-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GLBMLb22mTxDjb39F952JDWbDGV0b+wzR3IARErd/Rq7QGBjxRmyJoeQts/+zDuI ZBHc+YVIASx4J1f6hPRk6A== 0000926861-98-000005.txt : 19980504 0000926861-98-000005.hdr.sgml : 19980504 ACCESSION NUMBER: 0000926861-98-000005 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19980430 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST WASHINGTON REALTY TRUST INC CENTRAL INDEX KEY: 0000926861 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 521879972 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-51427 FILM NUMBER: 98606441 BUSINESS ADDRESS: STREET 1: 4350 EAST WEST HWY - STE 400 CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 3019077800 MAIL ADDRESS: STREET 1: 4350 EAST WEST HIGHWAY SUITE 400 STREET 2: 4350 EAST WEST HIGHWAY SUITE 400 CITY: BETHESDA STATE: MD ZIP: 20814 S-3 1 FORM S-3 As Filed with the Securities and Exchange Commission on April 30, 1998 Registration No. 333-[ ] SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FIRST WASHINGTON REALTY TRUST, INC. (Exact Name of Registrant as Specified in its Charter) Maryland 52-1879972 (State or Other Jurisdiction of (IRS Employer Identification Incorporation or Organization) Number) 4350 East-West Highway, Suite 400 Bethesda, Maryland 20814 (301) 907-7800 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) William J. Wolfe President and Chief Executive Officer 4350 East-West Highway, Suite 400 Bethesda, Maryland 20814 (301) 907-7800 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) with a copy to: R. Ronald Hopkinson, Esq. Latham & Watkins 885 Third Avenue Suite 1000 New York, New York 10022 Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement as determined by market conditions. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the "Securities Act"), other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ___________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ___________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE Proposed Proposed Maximum Maximum Title of Each Aggregate Aggregate Amount of Class of Securities Amount to be Price Offering Registration to be Registered Registered Per Unit (1) Price Fee Common Stock 55,335 $26.782 $1,481,982 $512 - ---------------------------------------- ------------------------ ------------ 9.75% Series A 9,538 34.00 324,292 112 Cumulative Participating Convertible Preferred Stock $624 - ---------------------------------------- ------------------------ ------------ (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c), and based on a per share of $26.782 and $34.00, the average of the high and low prices of the Company's common stock and convertible preferred stock, respectively, as reported on the New York Stock Exchange on April 27, 1998. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. PROSPECTUS SUBJECT TO COMPLETION DATED APRIL 30, 1998 FIRST WASHINGTON REALTY TRUST, INC. 9,538 Shares 9.75% Series A Cumulative Participating Convertible Preferred Stock (Liquidation Preference of $25 Per Share) 55,335 Shares Common Stock ($0.01 Par Value Per Share) ------------------------ All of the shares of Common Stock, par value $0.01 per share (the "Common Stock"), and 9.75% Series A Cumulative Participating Convertible Preferred Stock, par value $0.01 per share, liquidation value $25.00 per share (the "Convertible Preferred Stock", and together with the Common Stock, the "Securities") of First Washington Realty Trust, Inc., a Maryland corporation (the "Company"), offered hereby are being offered by the Company upon the exchange of certain partnership units as described more fully herein. The Company will not receive any of the proceeds from the sale of the shares offered hereby. See "Plan of Distribution." The Company engages in the acquisition, property management, leasing, renovation and development of principally supermarket-anchored neighborhood shopping centers. The Company is a fully-integrated, self-administered and self-managed real estate company that operates as a real estate investment trust (a "REIT"). The Company is the sole general partner of, and owns approximately 79% of the partnership interests in, First Washington Realty Limited Partnership (the "Operating Partnership"). For convenience, the business of the Company and the business of the Operating Partnership are sometimes referred to herein collectively as the "Company"). All of the Company's operations are conducted through the Operating Partnership. The Company owns a portfolio of 49 retail properties. The 49 retail properties contain a total of approximately 5.2 million square feet of gross leasable area ("GLA"). The Company, through a subsidiary, First Washington Management, Inc. (the "Management Company"), also provides management, leasing and related services to properties owned by third parties. The Company's Common Stock and Convertible Preferred Stock are listed on the New York Stock Exchange ("NYSE") under the symbol "FRW" and "FRW pf," respectively. On April 27, 1998, the closing sale price of the Common Stock and Convertible Preferred Stock as reported on the NYSE were $26.625 and $34 per share, respectively. To assist the Company in maintaining its qualification as a REIT, transfer of the Common Stock and the Convertible Preferred Stock is restricted, and actual or constructive ownership by any person is limited to 9.8% of the outstanding shares of Common Stock and 9.8% of the outstanding shares of Convertible Preferred Stock, subject to certain exceptions. The registration statement of which this Prospectus is a part is being filed pursuant to contractual obligations of the Company. This Prospectus relates to (i) the possible issuance by the Company of up to 55,335 shares (the "Exchange Common Shares") of Common Stock of the Company if, and to the extent that, holders of up to 55,335 common units of limited partnership interest in the Operating Partnership ("Common Units") tender such Common Units for exchange and (ii) the possible issuance by the Company of up to 9,538 shares (the "Exchanged Preferred Shares," and together with the Exchange Common Shares, the "Exchange Shares") of Convertible Preferred Stock of the Company if, and to the extent that, holders of up to 9,538 shares of preferred units of limited partnership interest in the Operating Partnership ("Exchangeable Preferred Units") tender such Exchangeable Preferred Units for exchange. The Company is registering the Exchange Shares to provide the holders thereof with freely tradable securities, but the registration of such shares does not necessarily mean that any of such shares will be offered or sold by the holders thereof. See "Risk Factors" incorporated by reference from the Company's Current Report on Form 8-K filed on September 10, 1997 for certain factors relevant to an investment in the Convertible Preferred Stock and Common Stock. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is ________, 1998 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: Midwest Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York, 10048. Copies of such material may be obtained from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also maintains a website at http://www.sec.gov containing reports, prospectuses and information statements and other information regarding registrants, including the Company, that file electronically. Copies of such materials and other information concerning the Company also are available for inspection at The New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a Registration Statement on Form S-3 (together with all amendments, exhibits and schedules, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Securities. The Prospectus and any accompanying Prospectus Supplement do not contain all of the information included in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Securities, reference is hereby made to the Registration Statement, including the exhibits and schedules thereto. Statements contained in this Prospectus and any accompanying Prospectus Supplement concerning the provisions or contents of any contract, agreement or any other document referred to herein are not necessarily complete. With respect to each such contract, agreement or document filed as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description of the matters involved, and each such statement shall be deemed qualified in its entirety by such reference to the copy of the applicable document filed with the Commission. The Registration Statement may be inspected without charge at the Commission's principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and copies of it or any part thereof may be obtained from such office, upon payment of the fees prescribed by the Commission. The Registration Statement also may be retrieved from the Commission's website. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents which have previously been filed by the Company with the Commission are incorporated herein by reference: (1) the Company's Annual Report on Form 10-K for the year ended December 31, 1997 filed with the Commission on March 31, 1998; (2) the description of the Company's Common Stock and Convertible Preferred Stock contained in the Company's Registration Statement on Form 8-A filed with the Commission on August 9, 1996; (3) the Company's Proxy Statement with respect to its Annual Meeting of Shareholders to be held on May 8, 1998. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering of the Securities made hereby shall be deemed to be incorporated in this Prospectus by reference and to be a part hereof from the date of filing of such documents. Any statement contained herein, or in a document incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently filed document which also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person, including any beneficial owner, to whom a copy of this Prospectus is delivered, on the written request of any such person, a copy of any or all of the documents incorporated herein by reference, except the exhibits to such documents (unless such exhibits are specifically incorporated by reference in such documents). Requests for such copies should be directed to the Company, at 4350 East-West Highway, Suite 400, Bethesda, MD 20814, Attention: Investor Relations; telephone number (301) 907-7800. - 2 - This Prospectus, including the documents incorporated herein by reference, contain forward-looking statements within the meaning of Section 27A of the Securities Act. Also, documents subsequently filed by the Company with the Commission and incorporated herein by reference will contain forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors incorporated herein by reference and the matters set forth or incorporated in this Prospectus generally. The Company cautions the reader, however, that such list of factors may not be exhaustive, particularly with respect to future filings. Prospective investors should carefully consider, among other factors, the risk factors incorporated herein by reference. Although the Company, the Operating Partnership, the Lower Tier Partnerships (as defined below), and the Management Company are separate entities, each of which is managed in accordance with its governing documents, for ease of reference, the term "Company" as used herein shall refer to the business and properties of the Company, the Operating Partnership, the Lower Tier Partnerships, and the Management Company, unless the context indicates otherwise. THE COMPANY General The Company is a fully-integrated, self-administered and self-managed real estate company that operates as a REIT with expertise in the acquisition, property management, leasing, renovation and development of principally supermarket-anchored neighborhood shopping centers. As of March 31, 1998, the Company owned a portfolio of 49 retail properties (the "Retail Properties" or the "Properties"). The 49 Retail Properties contain a total of approximately 5.2 million square feet of GLA. The Company's business strategy is highly focused with respect to property type and location. The Company concentrates its efforts on supermarket-anchored neighborhood shopping centers. The Company generally seeks to own properties located in densely populated areas, that have high visibility, open-air designs and ease of entry and exit, and that may be readily adaptable over time to expansion, renovation and redevelopment. The Retail Properties are strategically located neighborhood shopping centers principally anchored by well known tenants such as Giant Food, Safeway, Shoppers Food Warehouse, Food Lion, A&P Superfresh, Winn Dixie, Weis Markets, Acme Market, Dominick's Supermarket, CVS/Pharmacy and Rite Aid. Neighborhood shopping centers are typically open-air centers ranging in size from 50,000 to 150,000 square feet of GLA and anchored by supermarkets and/or drug stores. The Retail Properties range in size from approximately 3,000 square feet of GLA to approximately 335,000 square feet of GLA, and average approximately 106,000 square feet of GLA. The anchor tenants typically offer daily necessity items rather than specialty goods. Nine of the Retail Properties are relatively small in size, with less than 50,000 square feet of GLA. Such properties do not have a large supermarket or drug store anchor tenant, and as such may be subject to greater variability in consumer traffic and operating performance. The Company's assets are held by, and all its operations are conducted through, the Operating Partnership and the Management Company. Certain of the Properties are owned by partnerships (or limited liability companies) in which the Operating Partnership, the Company or a subsidiary of the Company acts as general partner (or managing member) and owns a controlling interest (the "Lower Tier Partnerships"). The Company is the sole general partner of the Operating Partnership and the Company currently owns approximately 79% of the partnership interests in the Operating Partnership. The limited partners are individuals, partnerships and others who have contributed their properties in exchange for partnership interests ("Units"). The limited partners may exchange their Units for cash, or at the option of the Company, for stock of the Company on a 1 for 1 basis. The Operating Partnership owns 100% of the non-voting preferred stock of the Management Company, and is entitled to 99% of the cash flow from the Management Company. The Company was formed in April 1994 to continue and expand the neighborhood shopping center acquisition, management and renovation strategies of First Washington Management, Inc. ("FWM"), which has been engaged in the business since 1983. FWM was founded by Stuart D. Halpert, the Company's Chairman, William J. Wolfe, President and Chief Executive Officer, and Lester Zimmerman, an Executive Vice President (the "Principals"). The Company has approximately 70 employees, including a team of asset and property managers and leasing agents and in-house legal, architectural, engineering, accounting, marketing and computer specialists. The Company's executive and principal property management office is located at 4350 East-West Highway, Suite 400, Bethesda, Maryland 20814 and its telephone number is (301) 907-7800. The Company has regional property management offices located in North Carolina, Pennsylvania and Virginia. - 3 - Growth Strategies The Company seeks to increase cash flow and distributions, as well as the value of its portfolio, through intensive property management and strategic renovation and expansion of its properties and the opportunistic acquisition of additional neighborhood shopping centers within the Mid-Atlantic region and the Chicago metropolitan area, where the Company has extensive knowledge of local market growth patterns and economic conditions. The Company would also consider acquisitions in other metropolitan markets which management determines to be both attractive and conveniently accessible. Intensive Management. A key aspect of the Company's strategy is improving the operating performance of its properties over time through intensive property management. The Company seeks to increase operating margins through a combination of increasing revenues (through increased occupancy and/or rental rates), maintaining high tenant retention rates (i.e., the percentage of tenants who renew their leases upon expiration), and aggressively managing operating expenses. The Company believes that, as a fully integrated real estate organization with both owned and third-party managed properties, it enjoys significant operating efficiencies relative to many of its competitors that operate smaller, fragmented portfolios. These operating efficiencies are the result of economies of scale in operating expenses, more effective leasing and marketing efforts, and enhanced tenant retention levels. The Company also benefits from effectively spreading certain fixed property management and leasing costs over its entire owned and third-party managed portfolio. Management believes that the scope of the Company's portfolio, combined with the Principals' professional and community ties to the Mid-Atlantic region and the Chicago metropolitan area, enables the Company to develop long-term relationships with national and regional tenants which occupy multiple properties in its portfolio, which improves occupancy rates and tenant retention levels. Strategic Renovation and Expansion. The Company seeks to increase operating results through the strategic renovation and expansion of certain of the Properties. The Retail Properties are typically adaptable for varied tenant layouts and can be reconfigured to accommodate new tenants or the changing space needs of existing tenants. In determining whether to proceed with a renovation or expansion, the Company considers both the cost of such expansion or renovation and the increase in rent attributable to such expansion or renovation. The Company believes that the Retail Properties will provide opportunities for renovation and expansion. As a fully-integrated real estate organization, the Company maintains expertise in the development of new retail properties, having developed three of the FWM Properties containing approximately 525,000 square feet of GLA. Management believes the Company's principal anchor tenants and other real estate professionals present the Company with development opportunities which the Company may pursue. Opportunistic Acquisitions. Another principal component of the Company's strategy is the acquisition of additional neighborhood shopping centers within the Mid-Atlantic region and Chicago, Illinois. The Company will seek to acquire properties which are strategically located along major traffic arteries in well-established, densely populated communities. The Company typically selects properties in locations where it believes the supply of developable land and zoning restrictions impede the development of competing shopping centers and where tenants' location alternatives are limited. The Company would also consider acquisitions in other metropolitan markets which management determines to be both attractive and conveniently accessible. Through its third-party management, leasing and related service business and network of regional management and leasing offices, the Company is familiar with local conditions in its given markets. Because the Company's third-party clients frequently seek assistance with the revitalization and disposition of the properties, the Company believes it is in a unique position to ultimately acquire such properties. For example, FWM provided property management and leasing services for five properties acquired from third-party clients. The Company believes opportunities for neighborhood shopping center acquisitions are particularly attractive at this time because of the fragmentation in ownership of such properties, the limited amount of available capital for non-institutional owners of retail property, and the decline in the construction of new retail properties. When evaluating potential acquisitions, the Company will consider such factors as: (i) economic, demographic, and regulatory conditions in the property's local and regional market; (ii) the location, construction quality, and design of the property; (iii) the current and projected cash flow of the property and the potential to increase cash flow; (iv) the potential for capital appreciation of the property; (v) the terms of tenant leases, including the relationship between the property's current rents and market rents and the ability to increase rents upon lease rollover; (vi) the occupancy and demand by tenants for properties