| CEDAR SHOPPING CENTERS INC Item 1A Risk Factors Our performance and value are subject to risks associated with real estate assets and with the real estate industry |
| Our performance and value are subject to risks associated with real estate assets and with the real estate industry, including, among other things, risks related to adverse changes in national, regional and local economic and market conditions |
| Our continued ability to make expected distributions to our shareholders depends on our ability to generate sufficient revenues to meet operating expenses, future debt service and capital expenditure requirements |
| Events and conditions generally applicable to owners and operators of real property that are beyond our control may decrease cash available for distribution and the value of our properties |
| These events and conditions include, but may not be limited to, the following: 10 ______________________________________________________________________ [66]Back to Contents 1 |
| local oversupply, increased competition or declining demand for real estate; 2 |
| inability to collect rent or other charges from tenants; 3 |
| vacancies or an inability to rent space on favorable terms; 4 |
| inability to finance property development, tenant improvements and acquisitions on favorable terms; 5 |
| increased operating costs, including real estate taxes, insurance premiums, utilities, repairs and maintenance; 6 |
| increases in interest rates; 7 |
| increased costs of complying with current, new or expanded governmental regulations; 8 |
| the relative illiquidity of real estate investments; 9 |
| changing market demographics; and 10 |
| changing traffic patterns |
| In addition, periods of economic slowdown or recession, increased interest rates or decreased demand for real estate, or the public perception that any of these events may occur, could result in a decline in rents or an increased incidence of defaults under existing leases, which in turn could adversely affect our business, results of operations, liquidity, per share trading price of our common stock, and the ability to satisfy our debt service or repayment obligations and to make distributions to our shareholders |
| We have recently experienced and expect to continue to experience substantial growth and may not be able to integrate additional properties effectively into our operations or otherwise manage our growth, which in turn may adversely affect our operating results |
| All of our properties have been acquired since 2000, and the acquisition of any additional properties would generate additional operating expenses that we would be required to pay |
| As we acquire additional properties, we will be subject to risks associated with managing new properties, including tenant retention and mortgage default |
| There can be no assurance that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff, to integrate these properties into our portfolio without operating disruptions or unanticipated costs |
| Any failure by us to effectively integrate any future acquisitions into our portfolio could have a material adverse effect on our business and operations |
| Our properties will be subject to increases in real estate and other tax rates, utility costs, insurance costs, repairs, maintenance and other operating expenses, and administrative expenses |
| Rising operating expenses and/or interest rates could reduce our cash flow and funds available for future distributions |
| Our properties and any properties we acquire in the future are, and will be, subject to operating risks common to real estate in general, any or all of which may have a negative effect |
| If any property is not fully occupied or if rental receipts are insufficient to cover operating expenses, we could be required to expend additional funds to stabilize that property’s operating expenses |
| If we are unable to maintain profitability, the market price of our common stock could decrease, our business and operations could be negatively impacted, and we may have to reduce, eliminate or suspend our dividend |
| 11 ______________________________________________________________________ [67]Back to Contents Our substantial indebtedness may impede our operating performance and put us at a competitive disadvantage |
| We intend to incur additional debt in connection with future acquisitions of real estate and in connection with the development and redevelopment of properties owned by us |
| We also may borrow funds to make distributions to shareholders |
| Our debt may harm our business and operating results by (1) requiring us to use a substantial portion of our available liquidity to pay required debt service and/or repayments or establish additional reserves, which would reduce the amount available for distributions, (2) placing us at a competitive disadvantage compared to competitors that have less debt or debt at more favorable terms, (3) making us more vulnerable to economic and industry downturns and reducing our flexibility in responding to changing business and economic conditions, and (4) limiting our ability to borrow more money for operations, capital expenditures, or to finance acquisitions in the future |
| Increases in interest rates may impede our operating performance and put us at a competitive disadvantage |
| Payments of required debt service or amounts due at maturity, or creation of additional reserves under loan agreements, could adversely affect our liquidity |
