| LEXINGTON CORPORATE PROPERTIES TRUST Item 1A Risk Factors Set forth below are material factors that may adversely affect our business and operations |
| All references to the “Company,” “we,” “our” and “us” in this Item 1A mean Lexington Corporate Properties Trust and all entities owned by us, including non-consolidated entities, except where it is made clear that the term means only the parent company |
| Risks involved in single tenant leases |
| We focus our acquisition activities on real properties that are net leased to single tenants |
| Therefore, the financial failure of, or other default by, a single tenant under its lease is likely to cause a significant reduction in the operating cash flow generated by the property leased to that tenant and might decrease the value of that property |
| In March 2006, Dana Corporation, a tenant in 10 of the Company’s properties (including one in a non-consolidated entity) as of December 31, 2005, declared Chapter 11 bankruptcy |
| As of December 31, 2005 the aggregate net carrying cost of the 9 consolidated properties was dlra144dtta6 million, aggregate non-recourse mortgages encumbering these properties was dlra82dtta8 million and scheduled cash rent due in 2006 is dlra12dtta5 million |
| The aggregate carrying cost of the 1 non-consolidated property was dlra24dtta0 million, the non-recourse mortgage encumbering the property was dlra14dtta3 million and scheduled cash rent in 2006 is dlra2dtta4 million |
| The Company has a 30prca interest in this non-consolidated entity |
| Dependence on major tenants |
| Revenues from several of our tenants and/or their guarantors constitute a significant percentage of our base rental revenues |
| As of December 31, 2005, our 15 largest tenants/guarantors, which occupied 48 properties, represented approximately 37dtta8prca of our base rental revenue for the year ended December 31, 2005, including our proportionate share of base rental revenue from non-consolidated entities and base rental revenue recognized from properties sold through the respective date of sale |
| The default, financial distress or bankruptcy of any of the tenants of these properties could cause interruptions in the receipt of lease revenues from these tenants and/or result in vacancies, which would reduce our revenues and increase operating costs until the affected property is re-let, and could decrease the ultimate sales value of that property |
| Upon the expiration or other termination of the leases that are currently in place with respect to these properties, we may not be able to re-lease the vacant property at a comparable lease rate or without incurring additional expenditures in connection with the re-leasing |
| We have incurred, and expect to continue to incur, indebtedness (secured and unsecured) in furtherance of our activities |
| Neither our declaration of trust nor any policy statement formally adopted by our board of trustees limits either the total amount of indebtedness or the specified percentage of indebtedness that we may incur |
| Accordingly, we could become more highly leveraged, resulting in increased risk of default on our obligations and in an increase in debt service requirements which could adversely affect our financial condition and results of operations and our ability to pay distributions |
| Our current unsecured revolving credit facility contains cross-default provisions to our other material indebtedness (as defined therein) |
| In the event of a default on such other material indebtedness, our indebtedness under our current unsecured revolving credit facility could be accelerated |
| Depending upon the amount of indebtedness under our current unsecured revolving credit facility, such an acceleration could have a material adverse impact on our financial condition and results of operations |
| Our current unsecured revolving credit facility also contains various covenants which limit the amount of secured, unsecured and variable-rate indebtedness we may incur and restricts the amount of capital we may invest in specific categories of assets in which we may otherwise want to invest |
| Risks relating to interest rate increases |
| We have exposure to market risks relating to increases in interest rates due to our variable-rate debt |
| An increase in interest rates may increase our costs of borrowing on existing variable-rate indebtedness, leading to a reduction in our net income |
| As of December 31, 2005, we had outstanding dlra11dtta9 million in variable-rate indebtedness which represents 1dtta0prca of our total mortgages and notes payable |
| The level of our variable-rate indebtedness, along with the interest rate associated with such variable-rate indebtedness, may change in the future and materially affect our interest costs and net income |
| In addition, our interest costs on our fixed-rate indebtedness can increase if we are required to refinance our fixed-rate indebtedness at maturity at higher interest rates |
| 8 _________________________________________________________________ [49]Table of Contents Risks associated with refinancing |
| A significant number of our properties are subject to mortgage notes with balloon payments due at maturity |