of a similar type in the market area; (vii) the potential to - 4 - complete a strategic renovation, expansion, or retenanting of the property; (viii) the property's current expense structure and the potential to increase operating margins; and (ix) competition from comparable retail properties in the market area. The Company successfully completed the acquisition of 36 properties since its organization in April 1994. Property Management, Leasing And Related Service Business Through its interest in the Management Company, the Company has continued the property management, leasing and related service business of FWM. The Operating Partnership owns all of the non-voting preferred stock of the Management Company, entitled to 99% of the cash flow of the Management Company. The outstanding common stock of the Management Company, entitled to 1% of the cash flow of the Management Company, is owned by certain members of management. In addition to the Properties, as of March 31, 1998, the Management Company provided management, leasing and related services to 25 properties comprising approximately 2.9 million square feet of GLA for 15 third-party clients. In addition to providing another source of growth for funds from operations, management believes that the third-party management business allows the Company to: (i) achieve operating efficiencies in managing its owned properties through the bulk purchase of goods and services; (ii) develop more extensive, long-term relationships with tenants in multiple properties; and (iii) identify additional acquisition opportunities from third-party clients interested in the eventual sale of their properties. Services are provided to third-party owners pursuant to contracts that are of varying lengths of time and which generally provide for management fees of up to 5.0% of monthly gross property receipts. The management contracts are typically cancelable upon 30 days' notice or upon certain events, including the sale of the property. Leasing fees typically range from 3.0% to 6.0% of the minimum base rents payable during the initial term of the lease. Management believes that the Management Company has an excellent reputation with respect to lease renewals, increases in net operating income for managed properties, and its timely and accurate reporting to clients. In addition to its third-party management and leasing business, the Management Company provides related services including consulting and brokerage services for which it receives customary fees. DESCRIPTION OF CAPITAL STOCK The following summary of the terms of the stock of the Company does not purport to be complete and is subject to and qualified in its entirety by reference to the Maryland General Corporation Law (the "MGCL") and to the Company's charter (the "Charter") (a copy of which is an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) and the Company's bylaws (the "Bylaws") (a copy of which is an exhibit to the Registration Statement filed in connection with the June 1994 Offering). See "Available Information." General The Charter authorizes the Company to issue up to 100,000,000 shares of capital stock, consisting of 90,000,000 shares of common stock, par value $0.01 per share (the "Common Stock"), and 10,000,000 shares of preferred stock, par value $0.01 per share. As of December 31, 1997, 7,291,732 shares of Common Stock and 2,314,189 shares of Convertible Preferred Stock were issued and outstanding. Under Maryland law, stockholders generally are not liable for the corporation's debts or obligations solely as a result of their status as stockholders. In determining whether a distribution (other than upon voluntary or involuntary liquidation), by distribution, redemption or other acquisition of shares or otherwise, is permitted under the MGCL, the amount of the aggregate liquidation preference of the Convertible Preferred Stock will not be counted as a liability of the Company. Common Stock Subject to the preferential rights of any other shares or series of capital stock, holders of shares of Common Stock are entitled to receive distributions on such shares if, as and when authorized and declared by the Board of Directors of the Company out of assets legally available therefor and to share ratably in the assets of the Company legally available for distribution to its stockholders in the event of its liquidation, dissolution or winding-up after payment of, or adequate provision for, all known debts and liabilities of the Company. Holders of shares of Convertible Preferred Stock are entitled to participate in amounts available for distribution on the Common Stock in excess of $0.4875 per share of Common Stock with respect to any quarterly distribution payment, based on the number of shares of Common Stock (or fraction thereof ) into which each share of Convertible Preferred Stock is (or will be) convertible. See "--Convertible Preferred Stock--Distributions." Subject to the matters discussed under "Certain Provisions of Maryland Law and the Company's Charter and Bylaws--Control Share Acquisitions," each outstanding share of Common Stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors, and except as provided with - 5 - respect to any other class or series of stock, the holders of such shares of Common Stock possess the exclusive voting power. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of Common Stock can elect all of the directors then standing for election and the holders of the remaining shares of Common Stock will not be able to elect any directors. Holders of shares of Common Stock have no preference, conversion, sinking fund, redemption or exchange rights or preemptive rights to subscribe for any securities of the Company. All shares of a particular class of issued Common Stock have equal dividend, distribution, liquidation and other rights. Pursuant to the MGCL, a corporation generally cannot (except under and in compliance with specifically enumerated provisions of the MGCL) dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless approved by the affirmative vote of stockholders holding at least two-thirds of the shares entitled to vote on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation's charter. The Charter provides for approval of any such action by a majority of the votes entitled to be cast in the matter, except in the case of amendment of the Charter provisions relating to removal of directors, classification of the Board of Directors, voting rights of the Common Stock or voting requirements for charter amendments. In addition, a number of other provisions of the MGCL could have a significant effect on the shares of Common Stock and the rights and obligations of holders thereof. See "Certain Provisions of Maryland Law and the Company's Charter and Bylaws." Convertible Preferred Stock Distributions. Holders of shares of the Convertible Preferred Stock are entitled to receive, when and as declared by the Board of Directors, out of assets legally available for the payment of distributions, cumulative preferential cash distributions in an amount per share of Convertible Preferred Stock equal to $0.6094 per quarter ($2.4375 per annum) plus a participating distribution equal to the amount, if any, of distributions in excess of $0.4875 per quarter payable on the applicable Distribution Payment Date with respect to the number of shares of Common Stock (or fraction thereof) into which a share of Convertible Preferred Stock is then (or will be) convertible. The amount of participating distribution payable on any Distribution Payment Date will equal the number of shares of Common Stock, or fraction thereof, into which a share of Convertible Preferred Stock is then (or will be) convertible, multiplied by the quarterly distribution in excess of $0.4875 per share paid with respect to a share of Common Stock on such Distribution Payment Date. As a result of such participation right of the Convertible Preferred Stock, distributions on Convertible Preferred Stock and Common Stock will be made out of cash available for distribution as follows: (i) first, the outstanding shares of Convertible Preferred Stock will receive $0.6094 per share per quarter; (ii) second, the outstanding shares of Common Stock will receive $0.4875 per share per quarter; and (iii) third, any remaining cash available for distribution will be shared equally among the outstanding shares of Common Stock and Convertible Preferred Stock as if all of the outstanding shares of Convertible Preferred Stock were converted into shares of Common Stock. Distributions with respect to the Convertible Preferred Stock are cumulative from the date of original issuance of such stock and are payable quarterly in arrears on the fifteenth day of each August, November, February, and May or, if such day is not a business day, on the next succeeding business day (each, a "Distribution Payment Date"). If, for any taxable year, the Company elects to designate as "capital gains dividends" (as defined in Section 857 of the Internal Revenue Code of 1986, as amended, the "Code") any portion (the "Capital Gains Amount") of the dividends (within the meaning of the Code) paid or made available for the year to holders of all classes of stock (the "Total Dividends"), then the portion of the Capital Gains Amount that will be allocable to the holders of Convertible Preferred Stock will be the Capital Gains Amount multiplied by a fraction, the numerator of which shall be the total dividends (within the meaning of the Code) paid or made available to the holders of the Convertible Preferred Stock for the year and the denominator of which shall be the Total Dividends. Liquidation Rights. In the event of any liquidation, dissolution or winding up of the Company, subject to the prior rights of any series of capital stock ranking senior to the Convertible Preferred Stock, the holders of shares of Convertible Preferred Stock will be entitled to be paid out of the assets of the Company legally available for distribution to its stockholders a liquidation preference equal to the sum of $25.00 per share plus an amount equal to any accrued and unpaid distributions thereon (whether or not earned or declared) to the date of payment (the "Convertible Preferred Liquidation Preference Amount"), before any distribution of assets is made to holders of Common Stock or any other capital stock that ranks junior to the Convertible Preferred Stock as to liquidation rights. After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Convertible Preferred Stock will have no right or claim to any of the remaining assets of the Company. - 6 - Redemption. The Convertible Preferred Stock is not redeemable prior to July 15, 1999, except under certain limited circumstances to preserve the Company's status as a REIT, as described below under "-- Restrictions on Ownership, Transfer and Conversion." On and after July 15, 1999, the Company, at its option (to the extent the Company has assets legally available therefor) upon not less than 30 nor more than 60 days' written notice, may redeem shares of the Convertible Preferred Stock, in whole or in part, at any time or from time to time, for cash at the redemption price per share specified below, plus all accrued and unpaid distributions, if any, thereon (whether or not earned or declared) to the date fixed or redemption, if redeemed during the twelve-month period beginning on July 15, of each year specified below: YEAR PRICE 1999 $27.44 2000 26.95 2001 26.46 2002 25.98 2003 25.49 2004 and thereafter 25.00
The Convertible Preferred Stock has no stated maturity and will not be subject to any sinking fund. In addition to the redemption provision described above, shares of Convertible Preferred Stock will be subject to redemption under certain circumstances in order to preserve the Company's status as a REIT. See "--Restrictions on Ownership, Transfer and Conversion." Voting Rights. Holders of the Convertible Preferred Stock do not have any voting rights, except as set forth below. In any matter in which the Convertible Preferred Stock may vote, including any action by written consent, each share of Convertible Preferred Stock is entitled to one vote. The holders of each share of the Convertible Preferred Stock may separately designate a proxy for the vote to which that share of Convertible Preferred Stock is entitled. Whenever distributions on any shares of the Convertible Preferred Stock have been in arrears for six or more quarterly periods, the holders of such shares of Convertible Preferred Stock (voting separately as a class with all other series of preferred stock upon which rights to vote on such matter with the Convertible Preferred Stock have been conferred and are then exercisable, with each series having a number of votes proportional to the aggregate liquidation preference of its outstanding shares) will be entitled to elect two additional directors of the Company at a special meeting called by the holders of record of at least 10% of the outstanding shares of Convertible Preferred Stock and such other preferred stock, if any (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of the stockholders), or at the next annual meeting of stockholders, and at each subsequent annual meeting until all distributions accumulated on such shares of the Convertible Preferred Stock for the past distribution periods and the then current distribution period have been fully paid or declared and a sum sufficient for the payment thereof set aside for payment. In such event, the number of directors of the Company will be increased by two. Such right to elect two directors will continue until payment of the distribution arrearage for the Convertible Preferred Stock, at which time the term of any such directors shall expire. Conversion. Subject to the exceptions described under "--Restrictions on Ownership, Transfer and Conversion," holders of the Convertible Preferred Stock have the right, as provided in the charter, exercisable on or after May 31, 1999, except in the case of Convertible Preferred Stock called for redemption, to convert all or any of the outstanding shares of Convertible Preferred Stock (with each share of Convertible Preferred Stock valued for purposes of conversion at the Convertible Preferred Liquidation Preference Amount (currently $25.00 per share) determined immediately following the most recent Convertible Preferred Distribution Payment Date) into shares of Common Stock at a conversion price of $19.50 per share of Common Stock, subject to adjustment upon the occurrence of certain events. In the case of Convertible Preferred Stock called for redemption, conversion rights will expire at the close of business on the third business day immediately preceding the date fixed for redemption. Restrictions on Ownership, Transfer and Conversion. As discussed below under "--Restrictions on Ownership, Transfer and Conversion," because the Company intends to continue to qualify as a REIT under the Code, the Company's charter contains certain provisions described more fully in that section restricting the ownership, transfer and conversion of the Convertible Preferred Stock and other classes of capital stock of the Company. All certificates representing shares of Convertible Preferred Stock bear a legend referring to the ownership, transfer and conversion restrictions applicable to such shares. - 7 - Rank. The Convertible Preferred Stock, with respect to dividend rights and distributions upon liquidation, dissolution, and winding up, ranks (i) senior to the Common Stock, all other shares of Common Stock of the Company of all classes and series, and shares of all other classes or series of capital stock issued by the Company other than any series of capital stock the terms of which specifically provide that the capital stock of such series rank senior to or on a parity with such Convertible Preferred Stock with respect to dividend rights or distributions upon liquidation, dissolution, or winding up of the Company, as the case may be; (ii) on a parity with the shares of all other capital stock issued by the Company the terms of which specifically provide that the shares rank on a parity with the Convertible Preferred Stock with respect to dividends and distributions upon liquidation, dissolution, or winding up of the Company or make no specific provision as to their ranking; and (iii) junior to any capital stock issued by the Company the terms of which specifically provide that the shares rank senior to the Convertible Preferred Stock with respect to dividends and distributions upon liquidation, dissolution, or winding up of the Company, as the case may be (the issuance of which must have been approved by a vote of at least two-thirds of the outstanding shares of Convertible Preferred Stock). Power To Issue Additional Shares Of Common Stock And Preferred Stock The Board of Directors has the power under the Charter to authorize the Company to issue additional authorized but unissued shares of Common Stock and preferred stock (including any unissued shares of any series of preferred stock, to the extent permitted by the terms of such series) and to classify or reclassify unissued shares of Common or preferred stock and thereafter to cause the Company to issue such classified or reclassified shares of stock. Prior to the issuance of such shares of Common Stock and shares or series of preferred stock, the Board of Directors is required by the MGCL and the Charter of the Company to fix, the terms, preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each share or series. The Company believes that this power of the Board of Directors provides the Company with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. The additional classes or series, as well as the Common Stock, will be available for issuance without further action by the Company's stockholders (provided, however, that the issuance of additional series of preferred stock with rights senior to the Convertible Preferred Stock is subject to the approval of the holders of Convertible Preferred Stock), unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which the Company's securities may be listed or traded. Although the Board of Directors has no intention at the present time of doing so, it could authorize the Company to issue a class or series that could, depending upon the terms of such class or series, delay, defer or prevent a change of control of the Company or other transaction that might involve a premium price for the Common Stock and Convertible Preferred Stock or otherwise be in the best interest of the stockholders. Restrictions On Ownership, Transfer And Conversion For the Company to qualify as a REIT under the Code, not more than 50% in value of the issued and outstanding capital stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year and the capital stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of twelve months (or during a proportionate part of a shorter taxable year). In addition, rent from Related Party Tenants (as defined below under "Federal Income Tax Considerations--Taxation of the Company --Income Tests") is not qualifying income for purposes of the gross income tests of the Code. See "Federal Income Tax Considerations--Taxation of the Company--Requirements for Qualification." Because the Board of Directors believes it is essential for the Company to qualify as a REIT, the Board of Directors has adopted, and the stockholders prior to the June 1994 Offering have approved, provisions in the Charter restricting the acquisition and ownership of shares of the Company's capital stock. Subject to certain exceptions specified in the Charter, no holder may own, either actually or constructively under the applicable attribution rules of the Code, more than 9.8% (by number or value, whichever is more restrictive) of the outstanding shares of Common Stock (the "Common Ownership Limit"). Except as described below, the Common Ownership Limit will not apply, however, to holders of shares of Common Stock who acquire shares of Common Stock in excess of the Common Ownership Limit solely by reason of the conversion of shares of Convertible Preferred Stock owned by such holder into shares of Common Stock. Subject to certain exceptions specified in the Charter, no holder may acquire, either actually or constructively under the applicable attribution rules of the Code, more than 9.8% (by number or value, whichever is more restrictive) of the outstanding shares of Convertible Preferred Stock (the "Convertible Preferred Ownership Limit"). Except as described below, there are no restrictions on the ability of a holder of shares of Convertible Preferred - 8 - Stock to convert such shares into shares of Common Stock even if, as a result of such conversion, the holder will own shares of Common Stock in excess of the Common Ownership Limit. However, no person may actually or constructively acquire or own shares of Convertible Preferred Stock or shares of Common Stock, or convert Convertible Preferred Stock into Common Stock, to the extent that the aggregate value of Convertible Preferred Stock and Common Stock actually and constructively owned by such person would exceed 9.8% of the total value of the outstanding shares of the capital stock of the Company (the "Aggregate Stock Ownership Limit"). Under certain circumstances, this limitation could prevent a person who owns shares of Convertible Preferred Stock from converting a portion of such shares into shares of Common Stock. If, as a result of a purported acquisition (actual or constructive) of capital stock, any person (a "Prohibited Transferee") would acquire, either actually or constructively under the applicable attribution rules of the Code, shares of capital stock in excess of an applicable ownership restriction, such shares will be automatically transferred to a trust for the benefit of a charitable beneficiary, effective as of the close of business on the business day prior to the purported acquisition by the Prohibited Transferee. While such stock is held in trust, the trustee shall have all voting rights with respect to the shares, and all dividends or distributions paid on such stock will be paid to the trustee of the trust for the benefit of the charitable beneficiary (any dividend or distribution paid on shares of capital stock prior to the discovery by the Company that such shares have been automatically transferred to the trust shall, upon demand, be paid over to the trustee for the benefit of the charitable beneficiary). Within 20 days of receiving notice from the Company of the transfer of shares to the trust, the trustee of the trust is required to sell the shares held in the trust to a person who may own such shares without violating the ownership restrictions (a "Permitted Holder"). Upon such sale, the price paid for the shares by the Permitted Holder shall be distributed to the Prohibited Transferee to the extent of the lesser of (i) the price paid by the Prohibited Transferee for the shares or, in the case of a transfer of shares to a trust resulting from an event other than an actual acquisition of shares by a Prohibited Transferee, the Market Price (as defined in the Charter) on the date of transfer to the trust, of the shares so transferred or (ii) the price per share received by the trustee from the sale or other disposition of the shares held in the trust. Any proceeds in excess of this amount shall be paid to the charitable beneficiary. An automatic repurchase of shares by the Company will occur to the extent necessary to prevent any violation of the Convertible Preferred Ownership Limit, Common Ownership Limit, or the Aggregate Stock Ownership Limit as the result of events other than the actual or constructive acquisition of capital stock by the holder, such as changes in the relative value of different classes of the Company's capital stock. In the event of any such automatic repurchase, the repurchase price of each share will be equal to the market price on the date of the event that resulted in the repurchase. Any dividend or other distribution paid to a holder of repurchased shares (prior to the discovery by the Company that such shares have been automatically repurchased by the Company as described above) will be required to be repaid to the Company upon demand. If shares of capital stock which would cause the Company to be beneficially owned by less than 100 persons are issued or transferred to any person, such issuance or transfer shall be null and void to the intended transferee, and the intended transferee would acquire no rights to such stock. The Board of Directors may waive the Common Ownership Limit or the Convertible Preferred Ownership Limit or the Aggregate Stock Ownership Limit with respect to a particular stockholder if evidence satisfactory to the Board of Directors and the Company's tax counsel is presented that such ownership will not then or in the future jeopardize the Company's status as a REIT. As a condition of such waiver, the Board of Directors may require opinions of counsel satisfactory to it and/or an undertaking from the applicant with respect to preserving the REIT status of the Company. In addition to any of the foregoing ownership limits, no holder may own, either actually or constructively under the applicable attribution rules of the Code, any shares of any class of the Company's capital stock if such ownership or acquisition (i) would cause more than 50% in value of the Company's outstanding capital stock to be owned, either actually or constructively under the applicable attribution rules of the Code, by five or fewer individuals (as defined in the Code to include certain entities), (ii) would result in the Company's capital stock being beneficially owned by less than 100 persons (determined without reference to any rules of attribution), or (iii) would otherwise result in the Company failing to qualify as a REIT. Acquisition or ownership (actual or constructive) of the Company's capital stock in violation of these restrictions will result in automatic transfer of such stock to a trust for the benefit of a charitable beneficiary, automatic repurchase of the violative shares by the Company, or the violative transfer will be deemed void ab initio, as described above. If the Board of Directors shall at any time determine in good faith that a person intends to acquire or own, has attempted to acquire or own, or may acquire or own capital stock of the Company in violation of the above - 9 - described limits, the Board of Directors shall take such action as it deems advisable to refuse to give effect or to prevent such ownership or acquisition, including but not limited to causing the Company to repurchase stock, refusing to give effect to such ownership or acquisition on the books of the Company, or instituting proceedings to enjoin such ownership or acquisition. The constructive ownership rules are complex and may cause Common Stock or Convertible Preferred Stock owned actually or constructively by a group of related individuals and/or entities to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of the outstanding Common Stock or less than 9.8% of the outstanding Convertible Preferred Stock (or the acquisition of an interest in an entity which owns Common Stock or Convertible Preferred Stock) by an individual or entity could cause that individual or entity (or another individual or entity) to constructively own Common Stock or Convertible Preferred Stock in excess of the limits described above, and thus subject such stock to the Common Ownership Limit, the Convertible Preferred Ownership Limit, or the Aggregate Stock Ownership Limit. All certificates representing shares of the Company's capital stock bear a legend referring to the restrictions described above. All persons who own a specified percentage (or more) of the outstanding shares of the stock of the Company must file a completed questionnaire annually with the Company containing information regarding their ownership of such shares, as set forth in the Treasury Regulations. Under current Treasury Regulations, the percentage will be set between 0.5% and 5.0%, depending on the number of record holders of shares. In addition, each stockholder shall upon demand be required to disclose to the Company in writing such information with respect to the actual and constructive ownership of shares as the Board of Directors deems necessary to comply with the provisions of the Code applicable to a REIT or to comply with the requirements of any taxing authority or governmental agency. These ownership limitations could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of shares of Common Stock or Convertible Preferred Stock might receive a premium for their shares over the then prevailing market price or which such holders might believe to be otherwise in their best interest. Registration Rights Agreements Pursuant to various registration rights agreements the Company has shelf registration statements effective (or has agreed to file a registration statement) that cover: (i) the resale of shares of Convertible Preferred Stock and shares of Common Stock and the issuance of shares of Common Stock upon exchange of Common Units that were issued in private placements at the time of and since the formation of the Company and (ii) the exchange of the Exchangeable Debentures and Exchangeable Preferred Units for Convertible Preferred Stock. The Company is obligated to use its best efforts to maintain the effectiveness of such registration statements. The exchange of such outstanding securities for Common Stock and Convertible Preferred Stock will increase the number of outstanding shares of Common Stock and Convertible Preferred Stock, and will increase the Company's percentage ownership interest in the Operating Partnership. NYSE Listing The Common Stock is listed on the NYSE under the symbol "FRW." The Preferred Stock is listed on the NYSE under the symbol "FRW pf." The current rules of the NYSE effectively preclude the listing on the NYSE of any securities of an issuer which has issued securities or taken other corporate action that would have the effect of nullifying, restricting or disparately reducing the per share voting rights of holders of an outstanding class or classes of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company does not intend to issue any additional securities that would make it ineligible for inclusion on the NYSE or any national securities exchange or national market system. However, in the event the Company issues additional securities that cause it to become ineligible for continued inclusion on NYSE, such ineligibility would be likely to reduce materially the liquidity of an investment in the Common Stock and would likely depress its market value below that which would otherwise prevail. Transfer Agent The transfer agent and registrar for the shares of Common Stock and Convertible Preferred Stock is American Stock Transfer & Trust Company. - 10 - PARTNERSHIP AGREEMENT The following summary of the Partnership Agreement, including the descriptions of certain provisions set forth elsewhere in this Prospectus, is qualified in its entirety by reference to the Partnership Agreement. Management The Operating Partnership was organized as a Maryland limited partnership pursuant to the Maryland Revised Uniform Limited Partnership Act (the "Act") and the terms of the First Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"). Generally, pursuant to the Partnership Agreement, the Company, as the holder of a majority of the partnership units and sole general partner of the Operating Partnership, has full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership, subject to certain limited exceptions. The limited partners of the Operating Partnership (the "Limited Partners") generally have no authority to participate in or exercise control or management power over the business and affairs of the Operating Partnership. Transferability of Interests The Partnership Agreement provides that the Company may not voluntarily withdraw from the Operating Partnership, or transfer or assign its interest in the Operating Partnership, without the consent of a majority in interest of the Limited Partners, and only upon the admission of a successor general partner. The Limited Partners may transfer their interests in the Operating Partnership to any Qualified Transferee (as defined in the Partnership Agreement), subject to a right of first refusal by the Company and the Operating Partnership. No transferee may become a substituted limited partner without the consent of the Company. Capital Contributions If the Company determines that the Operating Partnership requires additional funds at any time or from time to time in excess of funds available to the Operating Partnership from borrowings or capital contributions, and the Company borrows such funds from a financial institution or other lender, then the Company, to the extent consistent with its REIT status, will lend such funds to the Operating Partnership on comparable terms and conditions as are applicable to the Company's borrowing of such funds. The Company will contribute the amount of any required additional funds which were not borrowed from a financial institution or other lender as an additional capital contribution to the Operating Partnership. If the Company so contributes additional capital to the Operating Partnership, the Company's partnership interest in the Operating Partnership will be increased on a proportionate basis based upon the amount of such additional capital contributions and the value of the Operating Partnership at the time of such contributions. Conversely, the partnership interests of the Limited Partners will be decreased on a proportionate basis in the event of additional capital contributions by the Company. Exchange Rights Pursuant to the Partnership Agreement, the holders of Common Units have the right to require the Operating Partnership to redeem part or all of their Common Units for cash or, at the election of the Company, the Company may acquire such Common Units for shares of Common Stock (on a one-for-one basis), provided, however, that a holder of Common Units may not effect an exchange to the extent that it would cause any person to violate any provision of the charter of the Company (the "Charter"), including those provisions relating to restrictions on ownership and transfer of the Company's capital stock. Similarly, holders of Exchangeable Preferred Units may require that the Company acquire such Exchangeable Preferred Units for shares of Convertible Preferred Stock (on a one-for-one basis), subject to the limitation set forth in the Charter. See "Description of Capital Stock-Restrictions on Ownership, Transfers and Conversion." Tax Matters Pursuant to the Partnership Agreement, the Company is the tax matters partner of the Operating Partnership and, as such, generally has authority to make tax elections under the Code on behalf of the Operating Partnership. The net income or net loss of the Operating Partnership will generally be allocated to the Company and the Limited Partners in accordance with their priorities of distribution, subject to the compliance with the provisions of Sections 704(b) and 704(c) of the Code and the regulations promulgated thereunder. See "Federal Income Tax Considerations--Tax Aspects of the Operating Partnership." - 11 - Operations The Partnership Agreement requires that the Operating Partnership be operated in a manner that will enable the Company to satisfy the requirements for being classified as a REIT. The Partnership Agreement provides that distributions of cash will be distributed from time to time as determined by the Company pro rata in accordance with the distribution rights of the holders of the Exchangeable Preferred Units and the Common Units. Pursuant to the Partnership Agreement, subject to certain exceptions, the Operating Partnership will also assume and pay when due, or reimburse the Company for payment of, all costs and expenses relating to the ownership of interests in and operation of the Operating Partnership; the Company shall not be reimbursed for expenses it incurs relating to the organization of the Operating Partnership and the Company or the initial or subsequent public offerings of shares of the Company. Duties and Conflicts The Partnership Agreement provides that all business activities of the Company, including all activities pertaining to the acquisition and operation of shopping center properties, must be conducted through the Operating Partnership. Term The Operating Partnership will continue in full force and effect until December 31, 2094, or until sooner dissolved upon the bankruptcy, dissolution, withdrawal or termination of the Company (unless the Limited Partners other than the Company elect to continue the Operating Partnership), upon the election of the Company and the approval of the Limited Partners, upon an entry of decree of judicial dissolution, or upon the sale or other disposition of all or substantially all the assets of the Operating Partnership. Indemnification The Partnership Agreement provides for indemnification of the Company and the officers and directors of the Company and of the Management Company, and limits the liability of the Company to the Operating Partnership and its partners for losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or mistakes of fact or law or any act or omission if the Company acted in good faith. See "Limitation of Liability and Indemnification." EXCHANGE OF THE UNITS Terms of the Exchange of Common Units Holders of Common Units may exchange up to 55,335 Common Units of the Operating Partnership for cash, or at the discretion of the Company, for a like number of Exchange Common Shares. Holders of Exchangeable Preferred Unites may exchange up to 9,538 Exchangeable Preferred Units for a like number of Exchanged Preferred Shares. Such Exchange Shares may be resold at any time, subject to certain exceptions and volume limitations. The number of Exchange Shares for which the holders of Units may exchange their Units is subject to adjustment in the event of stock splits, stock dividends, issuance of certain rights, certain extraordinary distributions and similar events. A holder of Common Units effecting an exchange (a "Common Tendering Holder") must deliver to the Company a notice of exchange. A Common Tendering Holder shall have the right to receive an amount of cash from the Operating Partnership equal to the Cash Amount (as defined in the Partnership Agreement) on the Valuation Date (as defined in the Partnership Agreement). The Company may elect to acquire such tendered Common Units in exchange for a like number of Exchange Common Shares, in which case the Common Tendering Holder shall have no right to cause the Operating Partnership to redeem the Common Units in exchange for the Cash Amount. A holder of Exchangeable Preferred Units effecting an exchange (a "Preferred Tendering Holder," and collectively with a Common Tendering Holder, a "Tendering Holder") must deliver to the Company a notice of exchange. A Preferred Tendering Holder shall have the right to receive on the day of receipt by the Company of such notice the number of Exchange Preferred Shares which corresponds to the tendered Exchangeable Preferred Units. The Exchange Shares shall be delivered as duly authorized, validly issued, fully paid and nonassessable shares, free of any pledge, lien, encumbrance or restriction, other than those provided in the Charter, the Bylaws of the Company, the Securities Act, relevant state securities or blue sky laws and any applicable registration rights agreement with respect to such Exchange Shares entered into by the Tendering Holder. Notwithstanding any delay - 12 - in such delivery, the Tendering Holder shall be deemed the owner of such Exchange Shares and rights for all purposes, including, without limitation, rights to vote or consent, receive dividends, and exercise rights, as of the date of the exchange notice. Each Tendering Holder shall continue to own all Units subject to any exchange, and be treated as a Limited Partner with respect to such Units for all purposes, until such Units are transferred to the Company and paid for on the date of the exchange notice. Until the date of the exchange notice, the Tendering Holder shall have no rights as a stockholder of the Company. Certain Conditions to the Exchange The Company will issue Exchange Shares to a Tendering Holder promptly upon receipt of a notice of exchange subject to the following conditions: o In order to protect the Company's status as a REIT, no Tendering Holder shall be entitled to effect an exchange, if such exchange would cause such Tendering Holder or any other Person to violate the Restrictions on Ownership and Transfer provisions of the Charter. o No Tendering Holder may effect an exchange for less than 100 Units, or if the Tendering Holder holds less than 100 Units, all of the Units held by such Tendering Holder. o No Tendering Holder may effect an exchange during the period after the record date established by the Company for a distribution from the Operating Partnership to the partners in the Operating Partnership and prior to the record date established by the Company for a distribution to its