Filed Pursuant to Rule 424(b)(3)
Registration No. 333-74180
PROSPECTUS SUPPLEMENT
(To Prospectus Dated December 7, 2001)
300,000 SHARES
HOME PROPERTIES OF NEW YORK, INC.
COMMON STOCK
This prospectus supplement relates to the sale by the selling
stockholder named below of 300,000 shares of our common stock, par value $0.01
per share, which were issued upon conversion by such selling stockholder of
shares of our Series A Convertible Preferred Stock, par value $0.01 per share.
This prospectus supplement should be read in conjunction with the accompanying
prospectus, dated December 7, 2001, which is attached to this prospectus
supplement.
The closing sales price of our common stock on December 14, 2001 as
reported on the New York Stock Exchange was $32.60 per share.
The selling stockholder will sell such shares in the manner described
under the section entitled "Plan of Distribution" in the accompanying
prospectus.
The selling stockholder is the Michigan Public School Employee's
Retirement System, State Employee's Retirement System, Michigan State Police
Retirement System and Michigan Judge's Retirement System (collectively, "SMRS").
The information appearing under the section entitled "Selling Stockholder" in
the accompanying prospectus is hereby amended by the addition or substitution,
as applicable, of the following:
NAME OF SELLING NUMBER OF SHARES
STOCKHOLDER OFFERED HEREBY
------------------ ------------------
SMRS ..................................................... 300,000
The shares of our common stock offered hereby by the selling stockholder
represent 1.4% of the outstanding shares of our common stock on the date hereof.
After completion of the sale, the selling stockholder will continue to hold
1,366,667 shares of our common stock, which will represent approximately 6.2% of
the outstanding shares of our common stock on the date hereof.
You should carefully consider the material risks set forth in the
section entitled "Risk Factors" beginning on page 3 of the accompanying
prospectus before purchasing any shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
---------------
The date of this prospectus supplement is December 17, 2001.
PROSPECTUS
1,666,667 Shares
HOME PROPERTIES OF NEW YORK, INC.
COMMON STOCK
The person listed herein may offer and sell from time to time up to
1,666,667 shares of our common stock covered by this prospectus. We refer to
such person as the selling stockholder. The selling stockholder may acquire
these shares if it elects to convert shares of our Series A Senior Convertible
Preferred Stock into shares of our common stock. We are registering the offered
shares as required under the terms of a registration rights agreement between
the selling stockholder and us. Our registration of the offered shares does not
mean that the selling stockholder will offer or sell any of the offered shares.
We will not receive any proceeds from any sales of the offered shares by the
selling stockholder, but we will incur expenses in connection with the offering.
The selling stockholder may sell the offered shares in public or
private transactions, on or off the New York Stock Exchange and at prevailing
market prices or at privately negotiated prices. The selling stockholder may
sell the offered shares directly or through agents or broker-dealers acting as
principal or agent, or in a distribution by underwriters.
Our common stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "HME." The last reported sale price of our common stock on the
NYSE on November 27, 2001 was $31.02.
You should carefully consider the material risks set forth under "Risk
Factors" beginning on page 2 of this prospectus before purchasing any shares of
our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is December 7, 2001.
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................i
WHERE YOU CAN FIND MORE INFORMATION...........................................1
HOME PROPERTIES...............................................................2
RISK FACTORS..................................................................2
NO PROCEEDS TO THE COMPANY....................................................9
SELLING STOCKHOLDER...........................................................9
DESCRIPTION OF CAPITAL STOCK.................................................11
GENERAL......................................................................11
COMMON STOCK.................................................................11
PREFERRED STOCK..............................................................12
RESTRICTIONS ON TRANSFER/OWNERSHIP LIMITS....................................12
OWNERSHIP REPORTS............................................................15
FEDERAL INCOME TAX CONSIDERATIONS............................................17
TAXATION OF HOME PROPERTIES..................................................18
FAILURE TO QUALIFY...........................................................26
TAXATION OF TAXABLE U.S. STOCKHOLDERS........................................27
DISPOSITIONS OF COMMON STOCK.................................................29
BACKUP WITHHOLDING...........................................................29
TAXATION OF TAX-EXEMPT STOCKHOLDERS..........................................29
TAXATION OF NON-U.S. STOCKHOLDERS............................................30
TAX ASPECTS OF THE OPERATING PARTNERSHIP.....................................33
OTHER TAX CONSEQUENCES.......................................................35
PLAN OF DISTRIBUTION.........................................................35
EXPERTS......................................................................38
LEGAL MATTERS................................................................38
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains, or incorporates by reference, statements that
may be deemed to be "forward-looking" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Exchange Act of 1934. Although we believe expectations reflected in such
forward-looking statements are based on reasonable assumptions, it can give no
assurance that our expectations will be achieved. Factors that may cause actual
results to differ include general economic and local real estate conditions,
other conditions that might affect operating expenses, and the timely completion
of repositioning activities within anticipated budgets, the actual pace of
future acquisitions and developments, and continued access to capital to fund
growth. Our actual results could differ materially from those set forth in the
forward-looking statements. Other factors that might cause such a difference are
discussed in the section entitled "Risk Factors."
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission, or SEC. You may
read and copy such reports, statements or other information at the SEC's public
reference room at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our SEC filings are also available to the public from
commercial document retrieval services and at the SEC's website at
http://www.sec.gov. You can also review copies of our SEC filings at the offices
of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
We have filed with the SEC a registration statement on Form S-3 to
register the securities offered hereby. This prospectus is part of that
registration statement and, as permitted by the SEC's rules, does not contain
all the information required to be set forth in the registration statement. For
further information, you may refer to the registration statement and to the
exhibits and schedules filed as part of the registration statement. You can
review and copy the registration statement and its exhibits and schedules at the
public reference facilities maintained by the SEC as described above. The
registration statement, including its exhibits and schedules, is also available
on the SEC's web site.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and the information that we file with
the SEC later will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"):
- - Annual Report on Form 10-K for the fiscal year ended December 31,
2000;
- - Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 2001, June 30, 2001 and September 30, 2001;
- - Current Reports on Form 8-K with respect to Items 2 and 7 filed
January 10, 2001 and Form 8-K/A, amending such filing, filed March 15,
2001; Form 8-K/A, amending a filing on Form 8-K filed December 1, 2000
with respect to Items 2 and 7, filed on January 16, 2001; Form 8-K with
respect to Items 7 and 9 filed January 24, 2001; Form 8-K with respect
to Items 7 and 9 filed February 15, 2001; Form 8-K with respect to
Items 7 and 9 filed April 27, 2001; Form 8-K with respect to Items 7
and 9 filed August 6, 2001; Form 8-K with respect to Items 5 and 7
filed September 12, 2001; Form 8-K with respect to Items 7 and 9 filed
November 2, 2001; and Form 8-K/A, amending a filing on Form 8-K filed
September 12, 2001 with respect to Items 5 and 7, filed on November 27,
2001; and
- - The description of the common stock, par value $.01 per share,
contained in our registration statement on Form 8-A filed under Section
12 of the Exchange Act, including all amendments and reports filed for
the purpose of updating that description.
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You may request a copy of these filings, at no cost, by writing or
telephoning us at: Home Properties of New York, Inc., Attention: Ann M.
McCormick, Secretary, 850 Clinton Square, Rochester, New York 14604; telephone
number (585) 546-4900.
YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
PROVIDED IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT. WE HAVE NOT AUTHORIZED
ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION. YOU SHOULD
NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY SUPPLEMENT IS ACCURATE
AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
HOME PROPERTIES
We are a fully integrated, self-administered and self-managed real
estate investment trust, a REIT, and one of the largest apartment companies in
the United States. With operations in select Northeast, Midwest, and
Mid-Atlantic markets, we own, operate, acquire, rehabilitate, and develop
apartment communities. As of November 26, 2001, we operated 295 communities
containing 49,903 apartment units. Of these, we, along with our subsidiaries,
directly own 39,006 units in 143 communities. We partially own and manage, as
general partner, 8,211 units, and we manage 2,775 units for other owners. We
also manage approximately 1 million square feet of commercial space. The owned
and managed apartment communities and commercial space are referred to herein as
the "Properties." Unless otherwise indicated, all references to "we" "us" or
"our" refer to Home Properties of New York, Inc. and its subsidiaries.
We were incorporated in November 1993 as a Maryland corporation. We are
the general partner of Home Properties of New York, L.P., a New York limited
partnership through which we own, acquire and operate most of our market rate
apartments. We frequently refer to Home Properties of New York, L.P. as the
"Operating Partnership." Certain of our activities, such as residential and
commercial property management for others, development activities and
construction, development and redevelopment services, are carried on through two
subsidiaries: Home Properties Management Inc. and Home Properties Resident
Services, Inc (the "Management Companies"). We own 95% and 99%, respectively of
the economic interest in these subsidiaries while certain members of our
management hold the remaining 5% and 1%, respectively, in order to satisfy
certain technical tax requirements.
Our principal executive offices are located at 850 Clinton Square,
Rochester, New York 14604. Our telephone number is (585) 246-4105.
RISK FACTORS
An investment in our common stock involves various risks. Before making
an investment decision, you should carefully consider all of the risks described
in this prospectus. If any of the risks discussed in this prospectus actually
occur, our business, financial condition and results of operations could be
materially and adversely affected. If this were to occur, the trading price of
our common stock could decline significantly and you may lose all or part of
your investment. In
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addition to general investment risks and those factors set forth elsewhere in
this prospectus, prospective investors should consider, among other things, the
following factors.
ASSIMILATION OF A SUBSTANTIAL NUMBER OF NEW ACQUISITIONS.
Since our formation, we have undertaken a strategy of aggressive growth
through acquisitions. Our ability to manage our growth effectively requires that
we, among other things, successfully apply our experience in managing our
existing portfolio to an increased number of properties. In addition, we will be
required to successfully manage the integration of a substantial number of new
personnel. There can be no assurances that we will be able to integrate and
manage these operations effectively or maintain or improve on their historical
financial performance.
REAL ESTATE FINANCING RISKS
GENERAL. We are subject to the customary risks associated with debt
financing, including the potential inability to refinance existing mortgage
indebtedness upon maturity on favorable terms. If a Property is mortgaged to
secure payment of indebtedness and we are unable to meet its debt service
obligations, the Property could be foreclosed upon. This could adversely affect
our cash flow and, consequently, the amount available for distributions to our
stockholders.
NO LIMITATION ON DEBT. Our Board of Directors has adopted a policy of
limiting our indebtedness to approximately 50% of our total market
capitalization (i.e., the market value of issued and outstanding shares of our
common stock and limited partnership interests in the Operating Partnership
("Units") plus total debt), but our organizational documents do not contain any
limitation on the amount or percentage of indebtedness, funded or otherwise,
that we may incur. Accordingly, our Board of Directors could alter or eliminate
its current policy on borrowing. If this policy were changed, we could become
more highly leveraged, resulting in an increase in debt service that could
adversely affect our ability to make expected distributions to stockholders and
increase the risk of default on our indebtedness. Our debt to total market
capitalization ratio fluctuates based on the timing of acquisitions and
financings. As of September 30, 2001, our ratio of debt to total market
capitalization was 40.5%. Our bank agreements and certain agreements with
holders of our Preferred Stock limit the amount of indebtedness that we may
incur.
EXISTING DEBT MATURITIES. We are subject to the risks normally
associated with debt financing, including the risk that our cash flow will be
insufficient to meet the required payments of principal and interest. Because
much of the financing is not fully self-amortizing, we anticipate that only a
portion of the principal of our indebtedness will be repaid prior to maturity.
So, we will need to refinance debt. Accordingly, there is a risk that we will
not be successful in refinancing existing indebtedness or that the terms of such
refinancing will not be as favorable as the terms of the existing indebtedness.
We aim to stagger our debt maturities with the goal of minimizing the amount of
debt which must be refinanced in any year.
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REAL ESTATE INVESTMENT RISKS
GENERAL RISKS. Real property investments are subject to varying degrees
of risk. If our communities do not generate revenues sufficient to meet
operating expenses, including debt service and capital expenditures, our cash
flow and ability to make distributions to our stockholders will be adversely
affected. A multifamily apartment community's revenues and value may be
adversely affected by the general economic climates; the local economic climate;
local real estate considerations (such as over supply of or reduced demand for
apartments); the perception by prospective residents of the safety, convenience
and attractiveness of the communities or neighborhoods in which they are located
and the quality of local schools and other amenities; and increased operating
costs (including real estate taxes and utilities). Certain significant fixed
expenses are generally not reduced when circumstances cause a reduction in
income from the investment.