| As of December 31, 2005, the scheduled balloon payments for our consolidated properties for the next five calendar years are as follows: • 2006 — dlra11dtta9 million; • 2007 — dlra0; • 2008 — dlra59dtta0 million; • 2009 — dlra47dtta7 million; and • 2010 — dlra56dtta6 million |
| As of December 31, 2005, none of our joint venture properties require a balloon payment prior to 2009, at which time dlra69dtta0 million (of which our proportionate share is dlra23dtta6 million) will become due |
| In 2010, balloon payments due for our joint venture properties aggregate dlra61dtta6 million (of which our proportionate share is dlra20dtta5 million) |
| Our ability to make the scheduled balloon payments will depend upon the amount available under our unsecured revolving credit facility and our ability either to refinance the related mortgage debt or to sell the related property |
| Our ability to accomplish these goals will be affected by various factors existing at the relevant time, such as the state of the national and regional economies, local real estate conditions, available mortgage rates, the lease terms of the mortgaged properties, our equity in the mortgaged properties, our financial condition, the operating history of the mortgaged properties and tax laws |
| If we are unable to obtain sufficient financing to fund the scheduled non-recourse balloon payments or to sell the related property at a price that generates sufficient proceeds to pay the scheduled non-recourse balloon payments, we would lose our entire investment in the related property |
| On January 5, 2006, we announced that we informed the holder of the non-recourse mortgage on one of our properties located in Milpitas, California that we will no longer make debt service payments as a result of a vacancy caused by the expiration of the lease on this property in December 2005 |
| As a result of this decision, we recorded an impairment charge of approximately dlra12dtta1 million in the fourth quarter of 2005, which is equal to the difference between this property’s net book value (approximately dlra17dtta3 million) and our estimate of the property’s fair market value (approximately dlra5dtta2 million) |
| We intend to convey this property to the lender in a deed-in-lieu of foreclosure to satisfy the mortgage |
| Any adjustment made to the approximately dlra11dtta1 million owed by us, which is net of dlra0dtta9 million in escrow deposits, will be recognized as a debt satisfaction gain in the period it occurs |
| Uncertainties relating to lease renewals and re-letting of space |
| Upon the expiration of current leases for space located in our properties, we may not be able to re-let all or a portion of that space, or the terms of re-letting (including the cost of concessions to tenants) may be less favorable to us than current lease terms |
| If we are unable to re-let promptly all or a substantial portion of the space located in our properties or if the rental rates we receive upon re-letting are significantly lower than current rates, our net income and ability to make expected distributions to our shareholders will be adversely affected due to the resulting reduction in rent receipts and increase in our property operating costs |
| There can be no assurance that we will be able to retain tenants in any of our properties upon the expiration of their leases |
| Defaults on cross-collateralized properties |
| As of December 31, 2005, the mortgages on three sets of two properties, for an aggregate of six properties, are cross-collateralized: (1) Canton, Ohio and Spartansburg, South Carolina leased to Best Buy Co |
| Inc, (2) 730 N Black Branch Road, Elizabethtown, Kentucky and 750 N Black Branch Road, Elizabethtown, Kentucky leased to Dana Corporation, and (3) Dry Ridge, Kentucky and Owensboro, Kentucky leased to Dana Corporation |
| To the extent that any of our properties are cross-collateralized, any default by us under the mortgage note relating to one property will result in a default under the financing arrangements relating to any other property that also provides security for that mortgage note or is cross-collateralized with such mortgage note |
| 9 _________________________________________________________________ [50]Table of Contents Possible liability relating to environmental matters |
| Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, as an owner of real property, we may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under our properties, as well as certain other potential costs relating to hazardous or toxic substances |
| These liabilities may include government fines and penalties and damages for injuries to persons and adjacent property |
| These laws may impose liability without regard to whether we knew of, or were responsible for, the presence or disposal of those substances |
| This liability may be imposed on us in connection with the activities of an operator of, or tenant at, the property |
| The cost of any required remediation, removal, fines or personal or property damages and our liability therefore could exceed the value of the property and/or our aggregate assets |
