta5prca of our revenues for the year ended December 31, 2005 |
| Our financial position and results of operations will therefore be affected by the results experienced at properties located in the Nashville, TN area |
| Rising interest rates could both increase our borrowing costs, thereby adversely affecting our cash flow and the amounts available for distributions to our stockholders, and decrease our stock price, if investors seek higher yields through other investments |
| 15 An environment of rising interest rates could lead holders of our securities to seek higher yields through other investments, which could adversely affect the market price of our stock |
| One of the factors that may influence the price of our stock in public markets is the annual distribution rate we pay as compared with the yields on alternative investments |
| Numerous other factors, such as governmental regulatory action and tax laws, could have a significant impact on the future market price of our stock |
| In addition, increases in market interest rates could result in increased borrowing costs for us, which may adversely affect our cash flow and the amounts available for distributions to our stockholders |
| Recent changes in the US federal income tax treatment of corporate dividends may make our stock less attractive to investors, thereby lowering our stock price |
| However, dividends payable by REITs are generally not eligible for such treatment |
| Although this legislation did not have a directly adverse effect on the taxation of REITs or dividends paid by REITs, the more favorable treatment for non-REIT dividends could cause individual investors to consider investments in non-REIT corporations as more attractive relative to an investment in a REIT, which could have an adverse impact on the market price of our stock |
| Certain of our credit facilities, the loss of which could have a material, adverse impact on our financial condition and results of operations, are conditioned upon the Operating Partnership continuing to be managed by certain members of its current senior management and by such members of senior management continuing to own a significant direct or indirect equity interest in the Operating Partnership |
| Certain of the Operating Partnershipapstas lines of credit are conditioned upon the Operating Partnership continuing to be managed by certain members of its current senior management and by such members of senior management continuing to own a significant direct or indirect equity interest in the Operating Partnership (including any shares of our common stock owned by such members of senior management may hold in us) |
| If the failure of one or more of these conditions resulted in the loss of these credit facilities and we were unable to obtain suitable replacement financing, such loss could have a material, adverse impact on our financial position and results of operations |
| The general liability and property casualty insurance policies on our Properties currently include loss resulting from acts of terrorism, whether foreign or domestic |
| The cost of general liability and property casualty insurance policies that include coverage for acts of terrorism has risen significantly post-September 11, 2001 |
| The cost of coverage for acts of terrorism is currently mitigated by the Terrorism Risk Insurance Act ( "e TRIA "e ) |
| If TRIA is not extended beyond 2006, we may incur higher insurance costs and greater difficulty in obtaining insurance that covers terrorist-related damages |
| Our tenants may also experience similar difficulties |
| We are unable at this time to predict whether we will continue our policy coverage as currently structured when our policies are up for renewal on December 31, 2006 |
| RISKS RELATED TO FEDERAL INCOME TAX LAWS If we fail to qualify as a REIT in any taxable year, our funds available for distribution to stockholders will be reduced |
| We intend to continue to operate so as to qualify as a REIT under the Internal Revenue Code |
| Although we believe that we are organized and operate in such a manner, no assurance can be given that we currently qualify and in the future will continue to qualify as a REIT Such qualification involves the application of highly technical and complex Internal Revenue Code provisions for 16 which there are only limited judicial or administrative interpretations |
| The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify |
| In addition, no assurance can be given that legislation, new regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification or its corresponding federal income tax consequences |
| If in any taxable year we were to 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 on our taxable income at regular corporate rates |
| Unless entitled to relief under certain statutory provisions, we also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost |
| As a result, the funds available for distribution to our stockholders would be reduced for each of the years involved |
| We currently intend to operate in a manner designed to qualify as a REIT However, it is possible that future economic, market, legal, tax or other considerations may cause our board of directors, with the consent of a majority of our stockholders, to revoke the REIT election |
| Any issuance or transfer of our capital stock to any person in excess of the applicable limits on ownership necessary to maintain our status as a REIT would be deemed void ab initio, and those shares would automatically be transferred to a non-affiliated charitable trust |
| To maintain our status as a REIT under the Internal Revenue Code, not more than 50prca in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the last half of a taxable year |
| Our certificate of incorporation generally prohibits ownership of more than 6prca of the outstanding shares of our capital stock by any single stockholder determined by vote, value or number of shares (other than Charles Lebovitz, our Chief Executive Officer, David Jacobs, Richard Jacobs and their affiliates under the Internal Revenue Codeapstas attribution rules) |