stockholders of some or all of its portion of such distribution. Any attempted exchange in violation of any of the foregoing conditions shall be null and void ab initio and such Tendering Holder shall not acquire any rights or economic interest in the Exchange Shares otherwise issuable upon such exchange Comparison of the Company and the Operating Partnership Generally the nature of an investment in Common Stock and Convertible Preferred Stock (collectively, the "Stock") is similar in several respects to an investment in the Units of the Operating Partnership. Holders of Common Stock, holders of Common Units, holders of Convertible Preferred Stock and holders of Exchangeable Preferred Units receive similar distributions and shareholders and holders of Units generally share in the risks and rewards of ownership in the enterprise being conducted by the Company through the Operating Partnership. However, there are also differences between ownership of Units and ownership of Stock, some of which may be material to investors. The information below highlights a number of the significant differences between the Operating Partnership and the Company relating to, among other things, form of organization, management control, voting rights, liquidity and federal income tax considerations. These comparisons are intended to assist holders of Units in understanding how their investment will be changed if they exchange their Units for Exchange Shares. This discussion is summary in nature and does not constitute a complete discussion of these matters, and holders of Units should carefully review the balance of this Prospectus and the registration statement of which this Prospectus is a part for additional important information about the Company. - 13 - Form of Organization and Assets Owned The Operating Partnership is organized as a Maryland limited partnership. The Operating Partnership owns interests in the Properties and the Lower Tier Partnerships and the Operating Partnership conducts the Company's management and leasing business. The Operating Partnership's purpose is to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act, provided that such business is to be conducted in a manner that permits the Company to be qualified as a REIT unless the Company ceases to qualify as REIT. The Company is a Maryland corporation. The Company has elected to be taxed as a REIT under the Code, commencing with its taxable year ended December 31, 1994, and intends to maintain its qualification as a REIT. The Company's primary asset is its interest in the Operating Partnership, which gives the Company an indirect investment in the Properties owned by the Operating Partnership. Under its Charter, the Company may engage in any lawful activity permitted by the MGCL. However, under the Partnership Agreement, the Company, as general partner, may not conduct any business other than the business of the Operating Partnership and cannot own any assets other than its interest in the Operating Partnership and other assets necessary to carry out its responsibilities under the Partnership Agreement and its Charter. Additional Equity The Operating Partnership is authorized to issue Common Units, Exchangeable Preferred Units and other partnership interests (including partnership interests of different series or classes that may be senior to Common Units) in exchange for additional capital contributions as determined by the Company as its general partner, in the Company's sole discretion. In exchange for such capital contributions, the Operating Partnership may issue Common Units and other partnership interests to the Company, may issue additional Common Units to existing Limited Partners, and may admit third parties as additional Limited Partners. The Board of Directors may issue, in its discretion, additional Common Stock or shares of Convertible Preferred Stock; provided, that the total number of shares issued does not exceed the authorized number of shares of stock set forth in the Charter. As long as the Operating Partnership is in existence, the proceeds of all equity capital raised by the Company will be contributed to the Operating Partnership in exchange for Units in the Operating Partnership. Management Control All management powers over the business and affairs of the Operating Partnership are vested in the general partner, and no limited partner of the Operating Partnership has any right to participate in or exercise control or management power over the business and affairs of the Operating Partnership except (1) the general partner of the Operating Partnership may not dispose of all or substantially all of the Operating Partnership's assets without the consent of the holders of two- thirds of the outstanding Common Units, and (2) there are certain limitations on the ability of the general partner of the Operating Partnership to cause or permit the Operating Partnership to dissolve. See "Vote Required to Dissolve the Operating Partnership or the Company" below. The general partner may not be removed by the holders of Common Units with or without cause. The business and affairs of the Company are managed under the direction of the Board of Directors subject to restrictions in the Charter and Bylaws. The board is classified into three classes of directors. At each annual meeting of the stockholders, the successors of the class of directors whose terms expire at that meeting will be elected. The policies adopted by the Board of Directors may be altered or eliminated without a vote of the stockholders. Accordingly, except for their vote in the elections of directors, stockholders have no control over the ordinary business policies of the Company. The Board of Directors cannot change the Company's policy of maintaining its status as a REIT, however, without the approval of holders of a majority of the outstanding Common Stock. - 14 - Duties of General Partners and Directors Under Maryland law, the general partner of the Operating Partnership is accountable to the Operating Partnership as a fiduciary and, consequently, is required to exercise good faith and integrity in all of its dealings with respect to partnership affairs. However, under the Partnership Agreement, the general partner is not liable for monetary damages for losses sustained or liabilities incurred by partners as a result of errors of judgment or of any act or omission, provided that the general partner has acted in good faith. Under the MGCL, the directors must perform their duties in good faith, in a manner that they reasonably believe to be in the best interests of the Company and with the care of an ordinarily prudent person in a like position. Directors of the Company who act in such a manner generally will not be liable by reason of being a director of the Company. Management Liability and Indemnification As a matter of Maryland law, the general partner has liability for the payment of the obligations and debts of the Operating Partnership unless limitations upon such liability are stated in the document or instrument evidencing the obligations. Under the Partnership Agreement, the Operating Partnership has agreed to indemnify the general partner and any director or officer of the general partner from and against all losses, claims, damages, liabilities, joint or several, expenses (including legal fee and expenses), judgments, fines, settlements and other amounts incurred in connection with any actions relating to the operations of the Operating Partnership in which the general partner or such director or officer is involved, unless (1) the act was in bad faith and was material to the action; (2) such party received an improper personal benefit; or (3) in the case of any criminal proceeding, such party had reasonable cause to believe the act was unlawful. The reasonable expenses incurred by an indemnitee may be reimbursed by the Operating Partnership in advance of the final disposition of the proceeding upon receipt by the Operating Partnership of an affirmation by such indemnitee of his, her or its good faith belief that the standard of conduct necessary for indemnification has been met and an undertaking by such indemnitee to repay the amount if it is determined that such standard was not met. The Charter contains a provision which eliminates the liability of the Company's directors and officers to the Company and its stockholders to the fullest extent permitted by Maryland law. The Bylaws provide indemnification to directors and officers to the same extent that such directors and officers have indemnification rights under the Partnership Agreement (as officers and directors of the general partner). - 15 - Antitakeover Provisions Except in limited circumstances (See "Voting Rights" below), the general partner of the Operating Partnership has exclusive management power over the business and affairs of the Operating Partnership. The general partner may not be removed by the Limited Partners with or without cause. A Limited Partner may generally transfer its limited partnership interest without restriction, provided that the Company and the Operating Partnership have a right of first refusal for any proposed transfer. The Charter and Bylaws of the Company contain a number of provisions that may have the effect of delaying or discouraging an unsolicited proposal for the acquisition of the Company or the removal of incumbent management. These provisions include, among other: (1) a staggered board of directors; (2) authorized stock that may be issued as Preferred Stock in the discretion of the Board of Directors, with superior voting or other rights to the Common Stock; (3) a requirement that directors may be removed only for cause and only by the affirmative vote of two-thirds of the aggregate number of votes then entitled to be cast generally in the election of directors; and (4) provisions designed to avoid concentration of share ownership in a manner that would jeopardize the Company's status as a REIT under the Code. See "Description of Capital Stock- Restrictions on Ownership, Transfer and Conversion." The MGCL also contains certain provisions which could have the effect of delaying, deferring or preventing a change of control of the Company or other transaction. See "Certain Provisions of Maryland Law and the Company's Charter and Bylaws." Voting Rights Under the Partnership Agreement, the Limited Partners have voting rights only as to the dissolution of the Operating Partnership, the sale of all or substantially all of the assets or merger of the Operating Partnership, and certain amendments to the Partnership Agreement, as described more fully below. Otherwise, all decisions relating to the operation and management of the Operating Partnership are made by the general partner. As Common Units are exchanged by holders of Common Units, the Company's percentage ownership of the Common Units will increase. If additional Units are issued to third parties, the Company's percentage ownership of the Units will decrease. The business and affairs of the Company are managed under the direction of the Board of Directors, consisting of three classes having staggered terms of office. Each class is to be elected by the stockholders at annual meetings of the Company. transactions, including most amendments to the Charter, may not be consummated without the approval of stockholders as set forth below. All shares of Common Stock have one vote per share, and the Charter permits the Board of Directors to classify and issue Preferred Stock in one or more series having voting power which may differ from that of the Common Stock. "See Description of Capital Stock." The following is a comparison of the voting rights of the holders of Units of the Operating Partnership and the stockholders of the Company as they relate to certain major transactions: - 16 - A. Amendment of the Partnership Agreement or the Charter The Partnership Agreement may be amended through a proposal by the general partner or any Limited Partner. Such proposal, in order to be effective, must be approved by the general partner and by the written vote of holders of at least a majority of the outstanding Common Units and Exchangeable Preferred Units. Certain amendments that affect the fundamental rights of a holder of Common Units must be approved by each affected Limited Partner. In addition, the general partner may, without the consent of the holders of Common Units, amend the Partnership Agreement as to certain ministerial matters. Under MGCL and the Charter, amendments to the Charter generally must be approved by the Board of Directors and holders of at least a majority of the votes entitled to be cast on the matter. B. Vote Required to Dissolve the Operating Partnership or the Company The general partner may not elect to dissolve the Operating Partnership without the prior written consent of the holders of at least a majority of the outstanding Common Units and Exchangeable Preferred Units. Under the MGCL and the Charter, dissolution of the Company must be approved by the Board of Directors and holders of at least a majority of the votes entitled to be cast on the matter. C. Vote Required to Sell Assets or Merger Under the Partnership Agreement, the sale, exchange, transfer or other disposition of all or substantially all of the Operating Partnership's assets merger or consolidation of the Operating Partnership requires the consent of the general partner and holders least a majority of the of at outstanding Common Units and Exchangeable Preferred Units. Under the MGCL, the sale of all or substantially all of the assets of the Company or or merger or consolidation of the Company requires the approval of the Board of Directors and holders of at least a majority of the votes entitled to be cast on the matter. No approval of the stockholders is required for the sale of less than all or substantially all of the Company's assets. Compensation, Fees and Distributions The general partner does not receive any compensation for its services as general partner of the Operating Partnership. As a partner in the Operating Partnership, however, the general partner has the same right to receive pro rata allocations and distributions as other partners of the Operating Partnership. In addition, the Operating Partnership will reimburse the general partner for all expenses incurred relating to the ongoing operation of the Company and any other offering of additional partnership interests in the Operating Partnership. The officers and outside directors of the Company any receive compensation for their services. Liability of Investors Under the Partnership Agreement and applicable Maryland law, the liability of the holders of Common Units and Exchangeable Preferred Units for the Operating Partnership's debts and obligations is generally limited to the amount of their investment in the Operating Partnership. Under Maryland law, stockholders are not personally liable for the debts or obligations of the Company. - 17 - Liquidity The Company may not transfer its Units except to a successor general partner with the consent of a majority in interest of the Limited Partners. Limited Partners may generally transfer their Units without restriction, provided that the Company and the Operating Partnership have a right of first refusal for any proposal transfer. The Exchange Shares will be freely transferable as registered securities under the Securities Act, subject to prospectus delivery and other requirements for registered securities. Taxes Income and loss from the Operating Partnership generally is subject to the "passive activity" limitations. Under the "passive activity" rules, income and loss from the Operating Partnership that is considered "passive income" generally can be offset against income and loss from other investments that constitute "passive activities." The Operating Partnership itself is not subject to Federal income taxes. Instead, each holder of Units includes its allocable share of the Operating Partnership's taxable income or loss in determining its individual federal income tax liability. Cash distributions from the Operating Partnership are generally not taxable to a holder of Units except to the extent they exceed such holder's basis in its interest in the Operating Partnership (which will include such holder's allocable share of the Operating Partnership's nonrecourse debt). Holders of Common Units are required, in some cases, to file state income tax returns and/or pay state income taxes in the states in which the Operating Partnership owns property, even if they are not residents of those states. Dividends paid by the Company will be treated as "portfolio" income and cannot be offset with losses from "passive activities." Distributions made by the Company to its taxable domestic stockholders out of current or accumulated earnings and profits will be taken into account by them as ordinary income. Distributions that are designated as capital gain dividends generally will be taxed as capital gain at a rate of 20%, 25% or 28%. Distributions in excess of current or accumulated earnings and profits will be treated as a non-taxable return of basis to the extent of a stockholder's adjusted basis in its stock, with the excess taxed as capital gain. See "Federal Income Tax Considerations Taxation of U.S. Stockholders Generally." The Company may be required to pay state income taxes in certain states. CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S CHARTER AND BYLAWS The following paragraphs summarize certain provisions of Maryland law and the Charter and Bylaws. The summary does not purport to be complete and is subject to and qualified in its entirety by reference to Maryland law and to the Charter (a copy of which is an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) and Bylaws (a copy of which is an exhibit to the Registration Statement filed in connection with the June 1994 Offering). See "Available Information." Classification Of The Board Of Directors The Bylaws provide that the number of directors of the Company may be established by the Board of Directors but may not be fewer than the minimum number required by the MGCL (which under most circumstances is three directors) nor more than fifteen. Any vacancy will be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining directors, except that a vacancy resulting from an increase in the number of directors will be filled by a majority vote of the entire Board of Directors. Pursuant to the Charter, the directors are divided into three classes. One class held office initially for a term which expired at the annual meeting of stockholders held in May 1995 (and the directors of such class were reelected for a full term of three years). Another class held office for a term which expired at the annual meeting of stockholders held in May 1996 (and the directors of such class were reelected for a full term of three years) and another class held office for a term which expired at the annual meeting of stockholders held in May 1997 (and the directors of such class were reelected for a full term of three years). As the term of each class expires, directors in that class will be elected for a term of three years and until their successors are duly elected and qualify. The Company believes that classification of the Board of Directors will help to assure the continuity and stability of the Company's business strategies and policies as determined by the Board of Directors. - 18 - The classified director provision could have the effect of making the replacement of incumbent directors more time consuming and difficult, which could discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its stockholders. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of the Board of Directors. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. Holders 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 shares of Common Stock will be able to elect all of the successors of the class of directors whose term expires at that meeting. Removal Of Directors The Charter provides that a director may be removed only for cause (as defined in the Charter) and only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors. This provision, when coupled with the provision in the Bylaws authorizing the Board of Directors to fill vacant directorships, precludes stockholders from both removing incumbent directors and filling the vacancies created by such removal with their own nominees. 