| In addition, the presence of those substances, or the failure to properly dispose of or remove those substances, may adversely affect our ability to sell or rent that property or to borrow using that property as collateral, which, in turn, would reduce our revenues and ability to make distributions |
| A property can also be adversely affected either through physical contamination or by virtue of an adverse effect upon value attributable to the migration of hazardous or toxic substances, or other contaminants that have or may have emanated from other properties |
| Although our tenants are primarily responsible for any environmental damages and claims related to the leased premises, in the event of the bankruptcy or inability of any of our tenants to satisfy any obligations with respect to the property leased to that tenant, we may be required to satisfy such obligations |
| In addition, we may be held directly liable for any such damages or claims irrespective of the provisions of any lease |
| From time to time, in connection with the conduct of our business, and prior to the acquisition of any property from a third party or as required by our financing sources, we authorize the preparation of Phase I environmental reports and, when necessary, Phase II environmental reports, with respect to our properties |
| Based upon these environmental reports and our ongoing review of our properties, as of the date of this Annual Report, we are not aware of any environmental condition with respect to any of our properties that we believe would be reasonably likely to have a material adverse effect on us |
| There can be no assurance, however, that the environmental reports will reveal all environmental conditions at our properties or that the following will not expose us to material liability in the future: • the discovery of previously unknown environmental conditions; • changes in law; • activities of tenants; or • activities relating to properties in the vicinity of our properties |
| Changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of our tenants, which could adversely affect our financial condition or results of operations, including funds from operations |
| We carry comprehensive liability, fire, extended coverage and rent loss insurance on most of our properties, with policy specifications and insured limits that we believe are customary for similar properties |
| However, with respect to those properties where the leases do not provide for abatement of rent under any circumstances, we generally do not maintain rent loss insurance |
| In addition, there are certain types of losses, such as losses resulting from wars, terrorism or certain acts of God that generally are not insured because they are either uninsurable or not economically insurable |
| Should an uninsured loss or a loss in excess of insured limits occur, we could lose capital invested in a property, as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property |
| Any loss of these types would adversely affect our financial condition |
| Future terrorist attacks such as the attacks which occurred in New York City, Pennsylvania and Washington, DC on September 11, 2001, and the military conflicts such as the military actions taken by the United States and its allies in Afghanistan and Iraq, could have a material adverse effect on general economic conditions, consumer confidence and market liquidity |
| An increase in interest rates may increase our costs of borrowing on existing variable-rate indebtedness, leading to a reduction in our net income |
| These types of terrorist acts could also result in significant damages to, or loss of, our properties |
| Our lenders may require that we carry terrorism insurance even if we do not believe this insurance is necessary or cost effective |
| We may also be prohibited under the applicable lease from passing all or a portion of the cost of such insurance through to the tenant |
| Should an act of terrorism result in an uninsured loss or a loss in excess of insured limits, we could lose capital invested in a property, as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property |
| There are numerous commercial developers, real estate companies, financial institutions and other investors with greater financial resources than we have that compete with us in seeking properties for acquisition and tenants who will lease space in our properties |
| Due to our focus on net lease properties located throughout the United States, and because most competitors are locally and/or regionally focused, we do not encounter the same competitors in each market |
| Our competitors include other REITs, financial institutions, insurance companies, pension funds, private companies and individuals |
| This competition may result in a higher cost for properties that we wish to purchase |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments |
| If we fail to maintain the adequacy of our internal controls, as such standards may be modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 |
| Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and to maintain our qualification as a REIT and are important to helping prevent financial fraud |
| If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, our REIT qualification could be jeopardized, investors could lose confidence in our reported financial information, and the trading price of our shares could drop significantly |
