| NEW PLAN EXCEL REALTY TRUST INC ITEM 1A Risk Factors Overview Set forth below are the risks that we believe are material to investors who purchase or own our securities that are not otherwise described in this Annual Report on Form 10-K We have separated the risks into three groups: · risks related to our properties and business; · risks related to our organization and structure; and · tax risks |
| The occurrence of any of the following factors or circumstances could adversely affect our cash flows, financial condition, results of operations and/or our ability to meet our operating expenses, including debt service and capital expenditure obligations, and make distributions to our stockholders, any or all of which could in turn cause a decline in the market value of our securities |
| Risks Related to Our Properties and Business The economic performance and value of our properties are subject to risks associated with real estate assets and with the real estate industry |
| As a real estate company, we are subject to all of the risks associated with owning and operating real estate, including: · changes in the national, regional and local economic climate, particularly in Texas, where 68 of our 311 wholly-owned properties, and 89 of our 476 total properties, are located as of December 31, 2005; · local conditions, including an oversupply of space in properties similar to those that we own, or a reduction in demand for properties similar to those that we own; · the attractiveness of our properties to tenants; · the financial stability of tenants, including the ability of tenants to pay rent; · competition from other available properties; · changes in market rental rates; · the need to periodically fund the costs to repair, renovate and re-let space; · changes in operating costs, including costs for maintenance, insurance and real estate taxes; · earthquakes, tornados, hurricanes and other natural disasters, civil unrest, terrorist acts or acts of war, which may result in uninsured or underinsured losses; · the fact that the expenses of owning and operating properties are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the properties; and · changes in laws and governmental regulations, including those governing usage, zoning, the environment and taxes |
| Downturns in the retailing industry likely will have a direct impact on our performance |
| Our properties consist of community and neighborhood shopping centers and other retail properties |
| Our performance therefore is linked to economic conditions in the market for retail space generally, and a decrease in the demand for retail space may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio |
| The market for retail space has been or could be 12 ______________________________________________________________________ adversely affected by weakness in the national, regional and local economies, the adverse financial condition of some large 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 and the Internet |
| To the extent that any of these conditions occur, they are likely to impact market rents for retail space and could adversely affect our business |
| Failure by any anchor tenant with leases in multiple locations to make rental payments to us, because of a deterioration of its financial condition or otherwise, could seriously harm our performance |
| Our performance depends on our ability to collect rent from tenants |
| At any time, our tenants may experience a downturn in their business that may significantly weaken their financial condition |
| As a result, our tenants may delay a number of lease commencements, decline to extend or renew a number of leases upon expiration, fail to make rental payments when due under a number of leases, close a number of stores or declare bankruptcy |
| Any of these actions could result in the termination of the tenant’s leases, or expiration of existing leases without renewal, and the loss of rental income attributable to the terminated or expired leases |
| In addition, lease terminations by an anchor tenant or a failure by that anchor tenant to occupy the premises could result in lease terminations or reductions in rent by other tenants in the same shopping centers under the terms of some leases |
| In that event, we may be unable to re-lease the vacated space at attractive rents or at all |
| The occurrence of any of the situations described above, particularly if it involves a substantial tenant with leases in multiple locations, could seriously harm our performance |
| As of December 31, 2005, our largest tenants were The Kroger Co, Wal-Mart Stores and Sears Holdings Corp, the scheduled ABR for which, including our pro rata share of ABR generated by properties owned by unconsolidated joint ventures, represented 4dtta1prca, 2dtta5prca and 2dtta4prca, respectively, of our total ABR As of December 31, 2005, The Kroger Co, Wal-Mart Stores and Sears Holdings Corp, represented 4dtta3prca, 2dtta6prca and 2dtta5prca, respectively, of our scheduled ABR, excluding our pro rata share of ABR generated by properties owned by unconsolidated joint ventures |
| We may be unable to collect balances due from any tenants in bankruptcy |
| We cannot assure you that any tenant that files for bankruptcy protection will continue to pay us rent |
| A bankruptcy filing by or relating to one of our tenants or a lease guarantor would bar all efforts by us to collect pre-bankruptcy debts from that tenant or the lease guarantor, or their property, unless we receive an order permitting us to do so from the bankruptcy court |
| A tenant or lease guarantor bankruptcy could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums |
| If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full |
| However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages |
| Any unsecured claim we hold may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims, and there are restrictions under bankruptcy laws that limit the amount of the claim we can make if a lease is rejected |
| As a result, it is likely that we will recover substantially less than the full value of any unsecured claims we hold from a bankrupt tenant |
| We face considerable competition in the leasing market and may be unable to renew leases or re-let space as leases expire |
| We compete with a number of other companies in providing leases to prospective tenants and in re-letting space to current tenants upon expiration of their respective leases |
| If our tenants decide not to renew or extend their leases upon expiration, we may not be able to re-let the space |
| Even if the tenants do renew or we can re-let the space, the terms of renewal or re-letting, including the cost of required renovations or concessions to tenants, may be less favorable or more costly than current lease terms or than expectations for the space |
| As of December 31, 2005, and including our pro rata share of properties owned by unconsolidated joint ventures, leases were scheduled to expire on a total of approximately 11dtta0prca of the space at our properties through 2006 |
| We may be unable to promptly renew the leases or re-let this space, or the rental rates upon renewal or re-letting may be significantly lower than expected rates |
| 13 ______________________________________________________________________ Future acquisitions of properties may not yield the returns we expect, may result in disruptions to our business and may strain management resources |
| We intend to continue acquiring select community and neighborhood shopping centers |
| In deciding whether to acquire a particular property, we make certain assumptions regarding the expected future performance of that property |
| Newly acquired properties may fail to perform as expected |
| Our management may underestimate the costs necessary to bring acquired properties up to standards established for their intended market position, which may result in the properties’ failure to achieve projected returns |
| In particular, we may acquire large portfolios of community and neighborhood shopping centers |
| Large portfolio acquisitions pose risks for our ongoing operations in that: · we may not achieve expected cost savings and operating efficiencies; · management attention may be diverted to the integration of acquired properties; · the acquired properties may not perform as well as we anticipate due to various factors, including changes in macro-economic conditions and the demand for retail space; and · we may experience difficulties and incur expenses related to the assimilation and retention of employees that we have hired or intend to hire to manage and operate acquired properties |
| We face significant competition for acquisitions of real properties, which may reduce the number of acquisition opportunities available to us and increase the costs of these acquisitions |
| We compete for acquisitions of, and investments in, properties and real estate companies with an indeterminate number of investors, including investors with access to significant capital such as domestic and foreign corporations and financial institutions, publicly traded and privately held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds |
| The current market for acquisitions continues to be extremely competitive |
| This competition may increase the demand for the types of properties in which we typically invest and, therefore, reduce the number of suitable acquisition opportunities available to us and increase the prices paid for such acquisition properties |
| Current and future development and redevelopment of real estate properties may not yield expected returns and may strain management resources |
| We are actively involved in several ongoing redevelopment projects, and have become more actively involved in development projects |
| We also expect to invest in additional development and redevelopment projects in the future |
| Redevelopment and new development of properties are subject to a number of risks, including the following: · abandonment of development activities after expending resources to determine feasibility; · construction and/or lease-up delays; · cost overruns, including construction costs that exceed our original estimates; · failure to achieve expected occupancy and/or rent levels within the projected time frame, if at all; and · delays in and the inability to obtain necessary zoning, occupancy, land use and other governmental permits, and changes in zoning and land use laws |
| If any of these problems occur, overall project costs may significantly exceed the costs that were estimated when the project was originally undertaken, which will result in reduced returns, or even losses, from such investments |
| In addition, delays in the completion of a development or redevelopment project may provide various tenants the right to withdraw from a property |
| 14 ______________________________________________________________________ Our current and future joint venture investments could be adversely affected by a lack of sole decision-making authority and our reliance on joint venture partners’ financial condition |
| We have invested in some cases as a co-venturer or partner in the development or redevelopment of new properties, instead of developing projects directly |