OPERATING RISKS. We are dependent on rental income to pay operating
expenses and to generate cash to enable us to make distributions to our
stockholders. If we are unable to attract and retain residents or if our
residents are unable, due to an adverse change in the economic condition of a
particular region or otherwise, to pay their rental obligations, our ability to
make expected distributions will be adversely affected.
ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively
illiquid and, therefore, we have limited ability to vary our portfolio quickly
in response to changes in economic or other conditions. In addition, the
prohibition in the Internal Revenue Code of 1986, as amended (hereinafter
referred to as the "Code" or the "Internal Revenue Code") on REITs holding
property for sale and related regulations may affect our ability to sell
properties without adversely affecting distributions to stockholders. A
significant number of our Properties were acquired using Units subject to
certain agreements, which restrict our ability to sell such Properties in
transactions, that would create current taxable income to the former owners.
COMPETITION. We plan to continue to acquire additional multifamily
residential properties in the Northeast, Midwest and Mid-Atlantic regions of the
United States. There are a number of multifamily developers and other real
estate companies that compete with us in seeking properties for acquisition,
prospective residents and land for development. Most of our Properties are in
developed areas where there are other properties of the same type. Competition
from other properties may affect our ability to attract and retain residents, to
increase rental rates and to minimize expenses of operation. Virtually all of
the leases for our Properties are short-term leases (generally, one year or
less).
UNINSURED LOSSES. Certain extraordinary losses may not be covered by
our comprehensive liability, fire, extended and rental loss insurance. If an
uninsured loss occurred, we could lose our investment in, and cash flow from,
the affected Property (but we would be required to repay any indebtedness
secured by that Property and related taxes and other charges).
COMPLIANCE WITH LAWS AND REGULATIONS.
Many laws and governmental regulations are applicable to our Properties
and changes in these laws and regulations, or their interpretation by agencies
and the courts, occur frequently.
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Under the Americans with Disabilities Act of 1990 (the "ADA"), all places of
public accommodation are required to meet certain federal requirements related
to access and use by disabled persons. These requirements became effective in
1992. The ADA requires removal of structural barriers to handicapped access in
certain public areas, where such removal is "readily achievable." The ADA does
not, however, consider residential properties, such as apartment communities, to
be public accommodations or commercial facilities, except to the extent portions
of such facilities, such as a leasing office, are open to the public. A number
of additional federal, state and local laws exist which also may require
modifications to our Properties, or restrict certain further renovations
thereof, with respect to access thereto by disabled persons. For example, the
Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment communities
first occupied after March 13, 1990 to be accessible to the handicapped.
Noncompliance with the ADA or the FHAA could result in the imposition of fines
or an award of damages to private litigants. Although management believes that
the Properties are substantially in compliance with present requirements, we may
incur additional costs in complying with the ADA for both existing properties
and properties acquired in the future. We believe that our Properties that are
subject to the ADA and the FHAA are in compliance with such laws.
Under the federal Fair Housing Act and state fair housing laws,
discrimination on the basis of certain protected classes is prohibited. We have
a policy against any kind of discriminatory behavior and we train our employees
to avoid discrimination or the appearance of discrimination. There is no
assurance, however, that an employee will not violate our policy against
discrimination and violate the fair housing laws. Such a violation could subject
us to legal action and the possible awards of damages.
Under various laws, ordinances and regulations relating to the
protection of the environment, a current or previous owner or operator of real
estate may be held liable for the costs of removal or remediation of certain
hazardous or toxic substances located on, under or in the property. These laws
often impose liability without regard to whether the owner or operator was
responsible for, or even knew of, the presence of such substances. The presence
of contamination from hazardous or toxic substances, or the failure to remediate
such contaminated property properly, may adversely affect the owner's ability to
rent or sell that property or use that property as collateral. Independent
environmental consultants conducted "Phase I" environmental audits (which
involve visual inspection but not soil or groundwater analysis) on substantially
all of our Properties prior to their acquisition. None of the Phase I audit
reports revealed any significant issues of environmental concern, nor are we
aware of any environmental liability that we believe would have a material
adverse effect on us. There is no assurance that the Phase I reports would
reveal all environmental liabilities or that environmental conditions not known
to us may exist now or in the future on our existing Properties or those
subsequently acquired which would result in liability to us for remediation or
fines, either under existing laws and regulations or future changes to such
requirements. If compliance with the various laws and regulations, now existing
or hereafter adopted, exceeds our budgets for such items, our ability to make
expected distributions could be adversely affected.
5
FEDERAL INCOME TAX RISKS.
GENERAL. We believe that we have been organized and have operated in
such manner so as to qualify as a REIT under the Code, commencing with our
taxable year ended December 31, 1994, and we intend to continue to so qualify. A
REIT generally is not taxed at the corporate level on income it currently
distributes to its stockholders as long as it distributes currently at least 90%
of its taxable income (excluding net capital gain). No assurance can be
provided, however, that we have qualified or will continue to qualify as a REIT
or that new legislation, treasury regulations, administrative interpretations or
court decisions will not significantly change the tax laws with respect to our
qualification as a REIT or the federal income tax consequences of such
qualification.
REQUIRED DISTRIBUTIONS AND PAYMENTS. In order to continue to qualify as
a REIT, we currently are required each year to distribute to our stockholders at
least 90% of our taxable income (excluding net capital gain). In addition, we
will be subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions made by us with respect to the calendar year are less than
the sum of 85% of our ordinary income, 95% of our capital gain net income for
that year, and any undistributed taxable income from prior periods. We intend to
make distributions to our stockholders to comply with the 90% distribution
requirement and to avoid the nondeductible excise tax and will rely for this
purpose on distributions from the Operating Partnership. However, differences in
timing between taxable income and cash available for distribution could require
us to borrow funds or to issue additional equity to enable us to meet the 90%
distribution requirement (and therefore to maintain our REIT qualification) and
to avoid the nondeductible excise tax. In addition, because we are unable to
retain earnings (as a result of REIT distribution requirements), we will
generally be required to refinance debt that matures with additional debt or
equity. There can be no assurance that any of these sources of funds, if
available at all, would be available to meet our distribution and tax
obligations.
ADVERSE CONSEQUENCES OF OUR FAILURE TO QUALIFY AS A REIT. If we fail to
qualify as a REIT, we will be subject to federal income tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. In addition, unless entitled to relief under certain statutory
provisions, we will be disqualified from treatment as a REIT for the four
taxable years following the year during which REIT qualification is lost. The
additional tax burden on us would significantly reduce the cash available for
distribution by us to our stockholders. Our failure to qualify as a REIT could
reduce materially the value of our common stock and would cause all our
distributions to stockholders to be taxable as ordinary income to the extent of
our current and accumulated earnings and profits (although, subject to certain
limitations under the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction with respect to these
distributions). See "Failure to Qualify."
THE OPERATING PARTNERSHIP'S FAILURE TO QUALIFY AS A PARTNERSHIP. We
believe that the Operating Partnership qualifies as a partnership for federal
income tax purposes. No assurance can be provided, however, that the Internal
Revenue Service (the "IRS") will not challenge its status as a partnership for
federal income tax purposes, or that a court would not sustain such a challenge.
If the IRS were to be successful in treating the Operating Partnership as an
entity that is taxable as a corporation, we would cease to qualify as a
6
REIT because the value our ownership interest in the Operating Partnership would
exceed 5% of our assets and because we would be considered to hold more than 10%
of another corporation. See "Taxation of Home Properties - Asset Tests." Also,
the imposition of a corporate tax on the Operating Partnership would reduce
significantly the amount of cash available for distribution to its limited
partners. See "Tax Aspects of the Operating Partnership."
LIMITS ON OWNERSHIP
OWNERSHIP LIMIT. In order for us to maintain our qualification as a
REIT, not more than 50% in value of our outstanding stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of a taxable year. We have
limited ownership of the issued and outstanding shares of our common stock by
any single stockholder to 8.0% of the outstanding shares. Shares of common stock
held by certain entities, such as qualified pension plans, are treated as if the
beneficial owners of such entities were the holders of the common stock. These
restrictions can be waived by our Board of Directors if it were satisfied, based
upon the advice of tax counsel or otherwise, that such action would be in our
best interests. Waivers have been granted to certain institutional investors in
connection with the sale of our preferred stock. Shares acquired or transferred
in breach of the limitation may be redeemed by us for the lesser of the price
paid or the average closing price for the ten trading days immediately preceding
redemption or may be sold at our direction. A transfer of shares of common stock
to a person who, as a result of the transfer, violates the ownership limit will
be void and the shares will automatically be converted into shares of "Excess
Stock," which is subject to a number of limitations. See "Description of Capital
Stock - Restrictions on Transfer" for additional information regarding the
ownership limits.
CHANGE OF CONTROL
Our Articles of Amendment and Restatement of the Articles of
Incorporation, as amended (the "Articles of Incorporation"), authorize our Board
of Directors to issue up to a total of 80 million shares of common stock and 10
million shares of preferred stock and to establish the rights and preferences of
any shares issued. Further, under the Articles of Incorporation, our
stockholders do not have cumulative voting rights.
The percentage ownership limit, the issuance of preferred stock in the
future and the absence of cumulative voting rights could have the effect of: (i)
delaying or preventing a change of control of us even if a change in control
were in the stockholders' interest; (ii) deterring tender offers for our common
stock that may be beneficial to the stockholders; or (iii) limiting the
opportunity for stockholders to receive a premium for their common stock that
might otherwise exist if an investor attempted to assemble a block of our common
stock in excess of the percentage ownership limit or otherwise to effect a
change of control of us.
We have various agreements which may have the effect of discouraging a
change of control of us due to the costs involved. The Articles Supplementary to
our Articles of Incorporation under which several series of our outstanding
preferred stock were issued provide that upon a change of control of us or the
Operating Partnership, under certain circumstances, the holder of such Preferred
Stock may require us to redeem it. Also, to assure that our management has
appropriate incentives to focus on our business and Properties in the face of a
change of
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control situation, we have adopted an executive retention plan which provides
some key employees with salary, bonus and certain benefit continuation in the
event of a change of control.
POTENTIAL CONFLICTS OF INTEREST
Unlike persons acquiring common stock, our executive officers own most
of their interest in us through Units. As a result of their status as holders of
Units, the executive officers and other limited partners may have interests that
conflict with stockholders with respect to business decisions affecting us and
the Operating Partnership. In particular, certain executive officers may suffer
different or more adverse tax consequence than us upon the sale or refinancing
of some of our Properties as a result of unrealized gain attributable to those
Properties. Thus, executive officers and the stockholders may have different
objectives regarding the appropriate pricing and timing of any sale or
refinancing of Properties. In addition, our executive officers, as limited
partners of the Operating Partnership, have the right to approve certain
fundamental transactions such as the sale of all or substantially all of the
assets of the Operating Partnership, merger or consolidation or dissolution of
the Operating Partnership and certain amendments to the Operating Partnership
Agreement.
We manage multifamily residential properties through the Operating
Partnership and commercial and development properties and certain multifamily
residential properties not owned by us through the Management Companies. As a
result, our officers will devote a significant portion of their business time
and efforts to the management of properties not owned by us. Some of our
officers have a significant interest in certain of the managed properties as the
only stockholders of the general partners of the partnerships that own such
managed properties and as holders of other ownership interests. Accordingly,
these officers will have conflicts of interest between their fiduciary
obligations to the partnerships that own the managed properties and their
fiduciary obligations as our officers and directors, particularly with respect
to the enforcement of the management contracts and timing of the sale of the
managed properties. In order to comply with technical requirements of the
Internal Revenue Code pertaining to the qualification of REITs, the Operating
Partnership owns all of the outstanding non-voting common stock (990 shares) of
one of the Management Companies, Home Properties Management, Inc., and Norman
and Nelson Leenhouts own all of the outstanding voting common stock (52 shares).