| Interest rate fluctuations |
| It is likely that the public valuation of our common shares will be related primarily to the earnings that we derive from rental income with respect to our properties and not from the underlying appraised value of the properties themselves |
| As a result, interest rate fluctuations and capital market conditions can affect the market value of our common shares |
| For instance, if interest rates rise, the market price of our common shares may decrease because potential investors seeking a higher dividend yield than they would receive from our common shares may sell our common shares in favor of higher rate interest-bearing securities |
| Inability to carry out our growth strategy |
| Our growth strategy is based on the acquisition and development of additional properties, including acquisitions through co-investment programs such as joint ventures |
| In the context of our business plan, “development” generally means an expansion or renovation of an existing property or the acquisition of a newly constructed property |
| We typically provide a developer with a commitment to acquire a property upon completion of construction of a property and commencement of rent from the tenant |
| Our plan to grow through the acquisition and development of new properties could be 11 _________________________________________________________________ [52]Table of Contents adversely affected by trends in the real estate and financing businesses |
| The consummation of any future acquisitions will be subject to satisfactory completion of our extensive valuation analysis and due diligence review and to the negotiation of definitive documentation |
| We cannot be sure that we will be able to implement our strategy because we may have difficulty finding new properties at attractive prices that meet our investment criteria, negotiating with new or existing tenants or securing acceptable financing |
| If we are unable to carry out our strategy, our financial condition and results of operations could be adversely affected |
| Acquisitions of additional properties entail the risk that investments will fail to perform in accordance with expectations, including operating and leasing expectations |
| Redevelopment and new project development are subject to numerous risks, including risks of construction delays, cost overruns or force majure events that may increase project costs, new project commencement risks such as the receipt of zoning, occupancy and other required governmental approvals and permits, and the incurrence of development costs in connection with projects that are not pursued to completion |
| We anticipate that some of our acquisitions and developments will be financed using the proceeds of periodic equity or debt offerings, lines of credit or other forms of secured or unsecured financing that will result in a risk that permanent financing for newly acquired projects might not be available or would be available only on disadvantageous terms |
| If permanent debt or equity financing is not available on acceptable terms to refinance acquisitions undertaken without permanent financing, further acquisitions may be curtailed or cash available for distribution may be adversely affected |
| Concentration of ownership by certain investors |
| As of December 31, 2005, E Robert Roskind, the Chairman of our board of trustees, owned or controlled (including through trusts with respect to which he is a beneficiary) 712cmam567 common shares and 1cmam651cmam486 operating partnership units which are convertible, on a one-to-one basis, into our common shares, representing approximately 3dtta71prca of our fully-diluted outstanding voting securities |
| In 1999, we entered into a joint venture agreement with The Comptroller of the State of New York as trustee of The Common Retirement Fund, or “CRF,” to acquire properties |
| This joint venture and a separate partnership established by the partners has made investments in 13 (one of which was sold in 2005) properties for an aggregated capitalized cost of dlra409dtta1 million and no additional investments will be made unless they are made pursuant to a tax-free exchange |
| We have a 33^1/3prca equity interest in this joint venture |
| In December 2001, we formed a second joint venture with CRF to acquire additional properties in an aggregate amount of up to approximately dlra560dtta0 million |
| Under these joint venture agreements, CRF has the right to sell its equity position in the joint ventures to us |
| In the event CRF exercises its right to sell its equity interest in either joint venture to us, we may, at our option, either issue common shares to CRF for the fair market value of CRF’s equity position, based upon a formula contained in the respective joint venture agreement, or pay cash to CRF equal to 110prca of the fair market value of CRF’s equity position |
| We have the right not to accept any property in the joint ventures (thereby reducing the fair market value of CRF’s equity position) that does not meet certain underwriting criteria |