| These investments involve risks not present in a wholly owned development or redevelopment project, including the following: · in these investments, we do not have exclusive control over the development, financing, leasing, management and other aspects of the project, which may prevent us from taking actions that are opposed by our joint venture partners; · we may be required to obtain prior consent from our co-venturers or partners for a sale or transfer to a third party of our interests in the joint venture, which restricts our ability to dispose of our interest in the joint venture; · our co-venturers or partners might have interests or goals that are inconsistent with our interests or goals, and may be in a position to take actions contrary to our interests or otherwise impede our objectives; · our co-venturers or partners also might become insolvent or bankrupt, which may delay construction or development of a property or increase our financial commitment to the joint venture; · such investments have the potential risk of impasse on certain major decisions, such as a sale, because neither we nor our partner or co-venturer typically would have full control over the joint venture; · any disputes that may arise between us and our joint venture partners could result in litigation or arbitration that could increase our expenses and distract our officers and/or directors from focusing their time and effort on our business; and · we might be liable for the actions of our joint venture partners in certain circumstances, and the activities of a joint venture could adversely affect our ability to qualify as a REIT, even though we do not control the joint venture |
| As of December 31, 2005, we had approximately dlra95dtta5 million of investments in and advances to eleven unconsolidated joint ventures that own an aggregate of 165 properties |
| The largest of these investments is our investment in the Galileo America LLC venture |
| We have a 5prca equity interest in this joint venture, which interest was acquired on August 10, 2005 in conjunction with our sale of an aggregate of 69 community and neighborhood shopping centers to Galileo America LLC Our investment in this joint venture is subject to the risks described above for jointly owned investments |
| As of December 31, 2005, this joint venture was comprised of 126 stabilized assets |
| Real estate property investments are illiquid, and therefore we may not be able to dispose of properties when appropriate or on favorable terms |
| Real estate property investments generally cannot be disposed of quickly |
| In addition, the federal tax code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies |
| In particular, the tax laws applicable to REITs require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales or properties that otherwise would be in our best interest |
| Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms, which may adversely affect our financial position |
| Some potential losses are not covered by insurance, so we could lose a significant portion of our investment in a property |
| We believe the policy specifications and insured limits of these policies are adequate and appropriate given the relative risk of loss, the cost of the coverage and industry practice |
| 15 ______________________________________________________________________ There are, however, certain types of losses, including lease and other contract claims, acts of war and acts of God, and, in some cases, flooding, that generally are not insured, either because such coverage is not available or is not available at commercially reasonable rates |
| If we experience a loss which is uninsured or which exceeds policy limits, we could lose a significant portion of the capital we have invested in the damaged property, as well as the anticipated future revenue from the property |
| Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it impractical or undesirable to use insurance proceeds to replace a property after it has been damaged or destroyed |
| 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 |
| There can be no assurance as to future costs and the scope of coverage that may be available under insurance policies |
| Although we believe our properties are adequately covered by insurance, we cannot predict at this time if we will be able to obtain full coverage at a reasonable cost in the future |
| The costs associated with property and casualty renewals may be higher than anticipated |
| We have substantial scheduled debt payments, which will result in significant debt service obligations, and we may not be able to refinance debt at maturity |
| As of December 31, 2005, the total principal amount of our outstanding debt was approximately dlra1dtta6 billion |
| Therefore, our business is subject to risks normally associated with debt financing, including the risk that our cash flow will be insufficient to pay expected dividends to stockholders and meet required payments of principal and interest |
| We are also subject to the risk that we may not be able to refinance existing debt, which in virtually all cases requires substantial principal payments at maturity, and, even if we can, the terms of a refinancing might not be as favorable as the terms of existing debt |
| If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, including new equity capital, cash flow may not be sufficient in all years to repay all maturing debt at the relevant time(s) and we may be forced to dispose of properties on disadvantageous terms |