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 ten percent or more of the voting power of the corporation's shares or an affiliate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the then outstanding voting stock of the corporation (an "Interested Stockholder") or an affiliate of such an Interested Stockholder are prohibited for five years after the most recent date on which the Interested Stockholder becomes an Interested Stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least: (a) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (b) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the Interested Stockholder with whom (or with whose affiliate) the business combination is to be effected, unless, among other conditions, the corporation's common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. 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 Board of Directors has exempted from these provisions of the MGCL any business combination with certain officers of the Company, any present or future affiliate or associate of theirs or any other person acting in concert or as a group with any of the foregoing persons. As a result, these persons may be able to enter into business combinations with the Company, which may not be in the best interest of the stockholders, without compliance by the Company with the super-majority vote requirements and the other provisions of the statute. 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 a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror, by officers or by directors who are employees of the corporation. "Control Shares" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by such person, or in respect of which such person is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth 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 then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions. A person who has made or proposes to make a control share acquisition, upon satisfaction of 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 shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting. - 19 - 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 statute, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights previously have 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 of any 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 and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid in the control share acquisition, and certain limitations and restrictions otherwise applicable to the exercise of dissenters' rights do not apply in the context of a control share acquisition. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. The business combination statute and the control share acquisition statute could have the effect of discouraging others to acquire the Company and of increasing the difficulty of consummating any offer. Amendment To The Charter Certain provisions of the Charter, including its provisions on classification of the Board of Directors, removal of directors, voting rights of Common Stock and voting requirements for charter amendments, may be amended only by the affirmative vote of the holders of not less than two-thirds of all of the votes entitled to be cast on the matter. Dissolution Of The Company The dissolution of the Company must be approved by the affirmative vote of the holders of not less than a majority of all of the votes entitled to be cast on the matter. Advance Notice Of Director Nominations And New Business The Bylaws provide that: (a) with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made only: (i) pursuant to the Company's notice of the meeting, (ii) by or at the direction of the Board of Directors, (iii) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the bylaws, and (b) with respect to special meetings of stockholders, only the business specified in the Company's notice of meeting may be brought before the meeting of stockholders, and nominations of persons for election to the Board of Directors may be made only (i) pursuant to the Company's notice of the meeting, (ii) by or at the direction of the Board of Directors, or (iii) provided that the Board of Directors has determined that directors shall be elected to such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the bylaws. The provisions in the Charter on classification of the Board of Directors and removal of directors, the business combination and the control share acquisition provisions of the MGCL, and the advance notice provisions of the bylaws could have the effect of delaying, deferring or preventing a change of control or other transaction in which holders of some, or a majority, of the Common Stock might receive a premium for their Common Stock over the then prevailing market price or which such holders might believe to be otherwise in their best interests. Limitation of Liability and Indemnification The MGCL permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from: (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Charter contains such a provision which eliminates such liability to the maximum extent permitted by the MGCL. This provision does not limit the ability of the Company or its stockholders to obtain equitable relief, such as an injunction or rescission. The Charter authorizes the Company, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any present or former director or officer from and against any claim or liability to which such person may become subject - 20 - or which such person may incur by reason of his status as a present or former director or officer of the Company. The Charter also provides that the Company may indemnify any other persons permitted but not required to be indemnified by Maryland law. The Bylaws obligate the Company, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to: (a) any present or former director or officer who is made a party to the proceeding by reason of his service in that capacity or (b) any individual who, while a director of the Company and at the request of the Company, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise and who is made a party to the proceeding by reason of his service in that capacity. The Bylaws also permit the Company to indemnify and advance expenses to any person who served a predecessor of the Company in any of the capacities described above and to any employee or agent of the Company or a predecessor of the Company. The MGCL requires a corporation (unless its charter provides otherwise, which the Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that: (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation. or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon the corporation's receipt of (a) a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by or on his behalf to repay the amount paid or reimbursed by the corporation if it shall ultimately be determined that the standard of conduct was not met. The termination of any proceeding by conviction, or upon a plea of nolo contendere or its equivalent, or an entry of any order of probation prior to judgment, creates a rebuttable presumption that the director or officer did not meet the requisite standard of conduct required for indemnification to be permitted. The Partnership Agreement also provides for indemnification of the Company, as general partner, and its officers and directors generally to the same extent as permitted by the MGCL for a corporation's officers and directors and limits the liability of the Company to the Operating Partnership and its partners in the case of losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or mistakes of fact or law or any act or omission if the Company acted in good faith. It is the position of the Commission that indemnification of directors and officers for liabilities arising under the Securities Act is against public policy and is unenforceable pursuant to Section 14 of the Securities Act. FEDERAL INCOME TAX CONSIDERATIONS The following summary of material federal income tax considerations regarding the Company and the Securities being registered by the Company is based on current law, is for general information only and is not tax advice. The information set forth below, to the extent that it constitutes matters of law, summaries of legal matters or legal conclusions, is the opinion of Latham & Watkins, tax counsel to the Company, as to the material federal income tax considerations relevant to purchasers of the Securities. The tax treatment of a holder of securities will vary depending on his or her particular situation and this discussion does not purport to deal with all aspects of taxation that may be relevant to particular stockholders in light of their personal investment or tax circumstances, or to certain types of stockholders (including, without limitation, insurance companies, financial institutions or broker-dealers, tax-exempt organizations, stockholders holding securities as part of a conversion transaction, or a 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, except to the extent discussed under the headings "Taxation of Tax-Exempt Stockholders" and "Taxation of Non-U.S. Stockholders") subject to special treatment under the federal income tax laws. 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 the Securities. The information in this section is based on the Code, current, temporary and proposed Treasury Regulations promulgated under the Code, the legislative history of the Code, current administrative interpretations and practices of the Internal Revenue Service (the "IRS") (including its practices and policies as expressed in certain 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 hereof. No assurance can be given that future legislation, - 21 - Treasury Regulations, administrative interpretations and practices and/or court decisions will not adversely affect existing interpretations. Any such change could apply retroactively to transactions preceding the date of the change. The Company has not requested, and does not plan to request, any rulings from the IRS concerning the tax treatment of the Company. Thus, no assurance can be provided that the statements set forth herein (which are, in any event, not binding on the IRS or courts) will not be challenged by the IRS or will be sustained by a court if so challenged. EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF THE SHARES OF THE SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. Tax Consequences of Redemption or Exchange of Units The redemption or exchange of Units for cash or Exchange Shares, will be a fully taxable transaction. Depending upon a holder's particular situation, it is possible that the amount of gain recognized or even the tax liability resulting from such gain could exceed the amount of cash and the value of Exchange Shares received upon such redemption or exchange. HOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE REDEMPTION OR EXCHANGE OF UNITS, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES OF SUCH TRANSACTION. Taxation Of The Company General. The Company has elected to be taxed as a REIT under Sections 856 through 860 (Code), commencing with its taxable year ended December 31, 1994. The Company believes that it has been organized and has operated in such a manner as to qualify for taxation as a REIT under the Code commencing with such taxable year, and the Company intends to continue to operate in such a manner however, the Company's qualification and taxation as a REIT depends upon the Company's ability to meet (through actual annual results, distribution levels and diversity of stock ownership) the various qualification tests imposed under the Code. Accordingly, no assurance can be given that it has operated or will continue to operate in such a manner so as to qualify or remain qualified. Further, the anticipated income tax treatment described in this Prospectus may be changed, perhaps retroactively, by legislative, administrative or judicial action at any time. See "-Failure to Qualify." These sections of the Code are highly technical and complex. The following sets forth the material aspects of the sections that govern the federal income tax treatment of a REIT and its stockholders. This summary is qualified in its entirety by the applicable Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof. If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income taxes on its net income that is currently distributed to stockholders. This treatment substantially eliminates the "double taxation" (at the corporate and stockholder levels) that generally results from investment in a corporation. However, the Company will be subject to federal income tax as follows: first, the Company will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. Second, under certain circumstances, the Company may be subject to the "alternative minimum tax" on its items of tax preference. Third, if the Company has (i) net income from the sale or other disposition of "foreclosure property" (defined generally as property acquired by the Company through foreclosure or otherwise after a default on a loan secured by the property or a lease of the property) which is held primarily for sale to customers in the ordinary course of business or (ii) other nonqualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if the Company has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business other than foreclosure property), such income will be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), but has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it 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 the Company fails the 75% or 95% test multiplied by (b) a fraction intended to reflect the Company's profitability. Sixth, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Seventh, with respect to an asset (a "Built-In Gain Asset") acquired by the Company from a corporation which is or has been a C - 22 - corporation (i.e., generally a corporation subject to full corporate-level tax) in certain transactions in which the basis of the Built-In Gain Asset in the hands of the Company is determined by reference to the basis of the asset in the hands of the C corporation, if the Company recognizes gain on the disposition of such asset during the ten-year period (the "Recognition Period") beginning on the date on which such asset was acquired by the Company, then, to the extent of the Built-In Gain (i.e., the excess of (a) the fair market value of such asset over (b) the Company's adjusted basis in such asset, determined as of the beginning of the Recognition Period), such gain will be subject to tax at the highest regular corporate tax pursuant to IRS regulations that have not yet been promulgated. The results described above with respect to the recognition of Built-In Gain assume that the Company will make an election pursuant to IRS Notice 88-19. and that the availability or nature of such election is not modified as proposed in President Clinton's 1999 Federal budget proposal. Requirements for Qualification. The Code defines a REIT as a corporation, trust or association (1) which is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (3) which would be taxable as a domestic corporation, but for Sections 856 through 859 of the Code; (4) which is neither a financial institution nor an insurance company subject to certain provisions of the Code; (5) the beneficial ownership of which is held by 100 or more persons; (6) during the last half of each taxable year not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities); and (7) which meets certain other tests, described below, regarding the nature of its income and assets and the amount of its distributions. The 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 is made to be taxed as a REIT. For purposes of conditions (5) and (6), pension funds and certain other tax-exempt entities are treated as individuals, subject to a "look-through" exception in the case of condition (6). The Company has satisfied condition (5) and believes that it has issued sufficient shares to allow it to satisfy condition (6). In addition, the Company's charter provides for restrictions regarding ownership and transfer of shares, which restrictions are intended to assist the Company in continuing to satisfy the share ownership requirements described in (5) and (6) above. Such ownership and transfer restrictions are described in "Description of Capital Stock--Restrictions on Ownership, Transfer and Conversion." These restrictions may not ensure that the Company will, in all cases, be able to satisfy the share ownership requirements described above, primarily (though not exclusively) as a result of fluctuations in value among the different classes of the Company's capital stock. If the Company fails to satisfy such share ownership requirements, the Company's status as a REIT will terminate; provided, however, if the Company complies with the rules contained in the applicable Treasury Regulations requiring the Company to ascertain the actual ownership of its shares but the Company does not know, or would not have known through the exercise of reasonable diligence, whether it failed to meet the requirement in condition (6) above, the Company will be treated as having met such requirement. See "--Failure to Qualify." In addition, a corporation may not elect to become a REIT unless its taxable year is the calendar year. The Company has and will continue to have a calendar taxable year. Ownership of Subsidiaries. The Company owns interests in certain of the Lower Tier Partnerships through subsidiaries. Code Section 856(i) provides that a corporation which is a "qualified REIT subsidiary" (defined for taxable years beginning on or before August 5, 1997, as any corporation if 100 percent of the stock of such corporation is held by the REIT at all times during the period such corporation was in existence and, for taxable years beginning after August 5, 1997, as any corporation 100 percent of the stock of which is owned by the REIT (without regard to prior ownership)) shall not be treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of a "qualified REIT subsidiary" shall be treated as assets, liabilities and such items (as the case may be) of the REIT for all purposes of the Code including the REIT qualification tests. Each of the Company's subsidiaries qualify as "qualified REIT subsidiaries" within the meaning of the Code. Thus, in applying the requirements described herein, the Company's subsidiaries are ignored, and all assets, liabilities and items of income, deduction and credit of such subsidiaries are treated as assets, liabilities and items of income, deduction, and credit of the Company for all purposes of the Code including the REIT qualification tests. For this reason, references under "Federal Income Tax Considerations" to the income and assets of the Company shall include the income and assets of the Company's subsidiaries. Because the Company's subsidiaries are treated as "qualified REIT subsidiaries" they will not be subject to federal income tax. In addition, the Company's ownership of the voting securities of the subsidiaries will not violate the restrictions against ownership of securities of any one issuer which constitutes more than 10% of such issuer's voting securities or more than 5% in value of the Company assets, described below under "-- Asset Tests." - 23 - Ownership of a Partnership Interest. In the case of a REIT which is a partner in a partnership, IRS regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the income of the partnership attributable to such share. In addition, the character of the assets and gross income of the partnership shall retain the same character in the hands of the REIT for purposes of Section 856 of the Code, including satisfying the gross income tests and the asset tests. Thus, the Company's proportionate share of the assets, liabilities and items of income of the Operating Partnership (including the Operating Partnership's share of such items of any Lower Tier Partnership) are treated as assets, liabilities and items of income of the Company for purposes of applying the requirements described herein. A summary of the rules governing the Federal income taxation of partnerships and their partners is provided below in "--Tax Aspects of the Operating Partnership." The Company has direct control of the Operating Partnership and has and will continue to operate it consistent with the requirements for qualification as a REIT. Income Tests. In order to maintain qualification as a REIT, the Company annually must satisfy two gross income requirements. First, at least 75% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property (including "rents from real property" and, in certain circumstances, interest) or from certain types of temporary investments. Second, at least 95% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property