| In addition, the joint venture agreements contain a mutual buy-sell provision in which either CRF or we can force the sale of any property |
| In October 2003, we entered into a joint venture agreement with CLPF-LXP/Lion Venture GP, LLC, or “Clarion,” which was expanded in September 2004, to acquire properties in an aggregate amount of up to approximately dlra460dtta0 million |
| This joint venture has made investments in 16 properties for an aggregate capitalized cost of dlra458dtta7 and no additional investments will be made unless they are made pursuant to a tax-free exchange or upon the mutual agreement of Clarion and us |
| We have a 30prca equity interest in this joint venture |
| Under the joint venture agreement, Clarion has the right to sell its equity position in the joint venture to us |
| In the event Clarion exercises its right to sell its equity interest in the joint venture to us, we may, at our option, either issue common shares to Clarion for the fair market value of Clarion’s equity position, based upon a formula contained in the partnership agreement, or pay cash to Clarion equal to 100prca of the fair market value of Clarion’s equity position |
| We have the right not to accept any property in the joint venture (thereby reducing the fair market value of Clarion’s equity position) that does not meet certain underwriting 12 _________________________________________________________________ [53]Table of Contents criteria |
| In addition, the joint venture agreement contains a mutual buy-sell provision in which either Clarion or we can force the sale of any property |
| In June 2004, we entered in a joint venture agreement with the Utah State Retirement Investment Fund, or “Utah,” which was expanded in December 2004, to acquire properties in an aggregate amount of up to approximately dlra345dtta0 million |
| As of December 31, 2005, this joint venture owned 14 properties for an aggregate capitalized cost of dlra241dtta1 million |
| We have a 30prca equity interest in this joint venture |
| Under the joint venture agreement, Utah has the right to sell its equity position in the joint venture to us |
| This right becomes effective upon the occurrence of certain conditions |
| In the event Utah exercises its right to sell its equity interest in the joint venture to us, we may, at our option, either issue common shares to Utah for the fair market value of Utah’s equity position, based upon a formula contained in the joint venture agreement, or pay cash to Utah equal to 100prca of the fair market value of Utah’s equity position |
| We have the right not to accept any property in the joint venture (thereby reducing the fair market value of Utah’s equity position) that does not meet certain underwriting criteria |
| In addition, the joint venture agreement contains a mutual buy-sell provision in which either Utah or we can force the sale of any property |
| Our future growth will depend in part on our ability to raise additional capital |
| If we raise additional capital through the issuance of equity securities, the interests of holders of our common shares could be diluted |
| Likewise, our board of trustees is authorized to cause us to issue preferred shares in one or more series, the holders of which would be entitled to dividends and voting and other rights as our board of trustees determines, and which could be senior to or convertible into our common shares |
| Accordingly, an issuance by us of preferred shares could be dilutive to or otherwise adversely affect the interests of holders of our common shares |
| Our Series C Preferred Shares may be converted by the holder, at its option, into our common shares at a current conversion rate of 1dtta8643 common shares per dlra50dtta00 liquidation preference, which is equivalent to an initial conversion price of approximately dlra26dtta82 per common share (subject to adjustment in certain events) |
| Depending upon the number of Series C Preferred Shares being converted at one time, a conversion of Series C Preferred Shares could be dilutive to or otherwise adversely affect the interests of holders of our common shares |
| Under our joint venture agreements, our joint venture partners have the right to sell their equity position in the applicable joint venture to us |
| In the event one of our joint venture partners exercises its right to sell its equity interest in the applicable joint venture to us, we may, at our option, either issue our common shares to the exercising joint venture partner for the fair market value of the exercising joint venture partner’s equity position, based upon a formula contained in the applicable joint venture agreement, or pay cash to the exercising joint venture partner equal to either (i) 110prca of the fair market value of the exercising joint venture partner’s equity position with respect to our joint ventures with CRF, or (ii) 100prca of the fair market value of the exercising joint venture partner’s equity position with respect to Lion and Utah |
| An exercise by one or more of our joint venture partners and our election to satisfy an exercise with our common shares could be dilutive to or otherwise adversely affect the interests of holders of our common shares |