| In addition, prevailing interest rates, our results of operations and financial condition, our senior debt ratings or other factors at the time of refinancing, including the possible reluctance of lenders to make loans, may result in higher interest rates and increased interest expense, which could adversely affect our cash flow and our ability to pay distributions to stockholders |
| Our degree of leverage could limit our ability to obtain additional financing and adversely affect our business and financial condition |
| Our organizational documents do not contain any limitation on the incurrence of debt |
| The degree of our leverage could have important consequences, including: · requiring us to dedicate a substantial portion of our funds from operations to servicing our debt, thereby reducing the amount available for distributions; · affecting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes; and · making us more vulnerable to economic and industry downturns |
| In addition, as a result of the financial and operating covenants described below, our leverage could reduce our flexibility in conducting our business and planning for, or reacting to, changes in our business and in the real estate industry |
| We currently have variable rate debt obligations, which could be substantial in the future and may impede our operating performance and put us at a competitive disadvantage |
| As of December 31, 2005, we had approximately dlra304dtta3 million of outstanding floating rate debt, including the impact of swaps, maturing at various times up to September 1, 2011 |
| In addition, we could increase the amount of our outstanding variable rate debt in the future in part by borrowing under the Revolving Facility, which bears interest at a variable rate and had approximately dlra285dtta0 million available for draw as of December 31, 2005 |
| The rates on our variable rate indebtedness increase when interest rates increase |
| Interest rates are currently low relative to historical levels and may increase significantly in the future |
| Increases in interest rates, or the 16 ______________________________________________________________________ loss of the benefits of any hedging agreements that we might have, would increase our interest expense, which would adversely affect cash flow and our ability to service debt and pay dividends to stockholders |
| Hedging agreements enable us to convert floating rate liabilities to fixed rate liabilities or fixed rate liabilities to floating rate liabilities |
| Hedging agreements expose us to the risk that the counterparties to such agreements may not perform, even though the counterparties to hedging agreements that we enter into are major financial institutions, which could increase our exposure to fluctuating interest rates |
| In addition, hedging agreements may involve costs, such as transaction fees or breakage costs, if we terminate them |
| As of December 31, 2005, we were a party to two hedging agreements |
| As discussed above, we may borrow additional money with floating interest rates in the future |
| Increases in interest rates, or the loss of the benefits of our existing or future hedging agreements, would increase our interest expense, which would adversely affect cash flow and our ability to service our debt |
| Future increases in interest rates will increase our interest expense as compared to the fixed rate debt underlying our hedging agreements and could result in our making payments to unwind such agreements |
| Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt |
| As of December 31, 2005, we had approximately dlra419dtta8 million of mortgage debt outstanding, excluding the impact of unamortized premiums |
| If a property or group of properties is mortgaged to secure payment of debt and we are unable to meet mortgage payments, the holder of the mortgage or lender could foreclose on the property, resulting in loss of our investment |
| Also, certain of these mortgages contain customary negative covenants which, among other things, limit our ability, without the prior consent of the lender, to further mortgage the property, to enter into new leases or materially modify existing leases, and to discontinue insurance coverage |
| Our financial covenants may restrict our operating and acquisition activities |
| The Revolving Facility, the Secured Term Loan and the indentures under which our senior unsecured debt is issued contain certain financial and operating covenants, including, among other things, certain coverage ratios, as well as limitations on our ability to incur secured and unsecured debt, make dividend payments, sell all or substantially all of our assets and engage in mergers and consolidations and certain acquisitions |
| These covenants may restrict our ability to pursue certain business initiatives or certain acquisition transactions |
| In addition, failure to meet any of these covenants, including the financial coverage ratios, could cause an event of default under and/or accelerate some or all of our indebtedness, which would have a material adverse effect on us |
| A downgrade in our credit rating could negatively impact us |
| The floating rates of interest applicable to much of our debt, including debt under our credit facilities, are determined based on the credit ratings of our debt provided by independent rating agencies |
| Thus, if these credit ratings are downgraded, our interest expense will be, and our ability to raise additional debt may be, negatively impacted |
| Environmental problems that exist at some of our properties could result in significant unexpected costs |
| We are subject to federal, state and local environmental regulations that apply generally to the ownership of real property and the operations conducted on real property |