The Operating Partnership also owns all of the outstanding non-voting common
stock (4,752 shares) of the other Management Company, Home Properties Resident
Services, Inc., and Norman and Nelson Leenhouts own all of the outstanding
voting common stock (48 shares). As a result, although we will receive
substantially all of the economic benefits of the business carried on by the
Management Companies through our right to receive dividends, we will not be able
to elect directors and officers of the Management Companies and, therefore, our
ability to cause dividends to be declared or paid or influence the day-to-day
operations of the Management Companies will be limited. Furthermore, although we
will receive a management fee for managing the managed properties, this fee has
not been negotiated at arm's length and may not represent a fair price for the
services rendered. We believe these management fees to be comparable to fees
charged in arm's length transactions.
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SHARES AVAILABLE FOR FUTURE SALE
Sales of substantial amounts of shares of common stock in the public
market or the perception that such sales might occur could adversely affect the
market price of our common stock. In May 1998, we registered on a Form S-3
registration statement, preferred stock, common stock, common stock rights or
warrants and debt securities having an aggregate offering price of up to
$400,000,000. As of the date hereof, preferred stock, common stock, common stock
rights or warrants and debt securities with an aggregate offering price of
$227,389,941 remain available for sale pursuant to such registration statement.
Additionally, the Operating Partnership has issued approximately 16,035,100
Units through September 30, 2001, to persons, other than us or the Home
Properties Trust, which may be exchanged on a one-for-one basis for shares of
common stock under certain circumstances. We have issued Class A Convertible
Preferred Stock, Class B Cumulative Convertible Preferred Stock, Class C
Cumulative convertible Preferred Stock, Class D Cumulative Convertible Preferred
Stock and Class E Cumulative Convertible Preferred Stock, which are convertible
into an aggregate of approximately 6,163,000 shares of common stock. Also, we
have issued 525,000 common stock purchase warrants to holders of the Class C
Cumulative Convertible Preferred Stock and the Class E Cumulative Convertible
Preferred Stock. In addition, as of September 30, 2001, we have granted options
to purchase approximately 7,112,400 shares of common stock to certain of our
directors, officers and employees, of Home Properties.
All of the shares of common stock issuable upon the exchange of Units
and upon conversion of shares of Preferred Stock will be "restricted securities"
within the meaning of Rule 144 under the Securities Act, and may not be
transferred unless they are registered under the Securities Act or are otherwise
transferrable under Rule 144. We have filed or expect to file registration
statements with respect to such shares of common stock, thereby allowing shares
issuable under our stock benefit plans and in exchange for Units to be
transferred or resold without restriction under the Securities Act.
NO PROCEEDS TO THE COMPANY
We will not receive any of the proceeds from sales of the offered
shares by the Selling Stockholder. We will pay all costs and expenses incurred
in connection with the offering of the offered shares, other than any brokerage
fees and commissions, fees and disbursements of legal counsel for the Selling
Stockholder and share transfer and other taxes attributable to the sale of the
common stock, which will be paid by the Selling Stockholder.
SELLING StockHOLDER
We may issue up to 1,666,667 shares of our common stock to the Michigan
Public School Employee's Retirement System, State Employee's Retirement System,
Michigan State Police Retirement System and Michigan Judge's Retirement System
(collectively, "SMRS" or the "Selling Stockholder"), which currently holds
1,666,667 shares of our Series A Convertible Preferred Stock, if and to the
extent the Selling Stockholder elects to convert its shares of Series A
Convertible Preferred Stock into common stock. Following any such issuance, the
Selling Stockholder may resell the offered shares of our common stock covered by
this prospectus as provided under the section entitled "Plan of Distribution" in
this prospectus or as described in an
9
applicable prospectus supplement. We are registering the offered shares as
required under the terms of a registration rights agreement between SMRS and us.
Pursuant to an agreement between SMRS and us, we have agreed, for so
long as SMRS continues to hold in excess of a stated threshold investment amount
in us, to provide a seat on our Board of Directors to a Director chosen by SMRS
and to annually nominate such Director for election to our Board of Directors.
In addition, such agreement also provides SMRS with certain other rights,
including the right to elect up to four additional Directors to our Board of
Directors if we fail to pay dividends on our Series A Convertible Preferred
Stock for six consecutive quarters and approval rights over certain corporate
transactions. Furthermore, we have agreed not to undertake any actions which may
compromise the rights of SMRS under such agreement without its consent.
The following table provides the name of the Selling Stockholder, the
number of offered shares to be owned by the Selling Stockholder upon conversion
of all of its shares of our Series A Convertible Preferred Stock prior to any
offering to which this prospectus relates and the number of offered shares that
may be offered by such Selling Stockholder. As used in this prospectus, the term
"Selling Stockholder" also includes permitted transferees, assignees,
distributees or pledgees (as permitted under the underlying agreements between
SMRS and us) of the Selling Stockholder. Because the Selling Stockholder may
sell all or some of its offered shares, no estimate can be made of the number of
offered shares that will be sold by the Selling Stockholder or that will be
owned by the Selling Stockholder upon completion of this offering. There is no
assurance that the Selling Stockholder will sell any of the offered shares. The
offered shares represent approximately 7.5% of the number of shares of our
common stock outstanding as of November 27, 2001.
NAME OF NUMBER OF
SHARES OFFERED
STOCKHOLDER HEREBY
------------ -------------------
SMRS............................................................1,666,667
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DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of:
- 80 million shares of Common Stock, $0.01 par value, of which
22,107,351 shares were outstanding on September 30, 2001;
- 10 million shares of Preferred Stock, $0.01 par value, with the
following shares outstanding, on September 30, 2001:
-- 1,666,667 shares which have been designated Series A
Convertible Preferred Stock, all of which were outstanding as
of September 30, 2001;
-- 2,000,000 shares which have been designated Series B
Convertible Cumulative Preferred Stock, all of which were
outstanding as of September 30, 2001;
-- 600,000 shares which have been designated Series C
Convertible Cumulative Preferred Stock, all of which are
outstanding as of September 30, 2001;
-- 500,000 shares which have been designated Series D
Convertible Cumulative Preferred Stock, 250,000 of which were
outstanding as of September 30, 2001; and
-- 300,000 shares which have been designated Series E
Convertible Cumulative Preferred Stock, 300,000 of which were
outstanding as of September 30, 2001.
- 10 million shares of Excess Stock, $0.01 par value (the "Excess
Stock"), of which no shares were outstanding on such date.
For more detail about our Articles of Incorporation, and the Articles
Supplementary thereto relating to our preferred stock and our bylaws, you should
refer to the Articles of Incorporation and bylaws, which have been filed as
exhibits to other reports incorporated by reference into this prospectus. In
addition, for a discussion of limitations on the ownership of our capital stock,
you should refer to the section entitled "Risk Factors" in this prospectus.
COMMON STOCK
All of the shares of common stock offered by this prospectus will be
duly authorized, fully paid, and nonassessable when issued upon conversion of
the Series A Convertible Preferred Stock. Holders of our common stock have no
conversion, redemption, sinking fund or preemptive rights; however, shares of
common stock will automatically convert into shares of Excess Stock as described
below. Under the Maryland General Corporation Law ("MGCL"), stockholders are
generally not liable for our debts or obligations, and the holders of shares
will not be liable for further calls or assessments by us. Subject to the
provisions of the Articles of Incorporation regarding Excess Stock described
below, all shares of common stock have equal
11
dividend, distribution, liquidation and other rights and will have no preference
or exchange rights.
Subject to the right of holders of preferred stock to receive
preferential distributions, the holders of the shares of our common stock will
be entitled to receive distributions in the form of dividends if and when
declared by our Board of Directors out of funds legally available therefor and,
upon our liquidation, each outstanding share of common stock will be entitled to
participate pro rata in the assets remaining after payment of, or adequate
provision for, all of our known debts and liabilities, including debts and
liabilities arising out of its status as general partner of the Operating
Partnership, and any liquidation preference of issued and outstanding preferred
stock. We intend to continue paying quarterly distributions.
The holder of each outstanding share of common stock is entitled to one
vote on all matters presented to stockholders for a vote, subject to the
provisions of the Articles of Incorporation regarding Excess Stock described
below. As described below, the Board of Directors has, and may in the future,
grant holders of one or more series of Preferred Stock the right to vote with
respect to certain matters when it fixes the attributes of such series of
Preferred Stock. Pursuant to the MGCL, we cannot dissolve, amend its Articles of
Incorporation, merge with or into another entity, sell all or substantially all
its assets, engage in a share exchange or engage in similar transactions unless
such action is approved by stockholders holding a majority of the outstanding
shares entitled to vote on such matter. In addition, the Second Amended and
Restated Partnership Agreement of the Operating Partnership, as amended,
requires that any merger or sale of all or substantially all of the assets of
the Operating Partnership be approved by partners holding a majority of the
outstanding Units, excluding Units held by us or Home Properties Trust. Our
Articles of Incorporation provide that our bylaws may be amended by our Board of
Directors.
The holder of each outstanding share of our common stock is entitled to
one vote in the election of directors who serve for terms of one year. Holders
of the shares of common stock will have no right to cumulative voting for the
election of directors. Consequently, at each annual meeting of stockholders, the
holders of a majority of the shares entitled to vote in the election of
directors will be able to elect all of the directors, subject to certain rights
of the holders of preferred stock. Directors may be removed only for cause and
only with the affirmative vote of the holders of a majority of the shares
entitled to vote in the election of directors.
PREFERRED STOCK
For a description of the outstanding Preferred Stock, see our Annual
Report on Form 10-K for the year ended December 30, 2000, which is incorporated
herein by reference into this prospectus.
RESTRICTIONS ON TRANSFER/OWNERSHIP LIMITS
Our Articles of Incorporation contain certain restrictions on the
number of shares of capital stock that stockholders may own. For us to qualify
as a REIT under the Code, no more than 50% in value of our outstanding shares of
capital stock may be owned, directly or indirectly,
12
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year or during a proportionate part
of a shorter taxable year. The capital stock must also be beneficially owned by
100 or more persons during at least 335 days of a taxable year or during a
proportionate part of a shorter taxable year. Because we expect to continue to
qualify as a REIT, our Articles of Incorporation contain restrictions on the
ownership and transfer of shares of our capital stock intended to ensure
compliance with these requirements.
Subject to certain exceptions specified in our Articles of
Incorporation, no holder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 8.0% (the "Ownership Limit") of
the value of the issued and outstanding shares of our capital stock. Certain
entities, such as qualified pension plans, are treated as if their beneficial
owners were the holders of the common stock held by such entities. Stockholders
("Existing Holders") whose holdings exceeded the Ownership Limit immediately
after our initial public offering of common stock, assuming that all Units of
the Operating Partnership are counted as shares of common stock, are permitted
to continue to hold the number of shares they held on such date and may acquire
additional shares of capital stock upon (i) the exchange of Units for shares,
(ii) the exercise of stock options or receipt of grants of shares of capital
stock pursuant to a stock benefit plan, (iii) the acquisition of shares of
capital stock pursuant to a dividend reinvestment plan, (iv) the transfer of
shares of capital stock from another Existing Holder or the estate of an
Existing Holder by devise, gift or otherwise, or (v) the foreclosure on a pledge
of shares of capital stock; provided, no such acquisition may cause any Existing
Holder to own, directly or by attribution, more than 17.5% (the "Existing Holder
Limit") of the issued and outstanding shares of common stock, subject to certain
additional restrictions.
Our Board of Directors may increase or decrease the Ownership Limit and
Existing Holder Limit from time to time, but may not do so to the extent that
after giving effect to such increase or decrease (i) five beneficial owners of
shares could beneficially own in the aggregate more than 49.5% of the aggregate
value of our outstanding capital stock or (ii) any beneficial owner of capital
stock would violate the Ownership Limit or Existing Holder Limit as a result of
a decrease. Our Board of Directors may waive the Ownership Limit or the Existing
Holder Limit with respect to a holder if such holder provides evidence
acceptable to the Board of Directors that such holder's ownership will not
jeopardize our status as a REIT. Waivers of the Ownership Limit have been
granted to certain institutional investors in connection with the sale of our
preferred stock.
Any transfer of our outstanding capital stock ("Outstanding Stock")
that would (i) cause any holder, directly or by attribution, to own capital
stock having a value in excess of the Ownership Limit or Existing Holder Limit,
(ii) result in shares of capital stock other than Excess Stock, if any, to be
owned by fewer than 100 persons, (iii) result in us being closely held within
the meaning of section 856(h) of the Code, or (iv) otherwise prevent us from
satisfying any criteria necessary for it to qualify as a REIT, is null and void,
and the purported transferee acquires no rights to such Outstanding Stock.