| As of December 31, 2005, an aggregate of approximately 5cmam760cmam571 common shares are issuable upon (i) the exchange of all outstanding units of limited partnership interests in our operating partnership subsidiaries (5cmam720cmam071 common shares) and (ii) the exercise of outstanding options under our equity-based award plans (40cmam500 common shares) |
| Depending upon the number of such securities exchanged or exercised at one time, an exchange or exercise of such securities could be dilutive to or otherwise adversely affect the interests of holders of our common shares |
| Limited control over joint venture investments |
| Our joint venture investments are a significant portion of our assets and are also a significant component of our growth strategy |
| In particular, as of December 31, 2005, 63 of our 189 properties representing 14dtta6 million of our total of approximately 40dtta2 million net rentable square feet of space was owned by joint ventures in which we have an ownership interest ranging from 25prca to 40prca |
| For the year ended December 31, 2005, our joint venture investments accounted for approximately dlra6dtta2 million of equity in earnings, while our gross revenues totaled approximately dlra197dtta1 million (approximately dlra5dtta3 million of which represents advisory fees earned from our management of the joint ventures) |
| As 13 _________________________________________________________________ [54]Table of Contents of December 31, 2005, we had approximately dlra2dtta2 billion in consolidated total assets of which dlra191dtta1 million was investment in joint ventures |
| Our joint venture investments may involve risks not otherwise present for investments made solely by us, including the possibility that our joint venture partner might, at any time, become bankrupt, have different interests or goals than we do, or take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT Other risks of joint venture investments include impasse on decisions, such as a sale, because neither we nor a joint venture partner have full control over the joint venture |
| Also, there is no limitation under our organizational documents as to the amount of funds that may be invested in joint ventures |
| Our unsecured revolving credit facility restricts the amount of capital that we can invest in joint ventures |
| Joint venture investments may conflict with our ability to make attractive investments |
| Under the terms of our active joint venture with CRF, we are required to first offer to the joint venture 50prca of our opportunities to acquire office and industrial properties requiring a minimum investment of dlra15dtta0 million which are net leased primarily to investment grade tenants for a minimum term of ten years, are available for immediate delivery and satisfy other specified investment criteria |
| Similarly, under the terms of our joint venture with Utah, unless 75prca of Utah’s capital commitment is funded, we are required to first offer to the joint venture all of our opportunities to acquire certain office, bulk warehouse and distribution properties requiring an investment of dlra8dtta0 million to dlra30dtta0 million which are net leased primarily to non-investment grade tenants for a minimum term of at least nine years and satisfy other specified investment criteria, subject also to our obligation to first offer such opportunities to our joint venture with CRF On September 12, 2005, our board of trustees adopted a conflicts policy with respect to us and LSAC In connection with a private offering by LSAC, we contributed to LSAC our indirect ownership interests in four real estate assets and financing deposits |
| In exchange, LSAC issued to us shares of its common stock having an aggregate value of approximately dlra33dtta2 million based on the offering price in the private offering |
| Under the conflicts policy we are required to first offer to LSAC, subject to the first offer rights of CRF and Utah, all of our opportunities to acquire (i) general purpose real estate net leased to unrated or below investment grade credit tenants, (ii) net leased special purpose real estate located in the United States, such as medical buildings, theaters, hotels and auto dealerships, (iii) net leased properties located in the Americas outside of the United States with rent payments denominated in United States dollars which are typically leased to US companies, (iv) specialized facilities in the United States supported by net leases or other contracts where a significant portion of the facility’s value is in equipment or other improvements, such as power generation assets and cell phone towers, and (v) net leased equipment and major capital assets that are integral to the operations of LSAC’s tenants and LSAC’s real estate investments |
| To the extent that a specific investment opportunity, which is not otherwise subject to a first offer obligation to our joint ventures with CRF or Utah, is determined to be suitable to us and LSAC, the investment opportunity will be allocated to LSAC Where full allocation to LSAC is not reasonably practicable (for example, if LSAC does not have sufficient capital), we may allocate a portion of the investment to ourselves after determining in good faith that such allocation is fair and reasonable |