| In addition to these risks and those normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest, we are also subject to the risk that we will not be able to refinance existing indebtedness on our properties (which, in most cases, will not have been fully amortized at maturity), or that the terms of any refinancing we could obtain would be favorable |
| If we are not successful in refinancing existing indebtedness, or otherwise able to repay our outstanding indebtedness when it becomes due, we may be forced to dispose of properties on disadvantageous terms, which might adversely affect our operating performance, our ability to service other debt, and to meet our other obligations |
| We may not be successful in identifying suitable acquisitions that meet our criteria, which may impede our growth; if we do identify suitable acquisition targets, we may not be able to consummate such transactions on favorable terms |
| Integral to our business strategy is our ability to expand through acquisitions, which requires us to identify suitable acquisition candidates or investment opportunities that meet our criteria and are compatible with our growth and operating strategy |
| We analyze potential acquisitions on a property-by-property and market-by-market basis |
| We may not be successful in identifying suitable real estate properties or other assets that meet our acquisition criteria, or in consummating acquisitions or investments on satisfactory terms |
| Failure to identify or consummate acquisitions could reduce the number of acquisitions we complete and slow our growth, which could in turn harm our stock price |
| We compete with many other entities engaged in real estate investment activities for acquisitions of retail properties, including institutional investors, REITs, and other owner-operators of shopping centers |
| These competitors may drive up the price we must pay for real estate properties, or may succeed in acquiring those properties themselves |
| In addition, our potential acquisition targets may find such competitors to be more attractive suitors for a number of reasons, including, for example, that they may have greater resources and may be willing to pay more |
| Further, the number of entities and the amount of funds competing for suitable investment properties may increase |
| This would result in increased demand for such properties and therefore increased prices paid for them |
| If we pay higher prices for properties, our profitability could be reduced |
| 12 ______________________________________________________________________ [68]Back to Contents As substantially all of our revenues are derived from rental income, failure of tenants to pay rent or delays in arranging leases and occupancy of leased premises, particularly with respect to anchor tenants, could seriously harm our operating results and financial condition |
| Substantially all of our revenues are derived from rental income from our properties |
| Our tenants may experience a downturn in their respective businesses at any time that may weaken their financial condition |
| As a result, any such tenants may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent, or declare bankruptcy |
| Any leasing delays, failure to make rental or other payments when due, or tenant bankruptcies, could result in the termination of tenants’ leases, which would have a negative impact on our operating results |
| In addition, adverse market conditions and competition may impede our ability to renew leases or re-let space as leases expire, which could harm our business and operating results |
| Our business may be seriously harmed if a major tenant fails to renew its lease(s) or vacates one or more properties and prevents us from re-leasing such premises by continuing to pay base rent for the balance of the lease terms |
| In addition, the loss of such a major tenant could result in lease terminations or reductions in rent by other tenants |
| We may be restricted from re-leasing space based on existing exclusivity lease provisions with some of our tenants |
| In these cases, the leases contain provisions giving the tenant the exclusive right to sell particular types of merchandise or provide specific types of services within the particular retail center which limit the ability of other tenants within that center to sell that merchandise or provide those services |
| When re-leasing space after a vacancy by one of these other tenants, these provisions may limit the number and types of prospective tenants for the vacant space |
| The failure to re-lease space or to re-lease space on satisfactory terms could harm operating results |
| Any bankruptcy filings by, or relating to, one of our tenants or a lease guarantor would generally bar efforts by us to collect pre-bankruptcy debts from that tenant, or lease guarantor, unless we receive an order permitting us to do so from the bankruptcy court |
| A bankruptcy by a tenant or lease guarantor could delay efforts to collect past due balances, and could ultimately preclude full collection of these sums |
| If a lease is affirmed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must generally be paid in full |
| However, if a lease is disaffirmed by a tenant in bankruptcy, we would have only an unsecured claim for damages, which would be paid normally only to the extent that funds are available, and only in the same percentage as is paid to all other members of the same class of unsecured creditors |
| It is possible and indeed likely that we would recover substantially less than the full value of any unsecured claims we hold, which may in turn harm our financial condition |
| Adverse market conditions and competition may impede our ability to renew leases or re-let space as leases expire, which could harm our business and operating results |