| Under various federal, state and local laws, ordinances and regulations, we may be considered an owner or operator of real property or may have arranged for the disposal or treatment of hazardous or toxic substances or petroleum product releases at a property and, therefore, may become liable for the costs of removal or remediation of certain hazardous substances released on or in our property or disposed of by us, as well as certain other potential costs which could relate to hazardous or toxic substances (including governmental fines and injuries to persons and property) |
| Such liability may be imposed whether or not we knew of, or were responsible for, the presence of these hazardous or toxic substances |
| As is common with community and neighborhood shopping centers, many of our properties had or have on-site dry cleaners and/or on-site gasoline facilities |
| These operations could potentially result in environmental contamination at the properties |
| The cost of 17 ______________________________________________________________________ investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such substances, may adversely affect our ability to sell or rent such property or to borrow using such property as collateral |
| We are aware that soil and groundwater contamination exists at some of our properties |
| The primary contaminants of concern at these properties include perchloroethylene and trichloroethylene (associated with the operations of on-site dry cleaners) and petroleum hydrocarbons (associated with the operations of on-site gasoline facilities) |
| While we do not expect the environmental conditions at our properties, considered as a whole, to have a material adverse effect on us, there can be no assurance that this will be the case |
| Further, no assurance can be given that any environmental studies performed have identified or will identify all material environmental conditions, that any prior owner of the properties did not create a material environmental condition not known to us or that a material environmental condition does not otherwise exist with respect to any of our properties |
| Changes in market conditions could adversely affect the market price of our publicly traded securities |
| As with other publicly traded securities, the market price of our publicly traded securities depends on various market conditions, which may change from time to time |
| Among the market conditions that may affect the market price of our publicly traded securities are the following: · the extent of institutional investor interest in the company; · the reputation of REITs generally and the reputation of REITs with portfolios similar to ours; · the attractiveness of the securities of REITs in comparison to securities issued by other entities (including securities issued by other real estate companies); · our financial condition and performance; · the market’s perception of our growth potential and potential future cash dividends; · changes in our revenues or earnings estimates or recommendations by securities analysts; · publication of research reports about us or our industry by securities analysts; · an increase in market interest rates, which may lead prospective investors to demand a higher distribution rate in relation to the price paid for our shares; · strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy; · the passage of legislation or other regulatory developments that adversely affect us or our industry; · speculation in the press or investment community; · actions by institutional shareholders or hedge funds; and · general economic and financial market conditions |
| Sales of a substantial number of shares of our stock, or the perception that such sales could occur, also could adversely affect prevailing market prices for our stock |
| These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate |
| In addition to the possibility that we may sell shares of our stock in a public offering at any time, we also may issue shares of common stock upon redemption of units of partnership interest held by third parties in affiliated partnerships that we control, as well as in connection with grants of restricted stock or upon exercise of stock options that we grant to our officers and employees |
| All of these shares will be available for sale in the public markets from time to time |
| 18 ______________________________________________________________________ Risks Related to Our Organization and Structure Provisions of the company’s charter and bylaws could inhibit changes in control of the company, and could prevent stockholders from obtaining a premium price for our common stock |
| A number of provisions of our charter and bylaws may delay, defer or prevent a change in control of the company or other transactions that could provide stockholders with a premium over the then-prevailing market price of our common stock or that might otherwise be in the best interests of the stockholders |
| These provisions include a staggered board of directors, advance notice requirements for stockholder proposals and our share ownership limit described below |
| In addition, our charter permits our Board of Directors to issue up to 25cmam000cmam000 shares of preferred stock, having those preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms or conditions of redemption as determined by our Board of Directors |
| Thus, any future series of our preferred stock may have voting or other provisions that could delay or prevent a change in control or other transaction that might involve a premium over the then-prevailing market price of our common stock or that might otherwise be in the best interests of the stockholders |