| We will apply the foregoing allocation procedures between LSAC and any investment funds or programs, companies or vehicles or other entities that we control which have overlapping investment objectives with LSAC Only if all of our joint venture partners elect not to approve the applicable joint venture’s pursuit of an acquisition opportunity or the applicable exclusivity conditions have expired may we pursue the opportunity directly |
| As a result of the foregoing rights of first offer, we may not be able to make attractive acquisitions directly and may only receive a minority interest in such acquisitions through our minority interest in these joint ventures |
| Conflicts of interest with respect to sales and refinancings |
| Two of our trustees and officers own limited partnership interests in our operating partnerships and, as a result, may face different and more adverse tax consequences than our other shareholders will if we sell our properties or reduce our mortgage indebtedness on our properties |
| Those individuals may, therefore, have different objectives than our other shareholders regarding the appropriate pricing and timing of any sale of such properties or reduction of mortgage debt |
| 14 _________________________________________________________________ [55]Table of Contents Accordingly, there may be instances in which we may not sell a property or pay down the debt on a property even though doing so would be advantageous to our other shareholders |
| In the event of an appearance of a conflict of interest, the conflicted trustee or officer must recuse himself or herself from any decision making or seek a waiver of our Code of Business Conduct and Ethics |
| Our ability to change our portfolio is limited because real estate investments are illiquid |
| Equity investments in real estate are relatively illiquid and, therefore, our ability to change our portfolio promptly in response to changed conditions will be limited |
| Our board of trustees may establish investment criteria or limitations as it deems appropriate, but currently does not limit the number of properties in which we may seek to invest or on the concentration of investments in any one geographic region |
| We could change our investment, disposition and financing policies without a vote of our shareholders |
| Failure to qualify as a REIT We believe that we have met the requirements for qualification as a REIT for federal income tax purposes beginning with our taxable year ended December 31, 1993, and we intend to continue to meet these requirements in the future |
| However, qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the “Code”), for which there are only limited judicial or administrative interpretations |
| No assurance can be given that we have qualified or will remain qualified as a REIT The Code provisions and income tax regulations applicable to REITs are more complex than those applicable to corporations |
| The determination of various factual matters and circumstances not entirely within our control may affect our ability to continue to qualify as a REIT In addition, no assurance can be given that legislation, regulations, administrative interpretations or court decisions will not significantly change the requirements for qualification as a REIT or the federal income tax consequences of such qualification |
| If we do not qualify as a REIT, we would not be allowed a deduction for distributions to shareholders in computing our net taxable income |
| In addition, our income would be subject to tax at the regular corporate rates |
| We also could be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost |
| Cash available for distribution to our shareholders would be significantly reduced for each year in which we do not qualify as a REIT In that event, we would not be required to continue to make distributions |
| Although we currently intend to continue to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause us, without the consent of the shareholders, to revoke the REIT election or to otherwise take action that would result in disqualification |
| Distribution requirements imposed by law limit our flexibility |
| To maintain our status as a REIT for federal income tax purposes, we are generally required to distribute to our shareholders at least 90prca of our taxable income for that calendar year |
| Our taxable income is determined with regard to the deduction for dividends paid and by excluding net capital gains |
| To the extent that we satisfy the distribution requirement, but distribute less than 100prca of our taxable income, we will be subject to federal corporate income tax on our undistributed income |
| In addition, we will incur a 4prca nondeductible excise tax on the amount, if any, by which our distributions in any year are less than the sum of (i) 85prca of our ordinary income for that year, (ii) 95prca of our capital gain net income for that year and (iii) 100prca of our undistributed taxable income from prior years |
| We intend to continue to make distributions to our shareholders to comply with the distribution requirements of the Code and to reduce exposure to federal income and nondeductible excise taxes |