| The affirmative vote of 66 (2)/3prca of our outstanding voting stock is required to amend this provision |
| Our board of directors may, subject to certain conditions, waive the applicable ownership limit upon receipt of a ruling from the IRS or an opinion of counsel to the effect that such ownership will not jeopardize our status as a REIT Absent any such waiver, however, any issuance or transfer of our capital stock to any person in excess of the applicable ownership limit or any issuance or transfer of shares of such stock which would cause us to be beneficially owned by fewer than 100 persons, will be null and void and the intended transferee will acquire no rights to the stock |
| Instead, such issuance or transfer with respect to that number of shares that would be owned by the transferee in excess of the ownership limit provision would be deemed void ab initio and those shares would automatically be transferred to a trust for the exclusive benefit of a charitable beneficiary to be designated by us, with a trustee designated by us, but who would not be affiliated with us or with the prohibited owner |
| Any acquisition of our capital stock and continued holding or ownership of our capital stock constitutes, under our certificate of incorporation, a continuous representation of compliance with the applicable ownership limit |
| In order to maintain our status as a REIT avoid the imposition of certain additional taxes under the Internal Revenue Code, we must satisfy minimum requirements for distributions to shareholders, which may limit the amount of cash we might otherwise have been able to retain for use in growing our business |
| To maintain our status as a REIT under the Internal Revenue Code, we generally will be required each year to distribute to our stockholders at least 90prca of our taxable income after certain adjustments |
| However, to the extent that we do not distribute all of our net capital gain or distribute at least 90prca but less than 100prca of our REIT taxable income, as adjusted, we will be subject to tax on the undistributed amount at ordinary and capital gains corporate tax rates, as the case may be |
| In addition, we will be subject to a 4prca nondeductible excise tax on the amount, if any, by which certain distributions paid by us during each calendar year are less than the sum of 85prca of our ordinary income 17 for such calendar year, 95prca of our capital gain net income for the calendar year and any amount of such income that was not distributed in prior years |
| In the case of property acquisitions, including our initial formation, where individual properties are contributed to our Operating Partnership for Operating Partnership units, we have assumed the tax basis and depreciation schedules of the entities &apos contributing properties |
| The relatively low tax basis of such contributed properties may have the effect of increasing the cash amounts we are required to distribute as dividends, thereby potentially limiting the amount of cash we might otherwise have been able to retain for use in growing our business |
| This low tax basis may also have the effect of reducing or eliminating the portion of distributions made by us that are treated as a non-taxable return of capital |
| RISKS RELATED TO OUR ORGANIZATIONAL STRUCTURE The ownership limit described above, as well as certain provisions in our amended and restated certificate of incorporation and bylaws, our stockholder rights plan, and certain provisions of Delaware law may hinder any attempt to acquire us |
| Certain provisions of Delaware law, as well as of our amended and restated certificate of incorporation and bylaws, and agreements to which we are a party, may have the effect of delaying, deferring or preventing a third party from making an acquisition proposal for us and may inhibit a change in control that some, or a majority, of our stockholders might believe to be in their best interest or that could give our stockholders the opportunity to realize a premium over the then-prevailing market prices for their shares |
| These provisions and agreements may be summarized as follows: |X| THE OWNERSHIP LIMIT - As described above, to maintain our status as a REIT under the Internal Revenue Code, not more than 50prca in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the last half of a taxable year |
| Our certificate of incorporation generally prohibits ownership of more than 6prca of the outstanding shares of our capital stock by any single stockholder determined by value (other than Charles Lebovitz, David Jacobs, Richard Jacobs and their affiliates under the Internal Revenue Codeapstas attribution rules) |
| In addition to preserving our status as a REIT, the ownership limit may have the effect of precluding an acquisition of control of us without the approval of our board of directors |
| |X| CLASSIFIED BOARD OF DIRECTORS; REMOVAL FOR CAUSE - Our certificate of incorporation provides for a board of directors divided into three classes, with one class elected each year to serve for a three-year term |
| As a result, at least two annual meetings of stockholders may be required for the stockholders to change a majority of our board of directors |
| In addition, our stockholders can only remove directors for cause and only by a vote of 75prca of the outstanding voting stock |
| Collectively, these provisions make it more difficult to change the composition of our board of directors and may have the effect of encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts |
| |X| ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS - Our bylaws establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of our stockholders |
| These procedures generally require advance written notice of any such proposals, containing prescribed information, to be given to our Secretary at our principal executive offices not less than 60 days nor more than 90 days prior to the meeting |