investments, dividends, interest and gain from the sale or disposition of stock or securities (or from any combination of the foregoing). In addition, for taxable years beginning on or prior to August 5, 1997, short-term gain from the sale or other disposition of stock or securities, gain from prohibited transaction, and gain on the sale or other disposition of real property held for less than four years (apart from involuntary conversions and sales of foreclosure property) must represent less than 30% of the Company's gross income (including gross income from prohibited transactions). The 30% gross income test has been repealed and will not apply beginning with the Company's 1998 taxable year. Rents received by the Company 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 Code provides that rents received from a tenant will not qualify as "rents from real property" in satisfying the gross income tests if the REIT, or an actual or constructive owner of 10% or more of the REIT, actually or constructively owns 10% or more of such tenant (a "Related Party 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 such personal property will not qualify as "rents from real property." Finally, for rents received to qualify as "rents from real property," the REIT generally must not operate or manage the property or furnish or render services to the tenants of such property (subject to a 1% de minimis exception applicable to the Company beginning with its 1998 taxable year), other than through an independent contractor from whom the REIT derives no revenue. The REIT may, however, directly perform certain services that are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant" of the property. The Company does not and will not (i) 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), (ii) rent any property to a Related Party Tenant (iii) 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 (iv) perform services considered to be rendered to the occupant of the property, other than through an independent contractor from whom the Company derives no revenue. Notwithstanding the foregoing, the Company may have taken and may continue to take certain of the actions set forth in (i) through (iv) above to the extent such actions will not, based on the advice of tax counsel to the Company, jeopardize the Company's status as a REIT. The Management Company receives fees in exchange for the performance of certain management services. Such fees will not accrue to the Company, but the Company will derive dividends from the Management Company which qualify under the 95% gross income test, but not the 75% gross income test. The Company believes that the aggregate amount of any non-qualifying income in any taxable year has not exceeded and will not exceed the limit on non-qualifying income under the gross income tests. The term "interest" generally does not include any amount received or accrued (directly or indirectly) if the determination of such 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. - 24 - If the Company fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions will be generally available if the Company's failure to meet such tests was due to reasonable cause and not due to willful neglect, the Company attaches a schedule of the sources of its income to its 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 the Company would be entitled to the benefit of these relief provisions. For example, if the Company fails to satisfy the gross income tests because nonqualifying income that the Company intentionally incurs exceeds the limits on such income, the IRS could conclude that the Company's failure to satisfy the tests was not due to reasonable cause. If these relief provisions are inapplicable to a particular set of circumstances involving the Company, the Company will not qualify as a REIT. As discussed above in "--Taxation of the Company-- General," even if these relief provisions apply, and the Company retains its status as a REIT, a 100% tax would be imposed with respect to the excess net income. There can be no assurance that the Company will always be able to maintain compliance with the gross income tests for REIT qualification despite its periodic monitoring. Any gain realized by the Company 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 the Company's 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. Such prohibited transaction income may also have an adverse effect upon the Company's ability to satisfy the income tests for qualification as a REIT. 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 with respect to the particular transaction. The Operating Partnership intends to hold the Properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing, owning, and operating the Properties (and other properties) and to make such occasional sales of the Properties as are consistent with the Operating Partnership's investment objectives. There can be no assurance, however, that the IRS might not contend that that one or more of such sales is subject to the 100% penalty tax. Asset Tests. The Company, at the close of each quarter of its taxable year, must also satisfy three tests relating to the nature of its assets. First, at least 75% of the value of the Company's total assets (including its allocable share of the assets held by the Operating Partnership) must be represented by real estate assets (including (i) its allocable share of real estate assets held by partnerships in which the Company owns an interest and (ii) stock or debt instruments held for not more than one year purchased with the proceeds of a stock offering or long-term (at least five years) debt offering of the Company), cash, cash items and government securities. Second, not more than 25% of the Company's total assets may be represented by securities other than those in the 75% asset class. Third, of the investments included in the 25% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets and the Company may not own more than 10% of any one issuer's outstanding voting securities. The Operating Partnership owns 100% of the nonvoting preferred stock of the Management Company and a note of the Management Company. The Operating Partnership does not and will not own any of the voting securities of the Management Company, and therefore the Company will not be considered to own more than 10% of the voting securities of the Management Company. In addition, the Company believes (and has represented to counsel to the Company for purposes of its opinion, as discussed below) that the value of its pro rata share of the securities of the Management Company to be held by the Operating Partnership did not exceed at any time up to and including the date of this Prospectus 5% of the total value of the Company's assets and will not exceed such amount in the future. President Clinton's 1999 federal budget proposal contains a provision which would amend the Code so as to prohibit REITs from owning stock of a corporation possessing more than 10% of the vote or value of all classes of stock of the corporation. This proposal would be effective with respect to stock acquired on or after the date of the first Congressional committee action with respect to the proposal (the "Action Date"). In addition, to the extent that a REIT's stock ownership is grandfathered by virtue of this effective date, such grandfathered status will terminate if the subsidiary corporation engages in a trade or business that it is not engaged in on the Action Date or acquires substantial new assets on or after such date. Accordingly, if this provision of the budget proposal is enacted in its present form, the Company's stock ownership of the Management Company would be grandfathered, but such grandfathered status would terminate if the Management Company engages in a trade or business that it is not engaged in on the Action Date or acquires substantial new assets on or after such date, even if such activities are undertaken prior to the adoption of the proposal. It is presently uncertain whether any proposal regarding REIT subsidiaries, such as the Management Company, will be enacted, or if enacted, what the terms of such proposal (including its effective date) will be. After initially meeting the asset tests at the close of any quarter, the Company will not lose its 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 - 25 - the failure to satisfy the asset tests results from an acquisition of additional securities of the Management Company or other securities or other property during a quarter (including as a result of the Company increasing its interests in the Operating Partnership), the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter. The Company has maintained and will continue to maintain adequate records of the value of its 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 the Company fails to cure noncompliance with the asset tests within such time period, the Company would cease to qualify as a REIT. Annual Distribution Requirements. The Company, in order to maintain its qualification as a REIT, is required to distribute dividends (other than capital gain dividends) to its stockholders in an amount at least equal to (A) the sum of (i) 95% of the Company's "REIT taxable income" (computed without regard to the dividends paid deduction and the Company's net capital gain) and (ii) 95% of the net income (after tax), if any, from foreclosure property, minus (B) the excess of the sum of certain items of noncash income over 5% of "REIT taxable income." In addition, if the Company disposes of any Built-In Gain Asset during its Recognition Period, the Company will be required, pursuant to IRS regulations which have not yet been promulgated, to distribute at least 95% of the Built-in Gain (after tax), if any, recognized on the disposition of such asset. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration. Such 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, even though such distributions relate to the prior year for purposes of the Company's 95% distribution requirement. The amount distributed must not be preferential -- e.g., every shareholder of the class of stock with respect to which a distribution is made must be treated the same as every other shareholder 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 the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax thereon at regular ordinary and capital gain corporate tax rates. The Company has made and intends to make timely distributions sufficient to satisfy these annual distribution requirements. It is expected that the Company's REIT taxable income will be less than its cash flow due to the allowance of depreciation and other non-cash charges in computing REIT taxable income. Accordingly, the Company anticipates that it will generally have sufficient cash or liquid assets to enable it to satisfy the distribution requirements described above. It is possible, however, that the Company, from time to time, may not have sufficient cash or other liquid assets to meet these distribution requirements due to timing differences between (i) the actual receipt of income and actual payment of deductible expenses and (ii) the inclusion of such income and deduction of such expenses in arriving at taxable income of the Company. In the event that such timing differences occur, in order to meet the distribution requirements, the Company may find it necessary to arrange for short-term, or possibly long-term, borrowings or to pay dividends in the form of taxable stock dividends. Under certain circumstances, the Company 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 the Company's deduction for dividends paid for the earlier year. Thus, the Company may be able to avoid being taxed on amounts distributed as deficiency dividends; however, the Company will be required to pay interest based upon the amount of any deduction taken for deficiency dividends. Furthermore, if the Company 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 (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such 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 the Company fails to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, the Company will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to stockholders in any year in which the Company fails to qualify will not be deductible by the Company nor will they be required to be made. As a result, the Company's failure to qualify as a REIT would reduce the cash available for distribution by the Company to its stockholders. In addition, if the Company fails to qualify as a REIT, all distributions to stockholders will be taxable as ordinary income, to the extent of the Company's current and accumulated earnings and profits, and, subject to certain limitations of the Code, corporate - 26 - distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, the Company will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances the Company would be entitled to such statutory relief. In addition, President Clinton's 1999 federal budget proposal contains a provision which, if enacted in its present from, would result in the immediate taxation of all gains inherent in a C corporation's assets upon an election by the corporation to become a REIT in taxable years beginning after January 1, 1999, and thus could effectively preclude the Company from re-electing to be taxed as a REIT following a loss of its REIT status. Taxation Of Taxable U.S. Stockholders As used herein, the term "U.S. Stockholder" means a holder of shares of Common Stock who (for United States federal income tax purposes) (i) is a citizen or resident of the United States, (ii) is a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, unless, in the case of a partnership, Treasury Regulations provide otherwise, or (iii) is an estate the income of which is subject to United States federal income taxation regardless of its source (iv) 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, certain trusts in existence on August 20, 1996, and treated as United States persons prior to such date that elect to continue to be treated as United States persons, shall also be considered U.S. Stockholders. As long as the Company qualifies as a REIT, distributions made by the Company out of its current or accumulated earnings and profits (and not designated as capital gain dividends) will constitute dividends taxable to its taxable U.S. Stockholders as ordinary income. Such distributions will not be eligible for the dividends-received deduction in the case of U.S. Stockholders that are corporations. For purposes of determining whether distributions to holders of Common Stock are out of current or accumulated earnings and profits, the earnings and profits of the Company will be allocated first to the Convertible Preferred Stock (to the extent of the preferred distribution on such stock), then to the Common Stock (to the extent of distributions equal to $0.4875 per quarter per share) and then pro-rata between both the Convertible Preferred Stock and the Common Stock with respect to any distributions in which the Convertible Preferred Stock is entitled to participate. Distributions made by the Company that are properly designated by the Company as capital gain dividends will be taxable to taxable U.S. Stockholders as gains (to the extent that they do not exceed the Company's actual net capital gain for the taxable year) from the sale or disposition of a capital asset. Depending on the period of time the Company held the assets which produced such gains, and on certain designations, if any, which may be made by the Company, such gains may be taxable to non-corporate U.S. stockholders at a 20%, 25% or 28% rate. U.S. Stockholders that are corporations may, however, be required to treat up to 20% of certain capital gain dividends as ordinary income. For a discussion of the manner in which that portion of any dividends designated by the Company as capital gain dividends will be allocated among the holders of Convertible Preferred Stock and Common Stock, see "Description of Capital Stock--Convertible Preferred Stock--Distributions." To the extent that the Company makes distributions (not designated as capital gain dividends) in excess of its current and accumulated earnings and profits, such distributions will be treated first as a tax-free return of capital to each U.S. Stockholder, reducing the adjusted basis which such U.S. Stockholder has in his shares of stock for tax purposes by the amount of such distribution (but not below zero), with distributions in excess of a U.S. Stockholder's adjusted basis in his shares taxable as capital gains (provided that the shares have been held as a capital asset) (which, with respect to a non-corporate U.S. Stockholder, will be taxable as long-term capital gain if the shares have been held for more than eighteen months, mid-term capital gain if the shares have been held for more than one year but not more than eighteen months, or short-term capital gain if the shares have been held for one year or less). Dividends declared by the Company in October, November, or December of any year and payable to a stockholder of record on a specified date in any such month shall be treated as both paid by the Company and received by the stockholder on December 31 of such year, provided that the dividend is actually paid by the Company on or before January 31 of the following calendar year. Stockholders may not include in their own income tax returns any net operating losses or capital losses of the Company. Distributions made by the Company and gain arising from the sale or exchange by a U.S. Stockholder of shares of the Company will not be treated as passive activity income, and, as a result, U.S. Stockholders generally will not be able to apply any "passive losses" against such income or gain. Distributions made by the Company (to the extent they do not constitute a return of capital) generally will be treated as investment income for purposes of - 27 - computing the investment income limitation. Gain arising from the sale or other disposition of shares, however, will not be treated as investment income under certain circumstances. The Company may elect to retain, rather than distribute as a capital gain dividend, its net long-term capital gains. In such event, the Company would pay tax on such retained net long-term capital gains. In addition to the extent designated by the Company, a U.S. Stockholder generally would (i) include its proportionate share of such 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 the Company's taxable year falls (subject to certain limitations as to the amount so includible), (ii) be deemed to have paid the capital gains tax imposed on the Company on the designated amounts included in such U.S. Stockholder's long-term capital gains, (iii) receive a credit or refund for such amount of tax deemed paid by it, (iv) increase the adjusted basis of its Common Stock by the difference between the amount of such includible gains and the tax deemed to have been paid by it, and (v), 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. Upon any sale or other disposition of shares of the Company, a U.S. Stockholder will recognize gain or loss for federal income tax purposes in an amount equal to the difference between (i) the amount of cash and the fair market value of any property received on such sale or other disposition and (ii) the holder's adjusted basis in the shares for tax purposes. Such gain or loss will be capital gain or loss if the shares have been held by the U.S. Stockholder as a capital asset. In the case of non-corporate holders, capital gain will be subject to a reduced rate if the shares have been held by the U.S. Stockholder for more than one year and will be eligible for a further reduced rate if the shares have been held for more than 18 months. In general, any loss recognized by a U.S. Stockholder upon the sale or other disposition of shares of the Company that have been held for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss, to the extent of distributions received by such U.S. Stockholder from the Company which were required to be treated as long-term capital gains. Additional Tax Consequences to Holders of Convertible Preferred Stock Redemption of Convertible Preferred Stock. A redemption of shares of Convertible Preferred Stock will be treated under Section 302 of the Code as a distribution taxable as a dividend (to the extent of the Company's current and accumulated earnings and profits) at ordinary income rates unless the redemption satisfies one of the tests set forth in Section 302(b) of the