Outstanding Stock owned by or attributable to a stockholder or shares
of Outstanding Stock purportedly transferred to a stockholder which cause such
stockholder or any other stockholder to own shares of capital stock in excess of
the Ownership Limit or Existing Holder Limit will automatically convert into
shares of Excess Stock. Such Excess Stock will be
13
transferred by operation of law to a separate trust, with us acting as trustee,
for the exclusive benefit of the person or persons to whom such Outstanding
Stock may be ultimately transferred without violating the Ownership Limit or
Existing Holder Limit. Excess Stock is not treasury stock, but rather
constitutes a separate class of our issued and outstanding stock. While the
Excess Stock is held in trust, it will not be entitled to vote, will not be
considered for purposes of any stockholder vote or the determination of a quorum
for such vote and will not be entitled to participate in dividends or other
distributions. Any record owner or purported transferee of Outstanding Stock
which has converted into Excess Stock (the "Excess Holder") who receives a
dividend or distribution prior to the discovery by us that such Outstanding
Stock has been converted into Excess Stock must repay such dividend or
distribution upon demand. While Excess Stock is held in trust, we will have the
right to purchase it from the trust for the lesser of (i) the price paid for the
Outstanding Stock which converted into Excess Stock by the Excess Holder (or the
market value of the Outstanding Stock on the date of conversion if no
consideration was given for the Outstanding Stock) or (ii) the market price of
shares of capital stock equivalent to the Outstanding Stock which converted into
Excess Stock (as determined in the manner set forth in the Articles of
Incorporation) on the date we exercise our option to purchase. We must exercise
this right within the 90-day period beginning on the date on which it receives
written notice of the transfer or other event resulting in the conversion of
Outstanding Stock into Excess Stock. Upon our liquidation, distributions will be
made with respect to such Excess Stock as if it consisted of the Outstanding
Stock from which it was converted.
Any Excess Holder, with respect to each trust created upon the
conversion of Outstanding Stock into Excess Stock, may designate any individual
as a beneficiary of such trust; provided, such person would be permitted to own
the Outstanding Stock which converted into the Excess Stock held by the trust
under the Ownership Limit or Existing Holder Limit and the consideration paid to
such Excess Holder in exchange for designating such person as the beneficiary is
not in excess of the price paid for the Outstanding Stock which converted into
Excess Stock by the Excess Holder (or the market value of the Outstanding Stock
on the date of conversion if no consideration was given for the Outstanding
Stock). Our redemption right must have expired or been waived prior to such
designation. Immediately upon the designation of a permitted beneficiary, the
Excess Stock, if any, will automatically convert into shares of the Outstanding
Stock from which it was converted and we, as trustee of the trust, will transfer
such shares, if any, and any proceeds from redemption or liquidation to the
beneficiary.
If the restrictions on ownership and transfer, conversion provisions or
trust arrangements in our Articles of Incorporation are determined to be void or
invalid by virtue of any legal decision, statute, rule or regulation, then the
Excess Holder of any Outstanding Stock that would have converted into shares of
Excess Stock if the conversion provisions of the Articles of Incorporation were
enforceable and valid shall be deemed to have acted as an agent on our behalf in
acquiring such Outstanding Stock and to hold such Outstanding Stock on our
behalf unless we waive our right to this remedy.
The foregoing ownership and transfer limitations may have the effect of
precluding acquisition of control of us without the consent of our Board of
Directors. All certificates representing shares of capital stock will bear a
legend referring to the restrictions described above. The foregoing restrictions
on transferability and ownership will not apply if the Board of Directors
determines, and the stockholders concur, that it is no longer in our best
interest to
14
attempt to qualify, or to continue to qualify, as a REIT. Approval of the
limited partners of the Operating Partnership to terminate REIT status is also
required.
OWNERSHIP REPORTS
Every owner of more than 5% of our issued and outstanding shares of
capital stock must file a written notice with us containing the information
specified in the Articles of Incorporation no later than January 31 of each
year. In addition, each stockholder shall, upon demand, be required to disclose
to Home Properties in writing such information as we may request in order to
determine the effect of such stockholder's direct, indirect and attributed
ownership of shares of capital stock on our status as a REIT or to comply with
any requirements of any taxing authority or other governmental agency.
15
CERTAIN OTHER PROVISIONS OF MARYLAND LAW AND OUR ARTICLES OF INCORPORATION
The following discussion summarizes certain provisions of MGCL and our
Articles of Incorporation and bylaws. This summary does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Articles of Incorporation and bylaws, copies of which are filed as exhibits to
the Registration Statement of which this prospectus constitutes a part. The
Articles of Incorporation and bylaws limit the liability of our directors and
officers and our stockholders to the fullest extent permitted from time to time
by the MGCL and require us to indemnify our directors, officers and certain
other parties to the fullest extent permitted from time to time by the MGCL.
BUSINESS COMBINATIONS. Under the MGCL, certain "business combinations"
(including a merger, consolidation, share exchange or, in certain circumstances,
an asset transfer or issuance or reclassification of equity securities) between
a Maryland corporation and any person who beneficially owns 10% or more of the
voting power of the outstanding voting stock of the corporation or an affiliate
or associate of the corporation who, at any time within the two-year period
immediately prior to the date in question, was the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the then-outstanding voting
stock of the corporation (an "Interested Stockholder") or an affiliate thereof,
are prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, in addition to any
other required vote, any such business combination must be recommended by the
board of directors of such corporation and approved by the affirmative vote of
at least (i) 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation, voting together as a single voting
group, and (ii) two-thirds of the votes entitled to be cast by holders of voting
stock of the corporation (other than voting stock held by the Interested
Stockholder who will, or whose affiliate will, be a party to the business
combination or by an affiliate or associate of the Interested Stockholder)
voting together as a single voting group. The extraordinary voting provisions do
not apply if, among other things, the corporation's stockholders receive a price
for their shares determined in accordance with the MGCL and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of the MGCL do not apply, however,
to business combinations that are approved or exempted by the board of directors
of the corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The Articles of Incorporation contain a provision
exempting from these provisions of the MGCL any business combination involving
the Leenhoutses (or their affiliates) or any other person acting in concert or
as a group with any of the foregoing persons.
CONTROL SHARE ACQUISITIONS. The MGCL provides that "control shares" of
a Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by the affirmative vote of two- thirds of
the votes entitled to be cast on the matter other than "interested shares"
(shares of stock in respect of which any of the following persons is entitled to
exercise or direct the exercise of the voting power of shares of stock of the
corporation in the election of directors: an "acquiring person," an officer of
the corporation or an employee of the corporation who is also a director).
"Control shares" are shares of stock which, if aggregated with all other such
shares of stock owned by the acquiring person, or in respect of which such
person is entitled to exercise or direct the exercise of voting power of shares
of stock
16
of the corporation in electing directors within one of the following ranges of
voting power: (i) one-tenth or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority or more of all voting power.
Control shares do not include shares the acquiring person is entitled to vote as
a result of having previously obtained stockholder approval. The control share
acquisition statute does not apply to shares acquired in a merger, consolidation
or share exchange if the corporation is a party to the transaction, or to
acquisitions approved or exempted by the Articles of Incorporation or bylaws of
the corporation. A person who has made or proposes to make a control share
acquisition, under certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the control shares upon delivery of an acquiring person statement containing
certain information required by the MGCL, including a representation that the
acquiring person has the financial capacity to make the proposed control share
acquisition, and a written undertaking to pay the corporation's expenses of the
special meeting (other than the expenses of those opposing approval of the
voting rights). If no request for a meeting is made, the corporation may itself
present the question at any stockholders meeting. If voting rights are not
approved at the meeting or if the acquiring person does not deliver an acquiring
person statement as required by the MGCL, then, subject to certain conditions
and limitations, the corporation may redeem any or all of the control shares
(except those for which voting rights have previously been approved) for fair
value, determined without regard to the absence of voting rights for control
shares, as of the date of the last control share acquisition or, if a
stockholder meeting is held, as of the date of the meeting of stockholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders' meeting before
the control share acquisition and the acquiring person becomes entitled to
exercise or direct the exercise of a majority or more of all voting power, all
other stockholders may exercise rights of objecting stockholders under Maryland
law to receive the fair value of their shares. The fair value of the shares for
such purposes may not be less than the highest price per share paid by the
acquiring person in the control share acquisition. Certain limitations and
restrictions otherwise applicable to the exercise of objecting stockholders'
rights do not apply in the context of a control share acquisition. The Articles
of Incorporation contain a provision exempting from the control share
acquisition statute any and all acquisitions to the extent that such
acquisitions would not violate the Ownership Limit or Existing Owner Limit.
There can be no assurance that such provision will not be amended or eliminated
at any point in the future.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax consequences
regarding us and our common stock we are registering is based on current law, is
for general information only and is not tax advice. The information in this
section is based on the Internal Revenue Code as currently in effect, current,
temporary and proposed Treasury Regulations promulgated under the Internal
Revenue Code, the legislative history of the Internal Revenue Code, current
administrative interpretations and practices of the IRS, including its practices
and policies as expressed in private letter rulings which are not binding on the
IRS except with respect to the particular taxpayers who requested and received
such rulings, and court decisions, all as of the date of this prospectus. There
is no assurance that future legislation, Treasury Regulations, administrative
interpretations and practices or court decisions will not adversely affect
existing
17
interpretations. Any change could apply retroactively to transactions preceding
the date of the change.
We have not requested, and do not plan to request, any rulings from the
IRS concerning our tax treatment and the statements in this prospectus are not
binding on the IRS or a court. Thus, we can provide no assurance that these
statements will not be challenged by the IRS or sustained by a court if
challenged by the IRS. The tax treatment to holders of common stock will vary
depending on a holder's particular situation and this discussion does not
purport to deal with all aspects of taxation that may be relevant to a holder of
common stock in light of his or her personal investments or tax circumstances,
or to stockholders subject to special treatment under the federal income tax
laws except to the extent discussed under the headings "Taxation of Tax-Exempt
Stockholders" and "Taxation of Non-U.S. Stockholders." Stockholders subject to
special treatment include, without limitation, insurance companies, financial
institutions or broker-dealers, tax-exempt organizations, stockholders holding
securities as part of a conversion transaction or hedge or hedging transaction
or as a position in a straddle for tax purposes, foreign corporations and
persons who are not citizens or residents of the United States.
In addition, the summary below does not consider the effect of any
foreign, state, local or other tax laws that may be applicable to holders of our
common stock. If we meet the detailed requirements in the Internal Revenue Code
for qualification as a REIT, which are summarized below, we will be treated as a
REIT for federal income tax purposes. In this case, we generally will not be
subject to federal corporate income taxes on our net income that is currently
distributed to our stockholders. This treatment substantially eliminates the
"double taxation" that generally results from investments in a corporation.
Double taxation refers to the imposition of corporate level tax on income earned
by a corporation and taxation at the stockholder level on funds distributed to a
corporation's stockholders. If we fail to qualify as a REIT in any taxable year,
we would not be allowed a deduction for dividends paid to our stockholders in
computing taxable income and would be subject to federal income tax at regular
corporate rates. Unless entitled to relief under specific statutory provisions,
we would be ineligible to be taxed as a REIT for the four succeeding tax years.
As a result, the funds available for distribution to our stockholders would be
reduced. Each prospective purchaser should consult his or her own tax advisor
regarding the specific tax consequences of the purchase, ownership and sale of
common stock, including the federal, state, local, foreign and other tax
consequences of such purchase, ownership and sale and of potential changes in
applicable tax laws.
TAXATION OF HOME PROPERTIES
GENERAL. We elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code, commencing with our taxable year ended
December 31, 1994. We believe we have been organized and have operated in a
manner so as to qualify for taxation as a REIT under the Internal Revenue Code
commencing with our taxable year ended December 31, 1994. We intend to continue
to operate in this manner. However, our qualification and taxation as a REIT
depends upon our ability to meet, through actual annual operating results, asset
diversification, distribution levels and diversity of stock ownership, the
various qualification tests imposed under the Internal Revenue Code.
Accordingly, there is no assurance that we have operated or will continue to
operate in a manner so as to qualify or remain qualified as a REIT.
18
Further, legislative, administrative or judicial action may change, perhaps
retroactively, the anticipated income tax treatment described in this
prospectus. See "Failure to Qualify."