| Our Board of Directors could adopt the limitations available under Maryland law on changes in control that could prevent transactions in the best interests of stockholders |
| Certain provisions of Maryland law may have the effect of inhibiting a third party from making an acquisition proposal or of impeding a change in control under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including the following: · “business combination moratorium/fair price” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10prca or more of the voting power of our outstanding shares or an affiliate thereof) for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter a business combination with an interested stockholder must be approved by two super-majority stockholder votes unless, among other conditions, our common stockholders receive a minimum price for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares of common stock; and · “control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares” from a party other than the issuer) 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, and are subject to redemption in certain circumstances |
| Our Board of Directors has opted out of these provisions of Maryland law |
| As a result, these provisions will not apply to a business combination or control share acquisition involving the company |
| Our Board of Directors may, however, repeal these elections in most cases and cause the company to become subject to these provisions in the future |
| Our share ownership limit may discourage a takeover of the company and depress our stock price |
| To facilitate maintenance of our REIT qualification and for other strategic reasons, our charter generally prohibits any person from acquiring or holding shares of our preferred and common stock in excess of 9dtta8prca (by value or by number of shares, whichever is more restrictive) of the outstanding shares of each class or series of our stock |
| Our Board of Directors may exempt a person from this ownership limit under specified conditions |
| Absent an exemption or a waiver, shares of stock that are purportedly transferred in excess of the ownership limit will be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries, and the purported transferee will not acquire any rights in such shares |
| This 19 ______________________________________________________________________ ownership limit could delay or prevent a change in control of the company and, therefore, could adversely affect the stockholders’ ability to realize a premium over the then-prevailing market price for our shares |
| We are dependent on external sources of capital, which may not be available |
| To qualify as a REIT, we must, among other things, distribute to our stockholders each year at least 90prca of our REIT taxable income (excluding any net capital gains) |
| In order to eliminate federal income tax, we will be required to distribute annually 100prca of our net taxable income (including capital gains) |
| Because of these distribution requirements, we likely will not be able to fund all future capital needs, including capital for property development and acquisitions, with income from operations |
| We therefore will have to rely on third-party sources of capital, which may or may not be available on favorable terms or at all |
| Our access to third-party sources of capital depends on a number of things, including the market’s perception of our growth potential and our current and potential future earnings and our ability to continue to qualify as a REIT for federal income tax purposes |
| Tax Risks Failure of the company to qualify as a REIT would have serious adverse consequences to stockholders |
| We believe that the company has qualified for taxation as a REIT for federal income tax purposes since September 28, 1998, the date of the merger of our predecessor companies, New Plan Realty Trust and Excel Realty Trust, Inc, and that our predecessor companies qualified for taxation as REITs for federal income tax purposes since their first elections to be taxed as REITs and for each taxable year where a failure to qualify would adversely affect the company |
| We plan to continue to operate so that the company meets the requirements for taxation as a REIT Many of these requirements, however, are highly technical and complex |
| The determination that the company is a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control |
| For example, to qualify as a REIT, at least 95prca of our gross income must come from certain sources that are itemized in the REIT tax laws |
| We are also required to distribute to stockholders at least 90prca of our REIT taxable income (excluding any net capital gains) |
| The fact that we hold certain of our assets through partnerships and their subsidiaries further complicates the application of the REIT requirements |
| Even a technical or inadvertent mistake could jeopardize the company’s REIT status |
| Furthermore, Congress and the Internal Revenue Service might make changes to the tax laws and regulations, and the courts might issue new rulings, that make it more difficult, or impossible, for the company to remain qualified as a REIT If the company fails to qualify as a REIT and any available relief provisions do not apply, the company would be subject to federal income tax at regular corporate rates |
| Also, unless the Internal Revenue Service granted the company relief under certain statutory provisions, the company would remain disqualified as a REIT for four years following the year the company first failed to qualify |