| We also face competition from similar retail centers within our respective trade areas that may affect our ability to renew leases or re-let space as leases expire |
| In addition, any new competitive properties that are developed within the trade areas of our existing properties may result in increased competition for customer traffic and creditworthy tenants |
| Increased competition for tenants may require us to make tenant and/or capital improvements to properties beyond those that we would otherwise have planned to make |
| Any unbudgeted tenant and/or capital improvements we undertake may reduce cash that would otherwise be available for distributions to shareholders |
| Ultimately, to the extent we are unable to renew leases or re-let space as leases expire, our business and operations could be negatively impacted |
| 13 ______________________________________________________________________ [69]Back to Contents Our current and future joint venture investments could be adversely affected by the lack of sole decision-making authority, reliance on joint venture partners’ financial condition, and any disputes that may arise between us and our joint venture partners |
| We presently own six of our properties through joint ventures and in the future we may co-invest with third parties through joint ventures |
| We may not be in a position to exercise sole decision-making authority regarding the properties owned through joint ventures |
| Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that joint venture partners might file for bankruptcy protection or fail to fund their share of required capital contributions |
| Joint venture partners may have business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives |
| Such investments also may have the potential risk of impasses on decisions, such as a sale, because neither we nor the joint venture partner would have full control over the joint venture |
| Any disputes that may arise between us and joint venture partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business |
| Consequently, actions by or disputes with joint venture partners might result in subjecting properties owned by the joint venture to additional risk |
| In addition, we may in certain circumstances be liable for the actions of our third-party joint venture partners |
| Further, the terms of certain of our joint venture partnership agreements provide for minimum priority cumulative returns to the joint venture partners |
| To the extent that these specified minimum returns are not achieved, our equity interest in these partnerships may be negatively affected |
| The financial covenants in our loan agreements may restrict our operating or acquisition activities, which may harm our financial condition and operating results |
| The financial covenants in our loan agreements may restrict our operating or acquisition activities, which may harm our financial condition and operating results |
| The mortgages on our properties contain customary negative covenants, such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property, to enter into leases, or to discontinue insurance coverage |
| Our ability to borrow under our secured revolving credit facility is subject to compliance with these financial and other covenants, including restrictions on property eligible for collateral, and overall restrictions on the amount of indebtedness we can incur |
| If we breach covenants in our debt agreements, the lenders could declare a default and require us to repay the debt immediately and, if the debt is secured, could take possession of the property or properties securing the loan |
| Our properties consist primarily of community shopping and convenience centers |
| Our performance therefore is linked to economic conditions in the market for retail space generally |
| Our properties consist primarily of supermarket-anchored community shopping centers and drug store-anchored convenience centers, and our performance therefore is linked to economic conditions in the market for retail space generally |
| The market for retail space has been, and could be, adversely affected by actual or perceived weaknesses in national, regional and local economies, the adverse financial condition or revised operating strategies of certain retailing companies, the ongoing consolidation in the retail sector, the excess amount of retail space in a number of markets, and increasing consumer purchases through catalogues or the Internet |
| To the extent that any of these conditions occur, they are likely to impact market rents for retail space |
| 14 ______________________________________________________________________ [70]Back to Contents Substantially all of our properties are located in the Northeast and mid-Atlantic regions, which exposes us to greater economic risks than if our properties were owned in several geographic regions |
| Our properties are located in nine states, largely in the Northeast and mid-Atlantic regions, which exposes us to greater economic risks than if we owned properties in more geographic regions |
| Any adverse economic or real estate developments resulting from regulatory environment, business climate, fiscal problems or weather in such regions could have an adverse impact on our prospects |
| In addition, the economic condition of each of our markets may be dependent on one or more industries |
| An economic downturn in one of these industry sectors may result in an increase in tenant vacancies, which may harm our performance in the affected markets |
| Economic and market conditions also may impact the ability of our tenants to make payments required by their leases |