In the opinion of Nixon Peabody LLP, Home Properties was organized in
conformity with the requirements for qualification as a REIT, and its method of
operation has enabled it to meet the requirements for qualification and taxation
as a REIT under the Code and its proposed method of operation will enable it to
continue to so qualify. This opinion is based on certain assumptions and is
conditioned upon certain representations made by us as to certain factual
matters relating to our organization, manner of operation, income and assets.
Nixon Peabody LLP is not aware of any facts or circumstances that are
inconsistent with these assumptions and representations. Our qualification and
taxation as a REIT will depend upon satisfaction of the requirements necessary
to be classified as a REIT, discussed below, on a continuing basis. Nixon
Peabody LLP will not review compliance with these tests on a continuing basis.
Therefore, no assurance can be given that we will satisfy such tests on a
continuing basis.
The sections of the Internal Revenue Code that relate to the
qualification and operation as a REIT are highly technical and complex. The
following sets forth the material aspects of the sections of the Internal
Revenue Code that govern the federal income tax treatment of a REIT and its
stockholders. This summary is qualified in its entirety by the applicable
Internal Revenue Code provisions, relevant rules and regulations promulgated
under the Internal Revenue Code, and administrative and judicial interpretations
of the Internal Revenue Code, and these rules and these regulations.
If we qualify for taxation as a REIT, we generally will not be subject
to federal corporate income tax on our net income that is currently distributed
to our stockholders. This treatment substantially eliminates the "double
taxation" that generally results from investment in a corporation. However, we
will be subject to federal income tax as follows:
First, we will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains; provided,
however, that properly designated undistributed capital gains will effectively
avoid taxation at the stockholder level. A REIT's "REIT taxable income" is the
otherwise taxable income of the REIT subject to certain adjustments, including a
deduction for dividends paid.
Second, we may be subject to the "alternative minimum tax" on our items
of tax preference under some circumstances.
Third, if we have (a) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (b) other nonqualifying income from foreclosure
property, we will be subject to tax at the highest corporate rate on this
income. Foreclosure property is defined generally as Property we acquired
through foreclosure or after a default on a loan secured by the Property or a
lease of the Property.
Fourth, we will be subject to a 100% tax on any net income from
prohibited transactions. Prohibited transactions generally include sales or
other dispositions of Property held primarily for sale to customers in the
ordinary course of business, other than the sale or disposition of foreclosure
property.
19
Fifth, if we fail to satisfy the 75% gross income test or the 95% gross
income test but have maintained our qualification as a REIT because we satisfied
other requirements, we will be subject to a 100% tax on an amount equal to (a)
the gross income attributable to the greater of the amount by which we fail the
75% or 95% test multiplied by (b) a fraction intended to reflect our
profitability. The gross income tests are discussed below.
Sixth, if we fail to distribute during each calendar year at least the
sum of: 85% of our REIT ordinary income for the year, 95% of our REIT capital
gain net income for the year, and any undistributed taxable income from prior
periods, then we will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
Seventh, if we acquire any asset from a corporation which is or has
been a C corporation in a transaction in which the basis of the acquired asset
in our hands is determined by reference to the basis of such asset in the hands
of the C corporation, and we subsequently recognize gain on the disposition of
such asset during the ten-year period beginning on the date on which we acquired
the asset, then we will be subject to tax at the highest regular corporate tax
rate on this gain to the extent of the "built-in-gain" of the asset. The
built-in- gain of an asset equals the excess of (a) the fair market value of the
asset over (b) our adjusted basis in the asset, determined as of the date we
acquired the asset from the C corporation. A C corporation is generally a
corporation subject to full corporate-level tax. The results described in this
paragraph with respect to the recognition of built-in gain assume that we will
make an election pursuant to Treasury Regulation Section 1.337(d)-5T.
Eighth, we will be subject to a 100% tax on amounts received through
arrangements between us, our tenants and a taxable REIT subsidiary (as defined
below) that are not arm's length.
REQUIREMENTS FOR QUALIFICATION AS A REIT. The Internal Revenue Code
defines a REIT as a corporation, trust or association that:
(1) is managed by one or more trustees or directors;
(2) uses transferable shares or transferable certificates to
evidence beneficial ownership;
(3) would be taxable as a domestic corporation, but for Sections
856 through 860 of the Internal Revenue Code;
(4) is not a financial institution referred to in Section 582(c)
of the Internal Revenue Code or an insurance company to which
subchapter L of the Internal Revenue Code applies;
(5) is beneficially owned by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in
value of its outstanding stock is owned, actually or constructively, by
five or fewer individuals, as defined in the Internal Revenue Code to
include the entities set forth in Section 542(a)(2) of the Internal
Revenue Code; and
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(7) meets other tests, described below, regarding the nature of
its income and assets and the amount of its distributions.
The Internal Revenue Code provides that conditions (1) to (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of twelve months, or
during a proportionate part of a taxable year of less than twelve months.
Conditions (5) and (6) do not apply until after the first taxable year for which
an election made to be taxed as a REIT. For purposes of condition (6), pension
funds and some other tax-exempt entities are treated as individuals, subject to
a "look-through" exception in the case of pension funds. We have satisfied
condition (5) and believe that we have sufficient diversity of ownership to
satisfy condition (6). In addition, our articles of incorporation provides for
restrictions regarding ownership and transfer of shares. These restrictions are
intended to assist us in continuing to satisfy the share ownership requirements
described in (5) and (6) above. These ownership and transfer restrictions are
described in "Restrictions on Transfer Ownership Limits." Primarily, though not
exclusively, as a result of fluctuations in value among the different classes of
our stock, these restrictions may not ensure that we will, in all cases, be able
to satisfy the share ownership requirements described in conditions (5) and (6)
above. If we fail to satisfy these share ownership requirements, our status as a
REIT could terminate. However, if we comply with the rules contained in
applicable Treasury Regulations that require us to ascertain the actual
ownership of our shares and we do not know, or would not have known through the
exercise of reasonable diligence, that we failed to meet the requirement
described in condition (6) above, we will be treated as having met this
requirement. See "Failure to Qualify."
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. We have and will continue to have a calendar
taxable year.
TAXABLE REIT SUBSIDIARIES. A taxable REIT subsidiary is a corporation
other than a REIT in which we directly or indirectly hold stock and that has
made a joint election with us to be treated as a taxable REIT subsidiary. A
taxable REIT subsidiary also includes any corporation other than a REIT with
respect to which a taxable REIT subsidiary of ours owns securities possessing
more than 35% of the total voting power or value of the outstanding securities
of such corporation. However, a taxable REIT subsidiary does not include certain
health care and lodging facilities. A taxable REIT subsidiary is subject to
regular federal income tax, and state and local income tax where applicable, as
a regular "C" corporation. In addition, a taxable REIT subsidiary of ours may be
limited in its ability to deduct interest paid to us. We jointly made our
election with the following entities for such entities to be treated as taxable
REIT subsidiaries of ours effective January 1, 2001: Home Properties Resident
Services, Inc. and Home Properties Management, Inc.
QUALIFIED REIT SUBSIDIARIES. If a REIT owns a corporate subsidiary that
is a "qualified REIT subsidiary," the separate existence of that subsidiary will
be disregarded for federal income tax purposes. Generally, a qualified REIT
subsidiary is corporation, other than a taxable REIT subsidiary, all of the
capital stock of which is owned by the REIT. All assets, liabilities and items
of income, deduction and credit of the qualified REIT subsidiary are treated as
assets, liabilities and items of income, deduction and credit of the REIT
itself. A qualified REIT subsidiary of ours will not be subject to federal
corporate income taxation, although it may be subject to state and local
taxation in some states.
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OWNERSHIP OF A PARTNERSHIP INTEREST. In the case of a REIT which is a
partner in a partnership, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership. Also, a
partner in a partnership will be deemed to be entitled to the income of the
partnership attributable to its proportionate share. The character of the assets
and gross income of the partnership retains the same character in the hands of
Home Properties for purposes of Section 856 of the Internal Revenue Code,
including satisfying the gross income tests and the asset tests. Thus, our
proportionate share of the assets, liabilities and items of income of the
Operating Partnership, including the Operating Partnership's share of these
items for any partnership or limited liability company, are treated as our
assets, liabilities and items of income for purposes of applying the
requirements described in this prospectus.
We have included a summary of the rules governing the federal income
taxation of partnerships and their partners below in "Tax Aspects of the
Operating Partnership." We have direct control of the Operating Partnership and
will continue to operate it consistent with the requirements for our
qualification as a REIT.
INCOME TESTS. We must satisfy two gross income requirements annually to
maintain our qualification as a REIT. First, each taxable year we must derive at
least 75% of our gross income from investments relating to real property or
mortgages on real property, including "rents from real property" and, in
specific circumstances, interest, or from particular types of temporary
investments. Gross income from prohibited transactions is excluded for purposes
of determining if we satisfy this test. Second, each taxable year we must derive
at least 95% of our gross income from the real property investments previously
described, dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing. Gross income from
prohibited transactions is excluded for purposes of determining if we satisfy
this test.
The term "interest" generally does not include any amount received or
accrued, directly or indirectly, if the determination of the amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Rents we receive will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met.
First, the amount of rent must not be based in whole or in part on the
income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "rents from real property" solely
by reason of being based on a fixed percentage or percentages of receipts or
sales.
Second, the Internal Revenue Code provides that rents received from a
"related party tenant" will not qualify as "rents from real property" in
satisfying the gross income tests. A related party tenant is generally a tenant
that we, or one or more actual or constructive owners of 10% or more of us,
actually or constructively own in the aggregate 10% or more of such tenant.
Third, if rent attributable to personal property, leased in connection
with a lease of real property, is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to personal property will
not qualify as "rents from real property."
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Finally, for rents received to qualify as "rents from real property,"
we are allowed only to directly provide services that are both "usually or
customarily rendered" in connection with the rental of real property and not
otherwise considered "rendered to the occupant." Income received from any other
services will be treated as "impermissible tenant service income" unless the
services are provided through an independent contractor that bears the expenses
of providing the services and from whom we derive no revenue or through a
taxable REIT subsidiary, subject to specified limitations. The amount of
impermissible tenant service income with respect to a particular service is
deemed to be the greater of the amount actually received by us for that
particular service or 150% of our direct cost of providing the service. If the
impermissible tenant service income exceeds 1% of our total income from a
Property, then all of the income from that Property will fail to qualify as
rents from real property. If the total amount of impermissible tenant service
income from a Property does not exceed 1% of our total income from that
Property, the income will not cause the rent paid by tenants of that Property to
fail to qualify as rents from real property, but the impermissible tenant
service income itself will not qualify as rents from real property.
It is expected that our real estate investments will continue to give
rise to income that will enable it to satisfy all of the income tests described
above. Substantially all of our income will be derived from its interest in the
Operating Partnership, which will, for the most part, qualify as "rents from
real property" for purposes of the 75% and the 95% gross income tests. We
generally do not and do not intend to:
- charge rent for any Property that is based in whole or in part on the
income or profits of any person, except by reason of being based on a
percentage of receipts or sales, as described above;
- rent any Property to a related party tenant (except for leases to a
taxable REIT subsidiary);
- derive rental income attributable to personal property, other than
personal property leased in connection with the lease of real property,
the amount of which is less than 15% of the total rent received under
the lease; or
- perform services considered to be rendered to the occupant of the
Property, other than through an independent contractor from whom we
derive no revenue or through a taxable REIT subsidiary.
Notwithstanding the foregoing, we may have taken and may continue to take the
actions set forth above to the extent these actions will not, based on the
advice of our tax counsel, jeopardize our status as a REIT.
We may receive certain types of income with respect to the properties
we own that will not qualify for the 75% or 95% gross income test. In addition,
dividends received from stock in any non-controlled subsidiaries or taxable REIT
subsidiaries will not qualify under the 75% gross income test. We believe,
however, that the aggregate amount of such fees and other non-qualifying income
in any taxable year will not cause us to exceed the limits on non-qualifying
income under the 75% and 95% income tests.
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If we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may nevertheless qualify as a REIT for the year if we
are entitled to relief under specific provisions of the Internal Revenue Code.
Generally, we may avail ourselves of the relief provisions if:
- our failure to meet these tests was due to reasonable cause and not
due to willful neglect;
- we attach a schedule of the sources of our income to our federal
income tax return; and
- any incorrect information on the schedule was not due to fraud with
intent to evade tax.