| If the company failed to qualify as a REIT, the company would have to pay significant income taxes and would therefore have less money available for investments, debt service and dividends to stockholders |
| This likely would have a significant adverse affect on the value of our securities |
| In addition, we would no longer be required to pay any dividends to stockholders |
| Even if the company qualifies as a REIT for federal income tax purposes, we are required to pay certain federal, state and local taxes on our income and property |
| For example, we will pay tax on any net taxable income or gain that we do not distribute in a taxable year |
| In addition, if we have net income from “prohibited transactions,” that income will be subject to a 100prca tax |
| In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business |
| The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale |
| While we have undertaken a significant number of asset sales in recent years, we do not believe that those sales should be considered prohibited transactions, but there can be no assurance that the Internal Revenue Service would not contend otherwise |
| Any net taxable income earned directly by our taxable affiliates, including ERT Development Corporation, is subject to federal, 20 ______________________________________________________________________ state and local corporate income tax |
| The taxation of the company at the state and local levels may differ from the federal income tax treatment of the company |
| To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our stockholders |
| Subject to certain exceptions, including the one discussed in this paragraph, a REIT is generally prohibited from owning securities in any one issuer if the value of those securities exceeds 5prca of the value of the REIT’s total assets or the securities owned by the REIT represent more than 10prca of the issuer’s outstanding voting securities or more than 10prca of the value of the issuer’s outstanding securities |
| A REIT is permitted to own securities of a subsidiary in an amount that exceeds the 5prca value test and the 10prca vote or value test if the subsidiary elects to be a “taxable REIT subsidiary,” which is taxable as a corporation |
| However, a REIT may not own securities of taxable REIT subsidiaries that represent in the aggregate more than 20prca of the value of the REIT’s total assets |
| We currently own 100prca of the outstanding securities of ERT Development Corporation, which elected, effective January 1, 2001, to be a taxable REIT subsidiary of ours |
| Each corporate subsidiary in which ERT Development Corporation owns more than 35prca of the outstanding voting securities or more than 35prca of the value of the outstanding securities will also be treated as a taxable REIT subsidiary of ours |
| While we believe that we have satisfied the limitations on the ownership of securities with regard to our ownership of interests in ERT Development Corporation during each of the taxable years that each such limitation applied to us, given the highly complex nature of the rules governing REITs and the ongoing importance of factual determinations, we cannot provide any assurance that the Internal Revenue Service would not disagree with our determination |
| Several provisions of the applicable tax laws ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation |
| For example, a taxable REIT subsidiary is limited in its ability to deduct interest payments made to an affiliated REIT In addition, the REIT has to pay a 100prca penalty tax if the economic arrangements between the REIT, the REIT’s tenants, and a taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties |
| The company could be disqualified as a REIT or have to pay taxes if its predecessor companies did not qualify as REITs |
| If either New Plan Realty Trust or Excel Realty Trust, Inc, whose businesses were combined in a merger transaction on September 28, 1998 to form the company, failed to qualify as a REIT throughout the duration of its existence, we might have had undistributed “C corporation earnings and profits |
| ” If that were the case and either of our predecessor companies did not distribute such earnings and profits prior to the merger transaction, the company might not qualify as a REIT We believe that each of the predecessor companies qualified as a REIT and that, in any event, neither of the predecessor companies had any undistributed “C corporation earnings and profits” at the time of the merger transaction |
| If New Plan Realty Trust failed to qualify as a REIT, it would have recognized taxable gain at the time of the merger transaction (and we would be liable for the tax on that gain) |
| This would be the case even though the merger transaction qualified as a “tax-free reorganization,” unless we made a special election that was available under the law at the time of the merger |
| We made that election with respect to the assets acquired from New Plan Realty Trust |
| This election has the effect of requiring us, if New Plan Realty Trust was not qualified as a REIT, to pay corporate income tax on any gain existing at the time of the merger transaction on assets acquired in the transaction if those assets are sold within 10 years after the transaction |
| Finally, if either of the predecessor companies did not qualify as a REIT, the company could have been precluded from electing REIT status for up to four years after the year in which that predecessor company failed to qualify if the company were determined to be a “successor” to that predecessor company |