| If our properties do not generate sufficient income to meet operating expenses, including current and future debt service, our business and results of operations would be significantly harmed |
| Development and redevelopment activities may be delayed or otherwise may not achieve expected results |
| Development/redevelopment activities may be delayed or otherwise may not achieve expected results |
| We are in the process of developing/redeveloping several of our properties and expect to continue such activities in the future |
| In this connection, we will bear certain risks, including the risks of construction delays or cost overruns that may increase project costs and make such project uneconomical, the risk that occupancy or rental rates at a completed project will not be sufficient to enable us to pay operating expenses or achieve targeted rates of return on investment, and the risk of incurring acquisition and/or predevelopment costs in connection with projects that are not pursued to completion |
| Development/redevelopment activities are also generally subject to governmental permits and approvals, which may be delayed, may not be obtained, or may be conditioned on terms unfavorable to us |
| In addition, consents may be required from various tenants, lenders, and/or joint venture partners |
| In case of an unsuccessful project, our loss could exceed our investment in the project |
| Our success depends on the efforts of key personnel, whose continued service is not guaranteed |
| The loss of services of key personnel could materially and adversely affect our operations because of diminished relationships with lenders, sources of equity capital, construction companies, and existing and prospective tenants, and the ability to conduct our business and operations without material disruption |
| Potential losses may not be covered by insurance |
| Potential losses may not be covered by insurance |
| We carry comprehensive liability, fire, flood, extended coverage and rental loss insurance under a blanket policy covering all of our properties |
| We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice |
| We do not carry insurance for generally uninsured losses such as loss from war, nuclear accidents, and nuclear, biological and chemical occurrences from terrorist’s acts |
| Some of the insurance, such as that covering losses due to floods and earthquakes, is subject to limitations involving large deductibles or co-payments and policy limits that may not be sufficient to cover losses |
| Additionally, certain tenants have termination rights in respect of certain casualties |
| If we receive casualty proceeds, we may not be able to reinvest such proceeds profitably or at all, and we may be forced to recognize taxable gain on the affected property |
| If we experience losses that are uninsured or that exceed policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties |
| In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged |
| 15 ______________________________________________________________________ [71]Back to Contents If we fail to continue as a REIT, our distributions will not be deductible, and our income will be subject to taxation, thereby reducing earnings available for distribution |
| If we do not continue to qualify as a REIT, our distributions will not be deductible, and our income will be subject to taxation, reducing earnings available for distribution |
| A REIT will generally not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income, to the extent that it distributes at least 90prca of its taxable income to its shareholders and complies with certain other requirements |
| We intend to make distributions to shareholders to comply with the requirements of the Code |
| However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds to meet the 90prca distribution requirement of the Code |
| Certain assets generate substantial differences between taxable income and income recognized in accordance with accounting principles generally accepted in the United States (“GAAP”) |
| Such assets include, without limitation, operating real estate that was acquired through structures that may limit or completely eliminate the depreciation deduction that would otherwise be available for income tax purposes |
| As a result, the Code requirement to distribute a substantial portion of our otherwise net taxable income in order to maintain REIT status could cause us to (1) distribute amounts that could otherwise be used for future acquisitions, capital expenditures or repayment of debt, (2) borrow on unfavorable terms, or (3) sell assets on unfavorable terms |
| If we fail to obtain debt or equity capital in the future, it could limit our operations and our ability to grow, which could have a material adverse effect on the value of our common stock |
| Dividends payable by REITs do not qualify for the reduced tax rates under tax legislation which reduced the maximum tax rate for dividends payable to individuals from 35prca to 15prca (through 2008) |
| Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors to perceive investments in REITs to be relatively less attractive than investments in the stock of corporations that pay dividends qualifying for reduced rates of tax, which in turn could adversely affect the value of the stock of REITs |
| We could incur significant costs related to government regulation and litigation over environmental matters and various other federal, state and local regulatory requirements |
| We could incur significant costs related to regulations and litigation over environmental matters |
| Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or other contaminants at property owned, leased, managed or otherwise operated by such person, and may be held liable to a governmental entity or to third parties for property damage, and for investigation and clean up costs in connection with such contamination |
| The cost of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such conditions, may adversely affect the owner’s, lessor’s or operator’s ability to sell or rent such property or to arrange financing using such property as collateral |
| In connection with the ownership, operation and management of real properties, we are potentially liable for removal or remediation costs, as well as certain other related costs and liabilities, including governmental fines, injuries to persons, and damage to property |
| 16 ______________________________________________________________________ [72]Back to Contents We may incur significant costs complying with the Americans with Disabilities Act of 1990 (the “ADA”) and similar laws, which require that all public accommodations meet federal requirements related to access and use by disabled persons, and with various other federal, state and local regulatory requirements, such as state and local fire and life safety requirements |
| Environmental studies generally conducted at the time of acquisition with respect to substantially all of our properties did not reveal any material environmental liabilities, and we are unaware of any subsequent environmental matters that would have created a material liability |
| We believe that our properties are currently in material compliance with applicable environmental, as well as non-environmental, statutory and regulatory requirements |
| If one or more of our properties were not in compliance with such federal, state and local laws, we could be required to incur additional costs to bring the property into compliance |
| If we incur substantial costs to comply with such requirements, our business and operations could be adversely affected |
| If we fail to comply with such requirements, we might incur governmental fines or private damage awards |
| We cannot presently determine whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will adversely impact our business and operations |
| Our charter and Maryland law contain provisions that may delay, defer or prevent a change of control transaction and depress our stock price |
| Our charter and Maryland law contain provisions that may delay, defer or prevent a change of control transaction and depress the price of our common stock |
| The charter, subject to certain exceptions, authorizes directors to take such actions as are necessary and desirable relating to qualification as a REIT, and to limit any person to beneficial ownership of no more than 9dtta9prca of the outstanding shares of our common stock |
| Our Board of Directors, in its sole discretion, may exempt a proposed transferee from the ownership limit, but may not grant an exemption from the ownership limit to any proposed transferee whose direct or indirect ownership could jeopardize our status as a REIT These restrictions on transferability and ownership will not apply if our Board of Directors determines that it is no longer in our best interests to continue to qualify as, or to be, a REIT This ownership limit may delay or impede a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interests of shareholders |
| We may authorize and issue stock and OP Units without shareholder approval |
| Our charter authorizes the Board of Directors to issue additional shares of common or preferred stock, to issue additional OP Units, to classify or reclassify any unissued shares of common or preferred stock, and to set the preferences, rights and other terms of such classified or unclassified shares |
| Although the Board of Directors has no such intention at the present time, it could establish a series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interests of shareholders |
| Certain provisions of the Maryland General Corporation Law (the “MGCL”) may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including: 1 |
| “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person or an affiliate thereof who beneficially owns 10prca or more of the voting power of our shares) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations; and 2 |
| “control share” provisions that provide that our “control shares” (defined as shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of control shares) have no voting rights except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares |
| 17 ______________________________________________________________________ [73]Back to Contents We have opted out of these provisions of the MGCL However, the Board of Directors may, by resolution, elect to opt in to the business combination provisions of the MGCL, and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL Future terrorist attacks could harm the demand for, and the value of, our properties |
| Future terrorist attacks, such as the attacks that occurred in New York, Pennsylvania and Washington, DC on September 11, 2001, and other acts of terrorism or war, could harm the demand for, and the value of, our properties |
| Terrorist attacks could directly impact the value of our properties through damage, destruction, loss or increased security costs, and the availability of insurance for such acts may be limited or may be subject to substantial cost increases |
| To the extent that our tenants are impacted by future attacks, their ability to continue to honor obligations under their existing leases could be adversely affected |