It is not possible, however, to state whether in all circumstances we would be
entitled to the benefit of these relief provisions. For example, if we fail to
satisfy the gross income tests because non-qualifying income that we
intentionally incur exceeds the limits on non-qualifying income, the IRS could
conclude that our failure to satisfy the tests was not due to reasonable cause.
If we fail to satisfy the gross income tests and these relief provisions do not
apply, we will not qualify as a REIT. As discussed above in "Taxation of Home
Properties -General," even if these relief provisions apply, and we retain our
status as a REIT, a tax would be imposed with respect to our excess net income.
We may not always be able to maintain compliance with the gross income tests for
REIT qualification despite our periodic monitoring of our income.
PROHIBITED TRANSACTION INCOME. Any gain realized by us on the sale of
any Property held as inventory or other Property held primarily for sale to
customers in the ordinary course of business, including our share of any such
gain realized by the Operating Partnership, will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. Under existing
law, whether Property is held as inventory or primarily for sale to customers in
the ordinary course of a trade or business is a question of fact that depends on
all the facts and circumstances surrounding the particular transaction.
The Operating Partnership intends to hold its properties for investment
with a view to long-term appreciation, to engage in the business of acquiring,
developing, owning, and operating its properties and to make occasional sales of
the properties as are consistent with the Operating Partnership's investment
objectives. However, the IRS may contend that one or more of these sales is
subject to the 100% penalty tax.
ASSET TESTS. At the close of each quarter of our taxable year, we also
must satisfy certain tests relating to the nature and diversification of our
assets.
First, at least 75% of the value of our total assets must be
represented by real estate assets, cash, cash items and government securities.
Our real estate assets include, for purposes of this test, our allocable share
of real estate assets held by the partnerships in which we own an interest and
the non-corporate subsidiaries of those partnerships, as well as stock or debt
instruments held for one year or less that are purchased with the proceeds of an
offering of shares or long-term (at least five years) debt.
Second, not more than 25% of our total assets may be represented by
securities, other than those securities includable in the 75% asset test.
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Third, except for investments in REITs, qualified REIT subsidiaries,
taxable REIT subsidiaries, and qualified debt, the value of any one issuer's
securities owned by us may not exceed 5% of the value of our total assets.
Fourth, except for investments in REITs, qualified REIT subsidiaries
and taxable REIT subsidiaries, Home Properties may not own more than 10% of any
one issuer's outstanding voting securities.
Fifth, except for investments in REITs, qualified REIT subsidiaries,
taxable REIT subsidiaries, and qualified debt, we may not own more than 10% of
the total value of the outstanding securities of any one issuer.
Sixth, not more than 20% of the value of our total assets may be
represented by the securities of one or more taxable REIT subsidiaries.
After initially meeting the asset tests at the close of any quarter, we
will not lose our status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If we fail
to satisfy the asset tests, we can cure this failure by disposing of sufficient
non-qualifying assets within 30 days after the close of that quarter. We have
maintained and will continue to maintain adequate records of the value of our
assets to ensure compliance with the asset tests and to take such other actions
within the 30 days after the close of any quarter as may be required to cure any
noncompliance. If we fail to cure noncompliance with the asset tests within this
time period, we would cease to qualify as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS. To maintain our qualification as a
REIT, we are required to distribute dividends, other than capital gain
dividends, to our stockholders in an amount at least equal to:
- the sum of:
- 90% of our "REIT taxable income," computed without regard to
the dividends paid deduction and our net capital gain, and
- 90% of the after tax net income, if any, from foreclosure
Property;
- minus:
- the excess of the sum of particular items of noncash income
over 5% of "REIT taxable income" as described above.
These distributions must be declared and paid in the taxable year to which they
relate, or in the following taxable year if they are declared before we timely
file our tax return for such year and if paid on or before the first regular
dividend payment after such declaration. These distributions are taxable to
holders of common stock and convertible preferred stock, other than tax-exempt
entities, as discussed below, in the year in which paid, subject to an exception
for dividends with declaration and record dates falling the in the last three
months of the calendar year, and paid by the end of the January immediately
following such year. This is so even though these distributions relate to the
prior year for purposes of our 90% distribution requirement. In order
25
to qualify for a dividends paid deduction, amounts distributed must not be
preferential (e.g., every stockholder of the class of stock to which a
distribution is made must be treated the same as every other stockholder of that
class, and no class of stock may be treated otherwise than in accordance with
its dividend rights as a class).
To the extent that we do not distribute all of our net capital gain or
distribute at least 90%, but less than 100%, of our "REIT taxable income," as
adjusted, we will be subject to tax thereon at regular ordinary and capital gain
corporate tax rates. We have made and intend to make timely distributions
sufficient to satisfy the annual distribution requirements. We expect that our
REIT taxable income will be less than our cash flow due to the allowance of
depreciation and other non-cash charges in computing REIT taxable income.
Accordingly, we anticipate that we will generally have sufficient cash or liquid
assets to enable us to satisfy the distribution requirements described above. In
this regard, the Partnership Agreement of the Operating Partnership authorizes
us, as general partner, to take such steps as may be necessary to cause the
Operating Partnership to distribute to its partners an amount sufficient to
permit us to meet these distribution requirements. However, from time to time,
we may not have sufficient cash or other liquid assets to meet these
distribution requirements due to timing differences between the actual receipt
of income and actual payment of deductible expenses, and the inclusion of income
and deduction of expenses in arriving at our taxable income. If these timing
differences occur, in order to meet the distribution requirements, we may need
to arrange for short-term, or possibly long-term, borrowings or need to pay
dividends in the form of taxable stock dividends. Under specific circumstances
identified in the Internal Revenue Code, we may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends. However, we will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
Furthermore, if we should fail to distribute during each calendar year,
or in the case of distributions with declaration and record dates falling in the
last three months of the calendar year, by the end of January immediately
following such year, at least the sum of:
- 85% of our REIT ordinary income for such year,
- 95% of our REIT capital gain income for the year, and
- any undistributed taxable income from prior periods,
we would be subject to a 4% excise tax on the excess of the required
distribution over the amounts actually distributed.
Any REIT taxable income and net capital gain on which this excise tax is imposed
for any year is treated as an amount distributed during that year for purposes
of calculating such tax.
FAILURE TO QUALIFY
If we fail to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, we will be subject to tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. Distributions to stockholders in any year in which we
26
fail to qualify as a REIT will not be deductible by us and we will not be
required to distribute any amounts to our stockholders. As a result, our failure
to qualify as a REIT would reduce the cash available for distribution by us to
our stockholders.
In addition, if we fail to qualify as a REIT, all distributions to
stockholders will be taxable as ordinary income to the extent of our current and
accumulated earnings and profits, and subject to limitations identified in the
Internal Revenue Code, corporate distributees may be eligible for the dividends
received deduction. Unless entitled to relief under specific statutory
provisions, we will also be ineligible to be taxed as a REIT for the four tax
years following the year during which we lost our qualification. It is not
possible to state whether in all circumstances we would be entitled to this
statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used below, the term "U.S. stockholder" means a holder of shares of
common stock who, for United States federal income tax purposes: is a citizen or
resident of the United States; is a corporation, partnership, or other entity
created or organized in or under the laws of the United States or of any state
thereof or in the District of Columbia, unless, in the case of a partnership,
Treasury Regulations provide otherwise; is an estate the income of which is
subject to United States federal income taxation regardless of its source; or is
a trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust. Notwithstanding the
preceding sentence, to the extent provided in Treasury Regulations, some trusts
in existence on August 20, 1996, and treated as United States persons prior to
this date that elect to continue to be treated as United States persons, are
also considered U.S. stockholders.
DISTRIBUTIONS GENERALLY. As long as we qualify as a REIT, distributions
out of our current or accumulated earnings and profits, other than capital gain
dividends discussed below, will constitute dividends taxable to our taxable U.S.
stockholders as ordinary income. These distributions will not be eligible for
the dividends-received deduction in the case of U.S. stockholders that are
corporations. To the extent that we make distributions, other than capital gain
dividends discussed below, in excess of our current and accumulated earnings and
profits, these distributions will be treated first as a tax-free return of
capital to each U.S. stockholder. This treatment will reduce the adjusted basis
which each U.S. stockholder has in his or her shares of stock for tax purposes
by the amount of the distribution. This reduction will not, however, reduce a
holder's adjusted basis below zero. Distributions in excess of a U.S.
stockholder's adjusted basis in his or her shares will be taxable as capital
gain, provided that the shares have been held as a capital asset. In addition,
these distributions will be taxable as long-term capital gain if the shares have
been held for more than one year.
Dividends that we declare in October, November, or December of any year
and that are payable to a stockholder of record on a specified date in any of
these months shall be treated as both paid by us and received by the stockholder
on December 31 of that year, provided we actually pay the dividend on or before
January 31 of the following calendar year. Stockholders may not include in their
own income tax returns any of our net operating losses or capital losses.
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CAPITAL GAIN DISTRIBUTIONS. Distributions that we properly designate as
capital gain dividends will be taxable to U.S. stockholders as gains, to the
extent that they do not exceed our actual net capital gain for the taxable year,
from the sale or disposition of a capital asset. Capital gain dividends are
taxed to U.S. stockholders as gain from the sale or exchange of a capital asset
held for more than one year. This tax treatment applies regardless of the period
the stockholder has held its shares. If we designate any portion of a dividend
as a capital gain dividend, a U.S. stockholder will receive an Internal Revenue
Service Form 1099-DIV indicating the amount that will be taxable to the
stockholder as capital gain. U.S. stockholders that are corporations may,
however, be required to treat up to 20% of some capital gain dividends as
ordinary income.
PASSIVE ACTIVITY LOSSES AND INVESTMENT INTEREST LIMITATIONS.
Distributions we make and gain arising from the sale or exchange by a U.S.
stockholder of our shares will not be treated as passive activity income. As a
result, U.S. stockholders generally will not be able to apply any "passive
losses" against this income or gain. Distributions we make, to the extent they
do not constitute a return of capital, generally will be treated as investment
income for purposes of computing the investment income limitation. Gain arising
from the sale or other disposition of our shares, however, will not be treated
as investment income under some circumstances.
RETENTION OF NET LONG-TERM CAPITAL GAINS. We may elect to retain,
rather than distribute as a capital gain dividend, our net long-term capital
gains. If we make this election, we would pay tax on our retained net long-term
capital gains. In addition, to the extent we designate, a U.S. stockholder
generally would: include its proportionate share of our undistributed long-term
capital gains in computing its long-term capital gains in its return for its
taxable year in which the last day of our taxable year falls subject to
limitations as to the amount that is includable; be deemed to have paid the
capital gains tax imposed on us on the designated amounts included in the U.S.
stockholder's long-term capital gains; receive a credit or refund for the amount
of tax deemed paid by it; increase the adjusted basis of its common stock by the
difference between the amount of includable gains and the tax deemed to have
been paid by it; and in the case of a U.S. stockholder that is a corporation,
appropriately adjust its earnings and profits for the retained capital gains in
accordance with Treasury Regulations to be prescribed by the IRS.
CLASSIFICATION OF CAPITAL GAIN DIVIDEND. We will classify portions of
any designated capital gain dividend as either:
- a 20% gain distribution, which would be taxable to non-corporate U.S.
stockholders at a maximum rate of 20%; or
- an "unrecaptured Section 1250 gain" distribution, which would be
taxable to non-corporate U.S. stockholders at a maximum rate of 25%.
We must determine the maximum amounts that it may designate as 20% and
25% capital gain dividends by performing the computation required by the
Internal Revenue Code as if the REIT were an individual whose ordinary income
were subject to a marginal tax rate of at least 28%.
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DISPOSITIONS OF COMMON STOCK
If you are a U.S. stockholder and you sell or dispose of your shares of
common stock, you will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between the amount of cash and the fair market
value of any Property you receive on the sale or other disposition and your
adjusted basis in the shares for tax purposes. This gain or loss will be capital
if you have held the common stock as a capital asset and will be long-term
capital gain or loss if you have held the common stock for more than one year.