| |X| VOTE REQUIRED TO AMEND BYLAWS - A vote of 66 (2)/3prca of the outstanding voting stock is necessary to amend our bylaws |
| 18 |X| STOCKHOLDER RIGHTS PLAN - We have a stockholder rights plan, which may delay, deter or prevent a change in control unless the acquirer negotiates with our board of directors and the board of directors approves the transaction |
| The rights plan generally would be triggered if an entity, group or person acquires (or announces a plan to acquire) 15prca or more of our common stock |
| If such transaction is not approved by our board of directors, the effect of the stockholder rights plan would be to allow our stockholders to purchase shares of our common stock, or the common stock or other merger consideration paid by the acquiring entity, at an effective 50prca discount |
| |X| DELAWARE ANTI-TAKEOVER STATUTE - We are a Delaware corporation and are subject to Section 203 of the Delaware General Corporation Law |
| In general, Section 203 prevents an "e interested stockholder "e (defined generally as a person owning 15prca or more of a companyapstas outstanding voting stock) from engaging in a "e business combination "e (as defined in Section 203) with us for three years following the date that person becomes an interested stockholder unless: (a) before that person became an interested holder, our board of directors approved the transaction in which the interested holder became an interested stockholder or approved the business combination; (b) upon completion of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owns 85prca of our voting stock outstanding at the time the transaction commenced (excluding stock held by directors who are also officers and by employee stock plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (c) following the transaction in which that person became an interested stockholder, the business combination is approved by our board of directors and authorized at a meeting of stockholders by the affirmative vote of the holders of at least two-thirds of our outstanding voting stock not owned by the interested stockholder |
| Under Section 203, these restrictions also do not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of certain extraordinary transactions involving us and a person who was not an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of our directors, if that extraordinary transaction is approved or not opposed by a majority of the directors who were directors before any person became an interested stockholder in the previous three years or who were recommended for election or elected to succeed such directors by a majority of directors then in office |
| Certain ownership interests held by members of our senior management may tend to create conflicts of interest between such individuals and the interests of the Company and our Operating Partnership |
| |X| RETAINED PROPERTY INTERESTS - Members of our senior management own interests in certain real estate properties that were retained by them at the time of our initial public offering |
| These consist primarily of outparcels at certain of our properties, which are being offered for sale through our management company |
| As a result, these members of our senior management have interests that could conflict with the interests of the Company, our shareholders and the Operating Partnership with respect to any transaction involving these properties |
| |X| TAX CONSEQUENCES OF THE SALE OR REFINANCING OF CERTAIN PROPERTIES - Since certain of our properties had unrealized gain attributable to the difference between the fair market value and adjusted tax basis in such properties immediately prior to their contribution to the Operating Partnership, a taxable sale of any such properties, or a 19 significant reduction in the debt encumbering such properties, could cause adverse tax consequences to the members of our senior management who owned interests in our predecessor entities |
| As a result, members of our senior management might not favor a sale of a property or a significant reduction in debt even though such a sale or reduction could be beneficial to us and the Operating Partnership |
| Our bylaws provide that any decision relating to the potential sale of any property that would result in a disproportionately higher taxable income for members of our senior management than for us and our stockholders, or that would result in a significant reduction in such propertyapstas debt, must be made by a majority of the independent directors of the board of directors |
| The Operating Partnership is required, in the case of such a sale, to distribute to its partners, at a minimum, all of the net cash proceeds from such sale up to an amount reasonably believed necessary to enable members of our senior management to pay any income tax liability arising from such sale |
| |X| INTERESTS IN OTHER ENTITIES; POLICIES OF THE BOARD OF DIRECTORS - Certain entities owned in whole or in part by members of our senior management, including the construction company that built or renovated most of our properties, may continue to perform services for, or transact business with, us and the Operating Partnership |
| Furthermore, certain property tenants are affiliated with members of our senior management |
| Accordingly, although our bylaws provide that any contract or transaction between us or the Operating Partnership and one or more of our directors or officers, or between us or the Operating Partnership and any other entity in which one or more of our directors or officers are directors or officers or have a financial interest, must be approved by our disinterested directors or stockholders after the material facts of the relationship or interest of the contract or transaction are disclosed or are known to them, these affiliations could nevertheless create conflicts between the interests of these members of senior management and the interests of the Company, our shareholders and the Operating Partnership in relation to any transactions between us and any of these entities |