| Differences in timing between the receipt of income and the payment of expenses in determining our income and the effect of required debt amortization payments could require us to borrow funds on a short-term basis in order to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT Ownership limitations |
| For us to qualify as a REIT for federal income tax purposes, among other requirements, not more than 50prca of the value of our capital shares may be owned, directly or indirectly, by five or fewer individuals (as defined for federal income tax purposes to include certain entities) during the last half of each taxable year, and these capital shares must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year (in each case, other than the first such year for which a REIT election is made) |
| Our declaration of trust includes certain restrictions regarding transfers of our capital shares and ownership limits |
| 15 _________________________________________________________________ [56]Table of Contents Actual or constructive ownership of our capital shares in excess of the share ownership limits contained in our declaration of trust would cause the violative transfer or ownership to be void or cause the shares to be transferred to a charitable trust and then sold to a person or entity who can own the shares without violating these limits |
| As a result, if a violative transfer were made, the recipient of the shares would not acquire any economic or voting rights attributable to the transferred shares |
| Additionally, the constructive ownership rules for these limits are complex and groups of related individuals or entities may be deemed a single owner and consequently in violation of the share ownership limits |
| These restrictions and limits may not be adequate in all cases, however, to prevent the transfer of our capital shares in violation of the ownership limitations |
| The ownership limits discussed above may have the effect of delaying, deferring or preventing someone from taking control of our company, even though a change of control could involve a premium price for your common shares or otherwise be in your best interest |
| Adverse legislative or regulatory tax changes |
| At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended |
| Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a shareholder |
| Recently enacted legislation reduces individual tax rates applicable to certain corporate dividends |
| REIT dividends generally would not be eligible for reduced rates (other than dividends from LSAC and other taxable REIT subsidiaries that are distributed by us) because a REIT’s income generally is not subject to corporate level tax |
| As a result, investment in non-REIT corporations may be relatively more attractive than investment in REITs |
| This could adversely affect the market price of our shares |
| Restrictions on a potential change of control |
| Our board of trustees is authorized by our declaration of trust to establish and issue one or more series of preferred shares without shareholder approval |
| As of the date of this Annual Report, we had outstanding 3cmam160cmam000 Series B Cumulative Redeemable Preferred Shares that we issued in June 2003 and 3cmam100cmam000 Series C Cumulative Convertible Preferred Shares that we issued in December 2004 and January 2005 |
| Both our Series B and Series C Preferred Shares include provisions that may deter a change of control of us |
| The establishment and issuance of shares of our existing series of preferred shares or a future series of preferred shares could make more difficult a change of control of us |
| In addition, we have entered into employment agreements with six of our executive officers which provide that, upon the occurrence of a change in control of us (including a change in ownership of more than 50prca of the total combined voting power of our outstanding securities, the sale of all or substantially all of our assets, dissolution of our company, the acquisition, except from us, of 20prca or more of our voting shares or a change in the majority of our board of trustees), those executive officers would be entitled to severance benefits based on their current annual base salaries and recent annual bonuses, as defined in the employment agreements |
| The provisions of these agreements could deter a change of control of us |
| Our board of trustees may change our investment policy without shareholders’ approval |
| Subject to our fundamental investment policy to maintain our qualification as a REIT, our board of trustees will determine our investment and financing policies, our growth strategy and our debt, capitalization, distribution, acquisition, disposition and operating policies |
| Our board of trustees may revise or amend these strategies and policies at any time without a vote by our shareholders |
| Accordingly, our shareholders’ control over changes in our strategies and policies is limited to the election of trustees, and changes made by our board of trustees may not serve the interests of our shareholders and could adversely affect our financial condition or results of operations, including our ability to distribute cash to shareholders or qualify as a REIT |