The Internal Revenue Service has the authority to prescribe, but had not yet
prescribed, regulations that would apply a capital gain tax rate of 25%, which
is generally higher than the long-term capital gain tax rate for non-corporate
stockholders, to a portion of capital gain realized by a non-corporate
stockholder on the sale of REIT shares that would correspond to the REIT's
"unrecaptured Section 1250 gain." Stockholders are advised to consult with their
own tax advisors with respect to their capital gain tax liability.
In general, if you are a U.S. stockholder and you recognize loss upon
the sale or other disposition of common stock that you have held for six months
or less, after applying holding period rules set forth in the Internal Revenue
Code, the loss you recognize will be treated as a long-term capital loss, to the
extent you received distributions from us which were required to be treated as
long-term capital gains.
BACKUP WITHHOLDING
We report to our U.S. stockholders and the IRS the amount of dividends
paid during each calendar year, and the amount of any tax withheld. Under the
backup withholding rules, a stockholder may be subject to backup withholding
with respect to dividends paid unless the holder is a corporation or comes
within other exempt categories and, when required, demonstrates this fact, or
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding, and otherwise complies with applicable requirements of
the backup withholding rules. A U.S. stockholder that does not provide us with
his correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against the stockholder's income tax liability. In addition, we may be required
to withhold a portion of capital gain distributions to any stockholders who fail
to certify their non-foreign status. See "Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified
REIT do not constitute unrelated business taxable income when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt stockholder,
except tax-exempt stockholders described below, has not held its shares as "debt
financed property" within the meaning of the Internal Revenue Code and the
shares are not otherwise used in a trade or business, dividend income from us
will not be unrelated business taxable income to a tax-exempt stockholder.
Similarly, income from the sale of shares will not constitute unrelated business
taxable income unless a tax-exempt stockholder has held its shares as "debt
financed property" within the meaning of the Internal Revenue Code or has used
the shares in its trade or business.
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For tax-exempt stockholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Internal
Revenue Code Section 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively,
income from an investment in our shares will constitute unrelated business
taxable income unless the organization is able to properly deduct amounts set
aside or placed in reserve for certain purposes so as to offset the income
generated by its investment in our shares. These prospective investors should
consult their own tax advisors concerning these "set aside" and reserve
requirements.
Notwithstanding the above, a portion of dividends paid by a "pension
held REIT" shall be treated as unrelated business taxable income as to any trust
which: is described in Section 401(a) of the Internal Revenue Code; is
tax-exempt under Section 501(a) of the Internal Revenue Code; and holds more
than 10%, by value, of the interests in a REIT. Tax-exempt pension funds that
are described in Section 401(a) of the Internal Revenue Code are referred to
below as "qualified trusts." A REIT is a "pension held REIT" if: it would not
have qualified as a REIT but for the fact that Section 856(h)(3) of the Internal
Revenue Code provides that stock owned by qualified trusts shall be treated, for
purposes of the "not closely held" requirement, as owned by the beneficiaries of
the trust, rather than by the trust itself; and either at least one such
qualified trust holds more than 25%, by value, of the interests in a REIT, or
one or more such qualified trusts, each of which owns more than 10%, by value,
of the interests in a REIT, holds in the aggregate more than 50%, by value, of
the interests in the REIT.
The percentage of any REIT dividend treated as unrelated business
taxable income is equal to the ratio of: the unrelated business taxable income
earned by us, treating us as if we were a qualified trust and therefore subject
to tax on unrelated business taxable income, to our total gross income. A de
minimis exception applies where the percentage is less than 5% for any year. The
provisions requiring qualified trusts to treat a portion of REIT distributions
as unrelated business taxable income will not apply if we are able to satisfy
the "not closely held" requirement without relying upon the "look-through"
exception with respect to qualified trusts. As a result of the limitations on
the transfer and ownership of stock contained in our Articles of Incorporation,
we are not and do not expect to be classified as a "pension held REIT."
TAXATION OF NON-U.S. STOCKHOLDERS
When we use the term "non-U.S. stockholders," we mean holders of shares
of common stock that are nonresident alien individuals, foreign corporations,
foreign partnerships or foreign estates or trusts. The rules governing United
States federal income taxation of the ownership and disposition of stock by
persons that are non-U.S. stockholders are complex. No attempt is made in this
prospectus to provide more than a brief summary of these rules. Accordingly,
this discussion does not address all aspects of United States federal income tax
and does not address state, local or foreign tax consequences that may be
relevant to a non-U.S. stockholder in light of such holder's particular
circumstances. In addition, this discussion is based on current law, which is
subject to change, and assumes that we qualify for taxation as a REIT.
Prospective non- U.S. stockholders should consult with their own tax advisors to
determine the impact of federal, state, local and foreign income tax laws with
regard to an investment in stock, including any reporting requirements.
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DISTRIBUTIONS. If we make a distribution that is not attributable to
gain from the sale or exchange of a United States real property interest and is
not designated as a capital gain dividend, then the distribution will be treated
as a dividend of ordinary income to the extent it is made out of current or
accumulated earnings and profits. These distributions ordinarily will be subject
to withholding of United States federal income tax on a gross basis at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
However, if the dividends are treated as effectively connected with the conduct
by the non-U.S. stockholder of a United States trade or business, or if an
income tax treaty applies, as attributable to a United States permanent
establishment of the non-U.S. stockholder, the dividends will be subject to tax
on a net basis at graduated rates, in the same manner as domestic stockholders
are taxed with respect to such dividends and are generally not subject to
withholding. Any such dividends received by a non-U.S. stockholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Under some treaties, lower withholding rates generally applicable to dividends
do not apply to dividends from a REIT. Certification and disclosure requirements
must be satisfied to be exempt from withholding under the effectively connected
income and permanent establishment exemptions discussed above. Home Properties
expects to withhold U.S. income tax at the rate of 30% on any dividend
distributions, not designated as (or deemed to be) capital gain dividends, made
to a non-U.S. stockholder unless:
- a lower treaty rate applies and the non-U.S. stockholder files an IRS
Form W-8BEN evidencing eligibility for that reduced rate with Home
Properties; or
- the non-U.S. stockholder files an IRS Form W-8ECI with Home
Properties claiming that the distribution is effectively connected
income.
Distributions we make in excess of our current or accumulated earnings
and profits will not be taxable to a non-U.S. stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's stock, but rather
will reduce the adjusted basis of such stock. To the extent that these
distributions exceed the adjusted basis of a non-U.S. stockholder's stock, they
will give rise to gain from the sale or exchange of his stock. The tax treatment
of this gain is described below. Home Properties may be required to withhold at
least 10% of any distribution in excess of its current and accumulated earnings
and profits, even if a lower treaty rate applies or the non-U.S. stockholder is
not liable for tax on the receipt of that distribution. However, a non-U.S.
stockholder may seek a refund of these amounts.
Distributions to a non-U.S. stockholder that we designate at the time
of distribution as capital gains dividends, other than those arising from the
disposition of a United States real property interest, generally will not be
subject to United States federal income taxation, unless: investment in the
stock is effectively connected with the non-U.S. stockholder's United States
trade or business, in which case the non-U.S. stockholder will be subject to the
same treatment as domestic stockholders with respect to such gain, except that a
stockholder that is a foreign corporation may also be subject to the 30% branch
profits tax, as discussed above; or the non-U.S. stockholder is a nonresident
alien individual who is present in the United States for 183 days or more during
the taxable year and has a "tax home" in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains.
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Distributions to a non-U.S. stockholder that are attributable to gain
from our sale or exchange of United States real property interests will cause
the non- U.S. stockholder to be treated as recognizing this gain as income
effectively connected with a United States trade or business. Non-U.S.
stockholders would thus generally be taxed at the same rates applicable to
domestic stockholders, subject to a special alternative minimum tax in the case
of nonresident alien individuals. Also, this gain may be subject to a 30% branch
profits tax in the hands of a non-U.S. stockholder that is a corporation, as
discussed above. We are required to withhold 35% of any such distribution. That
amount is creditable against the non-U.S. stockholder's United States federal
income tax liability. We or any nominee (e.g., a broker holding shares in street
name) may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the disposition
of United States real property interests. A domestic person who holds shares of
common stock on behalf of a non-U.S. stockholder will bear the burden of
withholding, provided that we have properly designated the appropriate portion
of a distribution as a capital gain dividend.
SALE OF STOCK. If you are a non-U.S. stockholder and you recognize gain
upon the sale or exchange of shares of stock, the gain generally will not be
subject to United States taxation unless the stock constitutes a "United States
real property interest" within the meaning of FIRPTA. If we are a "domestically
controlled REIT," then the stock will not constitute a "United States real
property interest." A "domestically-controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock is
held directly or indirectly by non-U.S. stockholders. Because our shares of
stock are publicly traded, there is no assurance that we are or will continue to
be a "domestically-controlled REIT." Notwithstanding the foregoing, if you are a
non-U.S. stockholder and you recognize gain upon the sale or exchange of shares
of stock and the gain is not subject to FIRPTA, the gain will be subject to
United States taxation if: your investment in the stock is effectively connected
with a United States trade or business, or, if an income treaty applies, is
attributable to a United States permanent establishment; or you are a
nonresident alien individual who is present in the United States for 183 days or
more during the taxable year and you have a "tax home" in the United States. In
this case, a nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
If we are not or cease to be a "domestically-controlled REIT" whether
gain arising from the sale or exchange by a non-U.S. stockholder of shares of
stock would be subject to United States taxation under FIRPTA as a sale of a
"United States real property interest" will depend on whether the shares are
"regularly traded," as defined by applicable Treasury Regulations, on an
established securities market and on the size of the selling non-U.S.
stockholder's interest in our shares. If gain on the sale or exchange of shares
of stock were subject to taxation under FIRPTA, the non-U.S. stockholder would
be subject to regular United States income tax on this gain in the same manner
as a U.S. stockholder and the purchaser of the stock would be required to
withhold and remit to the Internal Revenue Service 10% of the purchase price. In
addition in this case, non- U.S. stockholders would be subject to any applicable
alternative minimum tax, nonresident alien individuals may be subject to a
special alternative minimum tax and foreign corporations may be subject to the
30% branch profits tax.
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TAX ASPECTS OF THE OPERATING PARTNERSHIP
GENERAL. Substantially all of our investments will be held indirectly
through the Operating Partnership. In general, partnerships are "pass-through"
entities which are not subject to federal income tax. Rather, partners are
allocated their proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive a distribution from the
partnership. We will include in our income our proportionate share of the
foregoing partnership items for purposes of the various REIT income tests and in
the computation of our REIT taxable income. Moreover, for purposes of the REIT
asset tests, we will include our proportionate share of assets held by the
Operating Partnership. See "Taxation of Home Properties."
ENTITY CLASSIFICATION. Our interests in the Operating Partnership
involve special tax considerations, including the possibility of a challenge by
the IRS of the status of the Operating Partnership as a partnership, as opposed
to an association taxable as a corporation, for federal income tax purposes. If
the Operating Partnership were treated as an association, it would be taxable as
a corporation and therefore be subject to an entity-level tax on its income. In
such a situation, the character of our assets and items of gross income would
change and preclude us from satisfying the asset tests and possibly the income
tests (see "Taxation of Home Properties - Asset Tests" and "-Income Tests").
This, in turn, would prevent us from qualifying as a REIT. See "Taxation of Home
Properties - Failure to Qualify" above for a discussion of the effect of our
failure to meet these tests for a taxable year. In addition, a change in the
Operating Partnership's status for tax purposes might be treated as a taxable
event. If so, we might incur a tax liability without any related cash
distributions.
Treasury Regulations that apply for tax period beginning on or after
January 1, 1997 provide that an "eligible entity" may elect to be taxed as a
partnership for federal income tax purposes. An eligible entity is a domestic
business entity not otherwise classified as a corporation and which has at least
two members. Unless it elects otherwise, an eligible entity in existence prior
to January 1, 1997, will have the same classification for federal income tax
purposes that it claimed under the entity classification Treasury Regulations in
effect prior to this date. In addition, an eligible entity which did not exist,
or did not claim a classification, prior to January 1, 1997, will be classified
as a partnership for federal income tax purposes unless it elects otherwise. The
Operating Partnership intends to claim classification as a partnership under
these regulations.
Even if the Operating Partnership is taxable as a partnership under
these Treasury Regulations, it could be treated as a corporation for federal
income tax purposes under the "publicly traded partnership" rules of Section
7704 of the Internal Revenue Code. A publicly traded partnership is a
partnership whose interests trade on an established securities market or are
readily tradable on a secondary market, or the substantial equivalent thereof.
While units of the Operating Partnership are not and will not be traded on an
established trading market, there is some risk that the IRS might treat the
units held by the limited partners of the Operating Partnership as readily
tradable because, after any applicable holding period, they may be exchanged for
our common stock, which is traded on an established market. A publicly traded
partnership will be treated as a corporation for federal income tax purposes
unless at least 90% of such partnership's gross income for a taxable year
consists of "qualifying income" under the
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publicly traded partnership provisions of Section 7704 of the Internal Revenue
Code. "Qualifying income" under Section 7704 of the Internal Revenue Code
includes interest, dividends, real property rents, gains from the disposition of
real property, and certain income or gains from the exploitation of natural
resources. Therefore, qualifying income under Section 7704 of the Internal
Revenue Code generally includes any income that is qualifying income for
purposes of the 95% gross income test applicable to REITs. We anticipate that
the Operating Partnership will satisfy the 90% qualifying income test under
Section 7704 of the Internal Revenue Code and, thus, will not be taxed as a
corporation.
There is one significant difference, however, regarding rent received
from related party tenants. For a REIT, rent from a tenant does not qualify as
rents from real property if the REIT and/or one or more actual or constructive
owners of 10% or more of the REIT actually or constructively own 10% or more of
the tenant. See "Taxation of Home Properties - Income Tests." Under Section 7704
of the Internal Revenue Code, rent from a tenant is not qualifying income if a
partnership and/or one or more actual or constructive owners of 5% or more of
the partnership actually or constructively own 10% or more of the tenant.
Accordingly, we will need to monitor compliance with both the REIT
rules and the publicly traded partnership rules. The Operating Partnership has
not requested, nor does it intend to request, a ruling from the IRS that it will
be treated as a partnership for federal income tax purposes. In the opinion of
Nixon Peabody LLP, which is based on the provisions of the partnership agreement
of the Operating Partnership and on certain factual assumptions and
representations of Home Properties, the Operating Partnership has since its
formation and will continue to be taxed as a partnership rather than an
association taxable as a corporation. Nixon Peabody LLP's opinion is not binding
on the IRS or the courts.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Under Section 704(c) of
the Internal Revenue Code, income, gain, loss and deduction attributable to
appreciated or depreciated Property that is contributed to a partnership in
exchange for an interest in the partnership, must be allocated in a manner so
that the contributing partner is charged with the "book-tax difference"
associated with the Property at the time of the contribution. The book-tax
difference with respect to Property that is contributed to a partnership is
generally equal to the difference between the fair market value of contributed
Property at the time of contribution and the adjusted tax basis of the Property
at the time of contribution. These allocations are solely for federal income tax
purposes and do not affect the book capital accounts or other economic or legal
arrangements among the partners. The Operating Partnership was formed by way of
contributions of appreciated Property. Moreover, subsequent to the formation of
the Operating Partnership, additional persons have contributed appreciated
Property to the Operating Partnership in exchange for interests in the Operating
Partnership.
The partnership agreement requires that allocations be made in a manner
consistent with Section 704(c) of the Internal Revenue Code. In general, limited
partners of the Operating Partnership who acquired their limited partnership
interests through a contribution of appreciated Property will be allocated
depreciation deductions for tax purposes which are lower than if determined on a
pro rata basis. In addition, in the event of the disposition of any of the
contributed assets which have a book-tax difference all income attributable to
the book-tax difference will generally be allocated to the limited partners who
contributed the Property, and
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we will generally be allocated only our share of capital gains attributable to
appreciation, if any, occurring after the time of contribution to the Operating
Partnership. This will tend to eliminate the book-tax difference over the life
of the Operating Partnership. However, the special allocation rules of Section
704(c) do not always entirely eliminate the book-tax difference on an annual
basis or with respect to a specific taxable transaction such as a sale. Thus,
the carryover basis of the contributed assets in the hands of the Operating
Partnership may cause us to be allocated lower depreciation and other deductions
and could be allocated an amount of taxable income in the event of a sale of
these contributed assets in excess of the economic or book income allocated to
us as a result of the sale. This may cause us to recognize taxable income in
excess of cash proceeds, which might adversely affect our ability to comply with
the REIT distribution requirements. See "Taxation of Home Properties - Annual
Distribution Requirements."
OTHER TAX CONSEQUENCES
STATE AND LOCAL TAX CONSIDERATIONS. We may be subject to state or local
taxation in various state or local jurisdictions, including those in which we
transact business and our stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which they reside.
Our state and local tax treatment may not conform to the federal income tax
consequences discussed above. In addition, your state and local tax treatment
may not conform to the federal income tax consequences discussed above.
Consequently, you should consult your own tax advisors regarding the effect of
state and local tax laws on an investment in our shares.
POSSIBLE FEDERAL TAX DEVELOPMENTS. The rules dealing with federal
income taxation are constantly under review by the IRS, the Treasury Department
and Congress. New federal tax legislation or other provisions may be enacted
into law or new interpretations, rulings or Treasury Regulations could be
adopted, all of which could affect the taxation of Home Properties or of its
stockholders. No prediction can be made as to the likelihood of passage of any
new tax legislation or other provisions either directly or indirectly affecting
Home Properties or its stockholders. Consequently, the tax treatment described
herein may be modified prospectively or retroactively by legislative, judicial
or administrative action.
PLAN OF DISTRIBUTION
This prospectus relates to the possible offer and sale by the Selling
Stockholder of up to 1,666,667 shares of common stock issuable upon conversion
of its shares of Series A Convertible Preferred Stock. We are registering the
shares of the Selling Stockholder for resale in order to provide it with freely
tradeable securities. The Selling Stockholder will offer the shares for its own
account, and not for our account. We will not receive any proceeds from the sale
of the offered shares by the Selling Stockholder.
The Selling Stockholder may from time to time, in one or more
transactions, or a series of transactions, sell all or a portion of the offered
shares on the New York Stock Exchange, in the over-the-counter market, on any
other national securities exchange on which our shares of common stock are
listed or traded, in negotiated transactions, in underwritten transactions or
otherwise, at prices then prevailing or related to the then current market price
or at negotiated
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prices. The offering price of the offered shares from time to time will be
determined by the Selling Stockholder and, at the time of the determination, may
be higher or lower than the market price of our common stock on the New York
Stock Exchange or any other exchange or market. In connection with an
underwritten offering, underwriters or agents may receive compensation in the
form of discounts, concessions or commissions from the Selling Stockholder or
from purchasers of the offered shares for whom they may act as agents. In
addition, underwriters may sell the offered shares to or through dealers, and
those dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. The offered shares may be sold directly or through
broker-dealers acting as principal or agent, or pursuant to a distribution by
one or more underwriters on a firm commitment or best-efforts basis. The methods
by which the offered shares may be sold include:
o a block trade in which a broker-dealer will attempt to sell
the offered shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
o an exchange distribution in accordance with the rules of the
New York Stock Exchange;
o the writing of options, whether the options are listed on an
options exchange or otherwise;
o the settlement of short sales;
o privately-negotiated transactions; and
o underwritten transactions.
From time to time, the Selling Stockholder may pledge, hypothecate or
grant a security interest in some or all of the offered shares. The pledgees,
secured parties or persons to whom the shares have been hypothecated will, upon
foreclosure in the event of default, be deemed to be Selling Stockholders. The
number of the Selling Stockholder's shares offered under this prospectus will
decrease as and when it takes any of the above actions. The plan of distribution
for the Selling Stockholder's shares will otherwise remain unchanged.
In connection with the distribution of the offered shares, the Selling
Stockholder may enter into hedging transactions with broker-dealers. In
connection with these hedging transactions, broker-dealers may engage in short
sales of the offered shares in the course of hedging the positions they assume
with the Selling Stockholder. The Selling Stockholder may also sell the offered
shares short and redeliver the offered shares to close out the short positions.
The Selling Stockholder may enter into option or other transactions with
broker-dealers, which
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require the delivery to the broker-dealer of the offered shares. The Selling
Stockholder may also loan or pledge the offered shares to a broker-dealer, and
the broker-dealer may sell the offered shares so loaned or, upon a default, the
broker-dealer may effect sales of the offered shares that are pledged. In
addition to the foregoing, the Selling Stockholder may enter into, from time to
time, other types of hedging transactions.
The Selling Stockholder and any underwriters, dealers or agents
participating in the distribution of the offered shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit on the
sale of the offered shares by the Selling Stockholder and any commissions
received by broker-dealers may be deemed to be underwriting commissions under
the Securities Act.
When the Selling Stockholder elects to make a particular offer of
offered shares, this prospectus and a prospectus supplement, if required, may be
distributed through the facilities of the New York Stock Exchange under Rule 153
of the Securities Act. A prospectus supplement, if required, will identify any
underwriters, dealers or agents and any discounts, commissions and other terms
constituting underwriting compensation from the Selling Stockholder and any
other required information.
We have agreed to pay the costs and expenses incurred in connection
with the registration under the Securities Act of the offered shares, including:
o all registration and filing fees;
o printing expenses and fees; and
o disbursements of counsel and accountants for us.
The Selling Stockholder will pay:
o any underwriting discounts, sales and commissions;
o fees and disbursements of counsel for the Selling Stockholder;
and
o transfer taxes, if any.
Under agreements that may be entered into by us, underwriters, dealers
and agents who participate in the distribution of offered shares, and their
respective directors, trustees, officers, partners, agents, employees and
affiliates, may be entitled to indemnification by us against various
liabilities, including liabilities under the securities laws in connection with
this offering, or may be entitled to contributions from us towards payments
which the underwriters, dealers or agents may be required to make. We have also
agreed to indemnify the Selling Stockholder and its officers, directors,
partners, employees, agents and representatives of, and each person who controls
any thereof (within the meaning of the Securities Act), the Selling Stockholder,
against any losses, claims, damages, liabilities, judgments, fines, penalties,
charges, costs, reasonable attorneys' fees, amounts paid in settlement or
expenses, joint or several, arising under the securities laws in connection with
this offering. The Selling Stockholder has agreed to indemnify us, our officers,
directors, employees, agents, representatives and each person who
37
controls any thereof (within the meaning of the Securities Act), against any
losses, claims, damages, liabilities, judgments, fines, penalties, charges,
costs, reasonable attorneys' fees, amounts paid in settlement or expenses, joint
or several, arising under the securities laws in connection with this offering
with respect to written information furnished to us by the Selling Stockholder
expressly for use in the registration statement of which this prospectus is a
part.
The Selling Stockholder is subject to the applicable provisions of the
Exchange Act and the rules and regulations under the Exchange Act, including
Regulation M. This regulation may limit the timing of purchases and sales of any
of the offered shares by the Selling Stockholder. The anti-manipulation rules
under the Exchange Act may apply to sales of offered shares in the market and to
the activities of the Selling Stockholder and its affiliates. Furthermore,
Regulation M may restrict the ability of any person engaged in the distribution
of the offered shares to engage in market-making activities for the particular
securities being distributed for a period of up to five business days before the
distribution. The restrictions may affect the marketability of the offered
shares and the ability of any person or entity to engage in market-making
activities for the offered shares.
To the extent required, this prospectus may be amended and/or
supplemented from time to time to describe a specific plan of distribution. In
addition, any offered shares covered by this prospectus that qualify for sale
pursuant to Rule 144 may be sold under Rule 144 under the Securities Act rather
than pursuant to this prospectus.
EXPERTS
The financial statements incorporated in this prospectus by reference
to our Annual Report on Form 10-K for the year ended December 31, 2000, the
audited historical financial statements included on our Form 8-K/A Amendment No.
1 dated June 30, 2000 and filed on January 16, 2001, the audited historical
financial statements included our Form 8-K/A Amendment No. 1, dated December 27,
2000 and filed on March 15, 2001, and the audited historical financial
statements included our Form 8-K/A Amendment No. 1, dated March 30, 2001 and
filed on November 27, 2001, have been so incorporated in reliance on the reports
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon by
Nixon Peabody LLP, Rochester, New York. Certain partners of Nixon Peabody LLP
own Units in the Operating Partnership equal to less than 1% of our outstanding
equity on a fully diluted basis. Nixon Peabody LLP has also provided an opinion
with respect to certain tax matters which form the basis of the discussion under
the caption "Federal Income Tax Matters."
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