Code and is therefore treated as a sale or exchange of the redeemed shares. The redemption will be treated as a sale or exchange if it (i) is "substantially disproportionate" with respect to the holder, (ii) results in a "complete termination" of the holder's stock interest in the Company, or (iii) is "not essentially equivalent to a dividend" with respect to the holder, all within the meaning of Section 302(b) of the Code. In determining whether any of these tests have been met, shares of capital stock (including Common Stock and other equity interests in the Company) considered to be owned by the holder by reason of certain constructive ownership rules set forth in the Code, as well as shares of capital stock actually owned by the holder, must generally be taken into account. Because the determination as to whether any of the alternative tests of Section 302(b) of the Code will be satisfied with respect to any particular holder of Convertible Preferred Stock depends upon the facts and circumstances at the time that the determination must be made, prospective holders of Convertible Preferred Stock are advised to consult their own tax advisors to determine such tax treatment. If a redemption of shares of Convertible Preferred Stock is not treated as a distribution taxable as a dividend to a particular holder, it will be treated, as to that holder, as a taxable sale or exchange. As a result, such holder will recognize gain or loss for Federal income tax purposes in an amount equal to the difference between (i) the amount of cash and the fair market value of any property received (less any portion thereof attributable to accumulated and declared but unpaid dividends, which will be taxable as a dividend to the extent of the Company's current and accumulated earnings and profits), and (ii) the holder's adjusted basis in the shares of Convertible Preferred Stock for tax purposes. In the case of non-corporate holders, capital gain will be subject to a reduced rate if the shares have been held by the U.S. Stockholder for more than one year and will be eligible for a further reduced rate if such shares have been held for more than 18 months. If a redemption of shares of Convertible Preferred Stock is treated as a distribution taxable as a dividend, the amount of the distribution will be measured by the amount of cash and the fair market value of any property received by the holder. The holder's adjusted basis in the redeemed shares of Convertible Preferred Stock for tax purposes will be transferred to the holder's remaining shares of capital stock in the Company, if any. If the holder owns no other shares of capital stock in the Company, such basis may, under certain circumstances, be transferred to a related person or it may be lost entirely. - 28 - Redemption Premium. Section 305(c) of the Code and applicable Treasury Regulations, provides that, in the case of preferred stock (such as shares of Convertible Preferred Stock) that is redeemable at the option of the issuer, but is not mandatorily redeemable or redeemable at the option of the holder, any excess of redemption price over issue price (such excess, "Preferred Stock Discount") with respect to such stock is taxable as a constructive distribution to the holder only if, based on all the facts and circumstances as of the issue date, redemption is more likely than not to occur. Even if redemption is more likely than not to occur, however, the regulations provide that Preferred Stock Discount is not taxable as a constructive distribution if the redemption premium is solely in the nature of a penalty for premature redemption, and such premium is paid as a result of changes in economic or market conditions over which neither the issuer nor the holder has legal or practical control. The applicable Treasury Regulations provide a "safe harbor" pursuant to which redemption pursuant to an issuer's right to redeem is not treated as more likely than not to occur if: (1) the issuer and the holder are not "related" within the meaning of the Code, (2) there are no plans, arrangements or agreements that effectively require or are intended to compel the issuer to redeem the stock and (3) exercise of the right to redeem would not reduce the yield of the stock. The Preferred Stock Discount with respect to the Convertible Preferred Stock is intended to be solely a penalty for premature redemption. Moreover, the Company believes that the requirements of the "safe harbor" described above will be satisfied with respect to the Convertible Preferred Stock. As a result, the above described constructive distribution rules of Section 305(c) of the Code should not apply to the Convertible Preferred Stock, and the Company intends to take this position in all filings with federal taxing authorities. Conversion of Convertible Preferred Stock into Common Stock. In general, no gain or loss will be recognized for Federal income tax purposes upon conversion of the Convertible Preferred Stock solely into shares of Common Stock. The basis that a holder will have for tax purposes in the shares of Common Stock received upon conversion will be equal to the adjusted basis for such holder in the shares of Convertible Preferred Stock so converted, and, provided that the shares of Convertible Preferred Stock were held as a capital asset, the holding period for the shares of Common Stock received would include the holding period for the shares of Convertible Preferred Stock converted. A holder will, however, recognize gain or loss on the receipt of cash in lieu of fractional shares of Common Stock in an amount equal to the difference between the amount of cash received and the holder's adjusted basis for tax purposes in the Convertible Preferred Stock for which cash was received. Furthermore, under certain circumstances, a holder of shares of Convertible Preferred Stock may recognize gain or dividend income to the extent there are dividends in arrears on such shares at the time of conversion into Common Stock. Adjustments to Conversion Price. Adjustments in the conversion price (or the failure to make such adjustments) pursuant to the anti-dilution provisions of the Convertible Preferred Stock or otherwise may result in constructive distributions to the holders of Convertible Preferred Stock that could, under certain circumstances, be taxable to them as dividends pursuant to Section 305 of the Code. If such a constructive distribution were to occur, a holder of Convertible Preferred Stock could be required to recognize ordinary income for tax purposes without receiving a corresponding distribution of cash. Backup Withholding The Company will report to its U.S. Stockholders and the IRS the amount of dividends paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a stockholder may be subject to backup withholding at the rate of 31% with respect to dividends paid unless such holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (b) 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 the Company 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, the Company may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their non-foreign status to the Company. 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 ("UBTI") when received by a tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder (except certain tax-exempt shareholders described below) has not held its shares as "debt financed property" within the meaning of the Code and the shares are not otherwise used in a trade or business, the - 29 - dividend income from the Company will not be UBTI to a tax-exempt shareholder. Similarly, income from the sale of shares will not constitute UBTI unless such tax-exempt shareholder has held such shares as "debt financed property" within the meaning of the Code or has used the shares in trade or business. For tax-exempt shareholders which are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from federal income taxation under Code Section 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an investment in the Company will constitute UBTI 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 the Company. Such prospective investors should consult their own tax advisors concerning these "set aside" and reserve requirements. Notwithstanding the above, however, the Omnibus Budget Reconciliation Act of 1993 (the "1993 Act") provides that, effective for taxable years beginning in 1994, a portion of the dividends paid by a "pension held REIT" shall be treated as UBTI as to any trust which (1) is described in Section 401(a) of the Code, (2) is tax-exempt under Section 501(a) of the Code, and (3) holds more than 10% (by value) of the interests in the REIT. Tax-exempt pension funds that are described in Section 401(a) of the Code are referred to below as "qualified trusts." A REIT is a "pension held REIT" if (1) it would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code (added by the 1993 Act) 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 (2) either (a) at least one such qualified trust holds more than 25% (by value) of the interests in the REIT, or (b) one or more such qualified trusts, each of which owns more than 10% (by value) of the interests in the REIT, hold in the aggregate more than 50% (by value) of the interests in the REIT. The percentage of any REIT dividend treated as UBTI is equal to the ratio of (i) the UBTI earned by the REIT (treating the REIT as if it were a qualified trust and therefore subject to tax on UBTI) to (ii) the total gross income of the REIT. A de minims 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 UBTI will not apply if the REIT is able to satisfy the "not closely held" requirement without relying upon the "look- through" exception with respect to qualified trusts. As a result of certain limitations on the transfer and ownership of stock contained in the Charter, the Company is not and does not expect to be classified as a "pension held REIT." Taxation of Non-U.S. Stockholders The rules governing United States federal income taxation of the ownership and disposition of stock by persons that are, for purposes of such taxation, nonresident alien individuals, foreign corporations, foreign partnerships or foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex, and no attempt is made herein to provide more than a brief summary of such rules. Accordingly, the 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 its particular circumstances. In addition, this discussion is based on current law, which is subject to change, and assumes that the Company qualifies for taxation as a REIT. Prospective Non-U.S. Stockholders should consult with their own tax advisers to determine the impact of federal, state, local and foreign income tax laws with regard to an investment in stock, including any reporting requirements. Distributions. Distributions by the Company to a Non-U.S. Stockholder that are neither attributable to gain from sales or exchanges by the Company of United States real property interests nor designated by the Company as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of current or accumulated earnings and profits of the Company. Such distributions ordinarily will be subject to withholding of United States federal income tax on a gross basis (that is, without allowance of deductions) at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless 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- US stockholder. Dividends that are effectively connected with such a trade or business (or, if an income tax treaty applies, that are attributable to a United States permanent establishment of the Non-US stockholder) will be subject to tax on a net basis (that is, after allowance of deductions) 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. Pursuant to current Treasury Regulations, dividends paid to an address in a country outside the United States are generally presumed to be paid to a resident of such country for purposes of determining the applicability of withholding discussed above and the applicability of a tax treaty rate. Under certain treaties, lower withholding rates - 30 - generally applicable to dividends do not apply to dividends from a REIT, such as the Company. Certain certification and disclosure requirements must be satisfied to be exempt from withholding under the effectively connected income and permanent establishment exemptions discussed above. Distributions in excess of current or accumulated earnings and profits of the Company 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 such 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 which is described below. If it cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current or accumulated earnings and profits, the distribution will generally be treated as a dividend for withholding purposes. However, amounts thus withheld are generally refundable by the IRS if it is subsequently determined that such distribution was, in fact, in excess of current or accumulated earnings and profits of the Company. Distributions to a Non-U.S. Stockholder that are designated by the Company 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 (i) 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 (ii) 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. Distributions to a Non-U.S. Stockholder that are attributable to gain from sales or exchanges by the Company of United States real property interests will cause the Non-U.S. Stockholder to be treated as recognizing such 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, such 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. The Company is 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. The Company 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 the Company's Common Stock on behalf of a Non-U.S. Stockholder will bear the burden of withholding, provided that the Company has properly designated the appropriate portion of a distribution as a capital gain dividend. Sale of Stock. Gain recognized by a Non-U.S. Stockholder upon the sale or exchange of shares of stock generally will not be subject to United States taxation unless the stock constitutes a "United States real property interest" within the meaning of FIRPTA. The stock will not constitute a "United States real property interest" so long as the Company is a "domestically controlled REIT." 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. The Company believes that it is currently a "domestically controlled REIT," and therefore that the sale of shares of stock will not be subject to taxation under FIRPTA. However, because the shares of stock will be publicly traded, no assurance can be given that the Company will continue to be a "domestically- controlled REIT." Notwithstanding the foregoing, gain from the sale or exchange of shares of stock not otherwise subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i) its investment in the stock is effectively connected with the Non-U.S. Stockholder's United States trade or business (or, if an income treaty applies, is attributable to a United States permanent establishment of the Non-U.S. Stockholder) or (ii) 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 such case, the nonresident alien individual will be subject to a 30% United States withholding tax on the amount of such individual's gain. If the Company is not or ceases 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 (e.g., the New York Stock Exchange) and on the size of the selling Non-U.S. Stockholder's interest in the Company. 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 - 31 - income tax with respect to such gain in the same manner as a U.S. Stockholder (subject to any applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals and the possible application of the 30% branch profits tax in the case of foreign corporations), and the purchaser of the stock would be required to withhold and remit to the IRS 10% of the purchase price. Backup Withholding Tax and Information Reporting. Backup withholding tax (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish certain information under the United States information reporting requirements) and information reporting will generally not apply to distributions paid to Non-U.S. Stockholders outside the United States that are treated as (i) dividends subject to the 30% (or lower treaty rate) withholding tax discussed above, (ii) capital gains dividends or (iii) distributions attributable to gain from the sale or exchange by the Company of United States real property interests. As a general matter, backup withholding and information reporting will not apply to a payment of the proceeds of a sale of stocks by or through a foreign office of a foreign broker. Information reporting (but not backup withholding) will apply, however, to a payment of the proceeds of a sale of stock by a foreign office of a broker that (a) is a United States person, (b) derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States or (c) is a "controlled foreign corporation" (generally, a foreign corporation controlled by United States stockholders) for United States tax purposes, unless the broker has documentary evidence in its records that the holder is a Non-U.S. Stockholder and certain other conditions are met, or the stockholder otherwise establishes an exemption. Payment to or through a United States office of a broker of the proceeds of sale of stocks is subject to both backup withholding and information reporting unless the stockholder certifies under penalties of perjury that the stockholder is a Non-U.S. Stockholder, or otherwise establishes an exemption. A Non-U.S. Stockholder may obtain a refund of any amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS. New Withholding Regulations. Final regulations dealing with withholding tax on income paid to foreign persons and related matters (the "New Withholding Regulations") were recently promulgated. In general, the New Withholding Regulations do not significantly alter the substantive withholding and information reporting requirements, but unify current certification procedures and forms and clarify reliance standards. For example, the New Withholding Regulations adopt a certification rule, which was in the proposed regulations, under which a foreign stockholder who wishes to claim the benefit of an applicable treaty rate with respect to dividends received from a United Stated corporation will be required to satisfy certain certification and other requirements. In addition, the New Withholding Regulations require a corporation that is a REIT to treat as a dividend the portion of a distribution that is not designated as a capital gain dividend or return of basis and apply the 30% withholding tax (subject to any applicable deduction or exemption) to such portion, and to apply the FIRPTA withholding rules (discussed above) with respect to the portion of the distribution designated by the REIT as capital gain dividend. The New Withholding Regulations will generally be effective for payments made after December 31, 1999, subject to certain transition rules. THE DISCUSSION SET FORTH ABOVE IN "TAXATION OF NON-U.S. STOCKHOLDERS" DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S. STOCKHOLDERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW WITHHOLDING REGULATIONS. Tax Aspects Of The Operating Partnership General. Substantially all of the Company's 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. The Company will include in its income its proportionate share of the foregoing partnership items for purposes of the various REIT income tests and in the computation of its REIT taxable income. Moreover, for purposes of the REIT asset tests, the Company will include its proportionate share of assets held by the Operating Partnership. See "--Taxation of the Company." Entity Classification. The Company's interests in the Operating Partnership and the Lower-Tier Partnerships involve special tax considerations, including the possibility of a challenge by the IRS of the status of the Operating Partnership or a Lower-Tier Partnership as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes. If the Operating Partnership or a Lower-Tier 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 the Company's assets and items of gross income would change and preclude the Company from satisfying the asset tests and possibly the income tests (see "---- Taxation of the Company ---- Asset Tests" and "---- Income Tests"), and, in turn, would prevent the Company from qualifying as a REIT. See "---- Taxation of the Company ---- Failure to Qualify" above for a discussion of the effect of the Company's failure to meet such tests for - 32 - a taxable year. In addition, a change in the Operating Partnership's or a Lower-Tier Partnership's status for tax purposes might be treated as a taxable event in which case the Company might incur a tax liability without any related cash distributions. The IRS recently finalized and published certain Treasury Regulations (the "Final Regulations") which provide that a domestic business entity not otherwise classified as a corporation and which has at least two members (an "Eligible Entity") may elect to be taxed as a partnership for federal income tax purposes. The Final Regulations apply for tax periods beginning on or after January 1, 1997 (the "Effective Date"). Unless it elects otherwise, an Eligible Entity in existence prior to the Effective Date will have the same classification for federal income tax purposes that it claimed under the entity classification Treasury Regulations in effect prior to the Effective Date. In addition, an Eligible Entity which did not exist, or did not claim a classification, prior to the Effective Date, will be classified as a partnership for federal income tax purposes unless it elects otherwise. The Operating Partnership and each of the Lower-Tier Partnerships intends to claim classification as a partnership under the Final Regulations. Partnership Allocations. Although a partnership agreement will generally determine the allocation of income and losses among partners, such allocations will be disregarded for tax purposes if they do not comply with the provisions of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated thereunder require that partnership allocations respect the economic arrangement of the partners. If an allocation is not recognized for federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners' interests in the partnership, which will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. The Operating Partnership's allocations of taxable income and loss are intended to comply with the requirements of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder. Tax Allocations with Respect to the Properties. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction attributable to appreciated or depreciated property (such as the Properties) that is contributed to a partnership in exchange for an interest in the partnership, must be allocated in a manner such that the contributing partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss 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 such property at the time of contribution (a "Book-Tax Difference"). Such 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 (including certain of the Properties). 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 such allocations be made in a manner consistent with Section 704(c) of the 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 such deductions would be 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 such Book-Tax Difference will generally be allocated to such limited partners, and the Company will generally be allocated only its 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 the Operating Partnership may cause the Company to be allocated lower depreciation and other deductions, and possibly an amount of taxable income in the event of a sale of such contributed assets in excess of the economic or book income allocated to it as a result of such sale. This may cause the Company to recognize taxable income in excess of cash proceeds, which might adversely affect the Company's ability to comply with the REIT distribution requirements. See "--Taxation of the Company--Annual Distribution Requirements." Treasury Regulations under Section 704(c) of the Code provide partnerships with a choice of several methods of accounting for Book-Tax Differences, including retention of the "traditional method" or the election of certain methods which would permit any distortions caused by a Book-Tax Difference to be entirely rectified on an annual basis or with respect to a specific taxable transaction such as a sale. The Operating Partnership and the Company have determined to use the "traditional method" for accounting for Book-Tax Differences with respect to the Properties initially contributed to the Operating Partnership and with respect to certain assets acquired subsequently. The Operating - 33 - Partnerships and the Company have not yet decided what method will be used to account for Book-Tax Differences with respect to properties to be acquired by the Operating Partnerships in the future. With respect to any property acquired by the Operating Partnership in a taxable transaction, such property will initially have a tax basis equal to its fair market value, and Section 704(c) of the Code will not apply. Basis in Operating Partnership Interest. The Company's adjusted tax basis in its interest in the Operating Partnership generally (i) will be equal to the amount of cash and the basis of any other property contributed to the Operating Partnership by the Company, (ii) will be increased by (a) its allocable share of the Operating Partnership's income and (b) its allocable share of indebtedness of the Operating Partnership and (iii) will be reduced, but not below zero, by the Company's allocable share of (a) losses suffered by the Operating Partnership, (b) the amount of cash distributed to the Company and (c) by constructive distributions resulting from a reduction in the Company's share of indebtedness of the Operating Partnership. If the allocation of the Company's distributive share of the Operating Partnership's loss exceeds the adjusted tax basis of the Company's partnership interest in the Operating Partnership, the recognition of such excess loss will be deferred until such time and to the extent that the Company has adjusted tax basis in its interest in the Operating Partnership. To the extent that the Operating Partnership's distributions, or any decrease in the Company's share of the indebtedness of the Operating Partnership (such decreases being considered a cash distribution to the partners), exceeds the Company's adjusted tax basis, such excess distributions (including such constructive distributions) constitute taxable income to the Company. Other Tax Consequences The Company and its stockholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Company and its stockholders may not conform to the federal income tax consequences discussed above. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the Company. A portion of the cash to be used by the Operating Partnership to fund distributions to partners is expected to come from the Management Company, through interest payments and dividends on non-voting preferred stock to be held by the Operating Partnership. The Management Company will pay federal and state tax on its net income at full corporate rates, which will reduce the cash available for distribution to stockholders. EXPERTS The consolidated balance sheets of the Company as of December 31, 1997 and 1996 and the consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997 and the financial statement schedules of the Company as of and for each of the three years in the period ended December 31, 1997, included in the Company's 1997 Form 10-K, incorporated by reference in this Registration Statement, have been incorporated herein in reliance on the reports of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. LEGAL MATTERS Certain legal matters will be passed upon for the Company by Latham & Watkins, Washington, D.C. Latham & Watkins has relied as to certain matters of Maryland law, including the legality of the Common Stock, on the opinion of Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland. PLAN OF DISTRIBUTION This Prospectus relates to (i) the possible issuance by the Company of up to 55,335 shares of Common Stock if, and to the extent that, holders of up to 55,335 Common Units tender such units for exchange, and (ii) the possible issuance by the Company of up to 9,538 shares of Convertible Preferred Stock if, and to the extent that, holders of up to 9,538 shares of Exchangeable Preferred Units tender such units for exchange. The Company is registering the Exchange Shares to provide the holders thereof with freely tradeable securities, but the registration of such shares does not necessarily mean that any of such shares will be offered or sold by the holders thereof. - 34 - The Company will not receive any proceeds from the issuance of the Exchange Shares to holders of Common Units and Exchangeable Preferred Units upon receiving a notice of exchange (but it may acquire from such holders the Common Units and Exchangeable Preferred Units tendered). NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. TABLE OF CONTENTS Available Information 2 Incorporation of Certain Documents by Reference 2 The Company 4 Description of Capital Stock 7 Partnership Agreement 13 Exchange of the Units 15 Certain Provision of Maryland Law and the Company's Charter and Bylaw 21 Federal Income Tax Considerations 25 Experts 39 Legal Matters 40 Plan of Distribution 40 FIRST WASHINGTON REALTY TRUST, INC. 9,538 Shares 9.75% Series A Cumulative Participating Convertible Preferred Stock (Liquidation Preference of $25 Per Share) 55,335 Shares Common Stock ($0.01 Par Value Per Share) PROSPECTUS ________, 1998 - 35 - INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the amount of fees and expenses to be incurred in connection with the issuance and distribution of the Common Stock and Convertible Preferred Stock registered hereby: SEC Registration Fee $ 624 Printing and Mailing Costs 1,000 Legal Fees and Expenses 5,000 Accounting Fees and Expenses 3,000 Miscellaneous 1,000 ----- Total $10,624 ITEM 15. LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS The MGCL permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Charter contains such a provision which eliminates such liability to the maximum extent permitted by the MGCL. This provision does not limit the ability of the Company or its stockholders to obtain equitable relief, such as an injunction or rescission. The Charter authorizes the Company, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any present or former director or officer from and against any claim or liability to which such person may become subject or which such person may incur by reason of his status as a present or former director or officer of the Company. The Charter also provides that the Company may indemnify any other persons permitted but not required to be indemnified by Maryland law. The Bylaws obligate the Company, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer who is made a party to the proceeding by reason of his service in that capacity or (b) any individual who, while a director of the Company and at the request of the Company, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his service in that capacity. The Bylaws also permit the Company to indemnify and advance expenses to any person who served a predecessor of the Company in any of the capacities described above and to any employee or agent of the Company or a predecessor of the Company. The MGCL requires a corporation (unless its charter provides otherwise, which the Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon the corporation's receipt of (a) a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by or on his behalf to repay the amount paid or reimbursed by the corporation if it shall ultimately be determined that the standard of conduct was not met. The termination of any - 1 - proceeding by conviction, or upon a plea of nolo contendere or its equivalent, or an entry of any order of probation prior to judgment, creates a rebuttable presumption that the director or officer did not meet the requisite standard of conduct required for indemnification to be permitted. The Partnership Agreement also provides for indemnification of the Company, as general partner, and its officers and directors generally to the same extent as permitted by the MGCL for a corporation's officers and directors and limits the liability of the Company to the Operating Partnership and its partners in the case of losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or mistakes of fact or law or any act or omission if the Company acted in good faith. It is the position of the Commission that indemnification of directors and officers for liabilities arising under the Securities Act is against public policy and is unenforceable pursuant to Section 14 of the Securities Act. ITEM 16. EXHIBITS Exhibit 4.1 Amended and Restated Articles of Incorporation* 4.2 Bylaws** 5 Opinion of Ballard Spahr Andrews & Ingersoll 8. Opinion of Latham & Watkins regarding tax matters 23(a) Consent of Latham & Watkins (included in Exhibit 8) 23(b) Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5) 23(c) Consent of Coopers & Lybrand L.L.P. * Included as an exhibit to the Company's Form 10-K for the fiscal year ended Decmber 31, 1996, and incorporated herein by reference. **Included as an exhibit to the Company's Registration Statement on Form S-11, file No. 33-83960, and incorporated herein by reference. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement; provided, however, that subparagraphs (i) and (ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in the periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement. (2) That for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the - 2 - Securities offered herein, and the offering of such Securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the Securities being registered which remain unsold at the termination of the offering. The undersigned Registrant hereby further undertakes that, for the purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the Securities offered herein, and the offering of such Securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 15 of this registration statement, or otherwise (other than insurance), the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in such Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the Securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in such Act and will be governed by the final adjudication of such issue. - 3 - SIGNATURES Pursuant to the requirements of the Securities Act, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3, and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bethesda, State of Maryland on April 30, 1998. FIRST WASHINGTON REALTY TRUST, INC. By: William J. Wolfe President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Each person whose signature appears below hereby constitutes and appoints William Wolfe as his attorney-in-fact and agent, with full power of substitution and resubstitution for him in any and all capacities, to sign any or all amendments or post-effective amendments to this Registration Statement, or any Registration Statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith or in connection with the registration of the Securities under the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that such attorney-in-fact and agent or his substitutes may do or cause to be done by virtue hereof. Signature Title Date /s/ Stuart D. Halpert Chairman of the Board of Directors April 30, 1998 - ----------------------- Stuart D. Halpert /s/ William J. Wolfe President, Chief Executive Officer, April 30, 1998 - ----------------------- William J. Wolfe Director /s/ Lester Zimmerman Executive Vice President, Director April 30, 1998 - ----------------------- Lester Zimmerman /s/ James G. Blumenthal Executive Vice President and Chief April 30, 1998 - ----------------------- James G. Blumenthal Financial Officer /s/ Stanley T. Burns Director April 30, 1998 - ----------------------- Stanley T. Burns /s/ Matthew J. Hart Director April 30, 1998 - ----------------------- Matthew J. Hart /s/ William M. Russell Director April 30, 1998 - ----------------------- William M. Russell /s/ Heywood Wilansky Director April 30, 1998 Heywood Wilansky - 4 - EX-5 2 OPINION LETTER First Washington Realty Trust, Inc. April 30, 1998 Page 1 BALLARD SPAHR ANDREWS & INGERSOLL, LLP 19th Floor 300 East Lombard Street Baltimore, Maryland 21202-3268 (410) 528-5600 FAX (410) 528-5650/5651 April 30, 1998 First Washington Realty Trust, Inc. 4350 East-West Highway, Suite 400 Bethesda, Maryland 20814 Re: Registration Statement on Form S-3 Ladies and Gentlemen: We have served as Maryland counsel to First Washington Realty Trust, Inc., a Maryland corporation (the "Company"), in connection with certain matters of Maryland law arising out of the registration of (a) 55,335 shares of common stock (the "Common Shares"), $.01 par value per share, of the Company ("Common Stock") issuable if, and to the extent that, holders of up to 55,335 common units of limited partnership interest ("Common Units") in First Washington Realty Limited Partnership, a Maryland limited partnership (the "Operating Partnership"), tender such Common Units for exchange and (b) 9,538 shares (the "Preferred Shares") of 9.75% Series A Cumulative Participating Convertible Preferred Stock, $.01 par value per share, of the Company ("Series A Preferred Stock") issuable if, and to the extent that, holders of up to 9,538 preferred units of limited partnership interest ("Preferred Units") in the Operating Partnership tender such Preferred Units for exchange, covered by the above-referenced Registration Statement, and all amendments thereto (the "Registration Statement"), filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "1933 Act"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to them in the Registration Statement. In connection with our representation of the Company, and as a basis for the opinion hereinafter set forth, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (collectively, the "Documents"): 1. The Registration Statement and the related form of prospectus included therein in the form in which it was transmitted to the Commission under the 1933 Act; 2. The charter of the Company (the "Charter"), certified as of a recent date by the State Department of Assessments and Taxation of Maryland (the "SDAT"); First Washington Realty Trust, Inc. April 30, 1998 Page 2 3. The Bylaws of the Company, certified as of a recent date by its Senior Vice President and Secretary; 4. Resolutions adopted by the Board of Directors of the Company (the "Board") authorizing the issuance and registration of the Common Shares and the Preferred Shares, certified as of a recent date by the Senior Vice President and Secretary of the Company (the "Resolutions"); 5. The form of certificate representing a share of Common Stock, certified as of a recent date by the Senior Vice President and Secretary of the Company; 6. The form of certificate representing a share of Series A Preferred Stock, certified as of a recent date by the Senior Vice President and Secretary of the Company; 7. A certificate as of a recent date of the SDAT as to the good standing of the Company; 8. A certificate executed by the Senior Vice President and Secretary of the Company, dated the date hereof; and 9. Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth in this letter, subject to the assumptions, limitations and qualifications stated herein. In expressing the opinion set forth below, we have assumed, and so far as is known to us there are no facts inconsistent with, the following: 1. Each individual executing any of the Documents, whether on behalf of such individual or another person, is legally competent to do so. 2. Each individual executing any of the Documents on behalf of a party (other than the Company) is duly authorized to do so. 3. Each of the parties (other than the Company) executing any of the Documents has duly and validly executed and delivered each of the Documents to which such party is a signatory, and such party's obligations set forth therein are legal, valid and binding. 4. Any Documents submitted to us as originals are authentic. Any Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all such Documents are genuine. All public records reviewed or relied upon by us or on our behalf are true and complete. All statements and information contained in the Documents are true and complete. There has been no oral or written modification of or amendment to any of the First Washington Realty Trust, Inc. April 30, 1998 Page 3 Documents and there has been no waiver of any provision of any of the Documents, by action or omission of the parties or otherwise. 5. The outstanding shares of stock of the Company have not been and will not be transferred in violation of any restriction or limitation contained in the Charter. Neither the Common Shares nor the Preferred Shares will be transferred in violation of any restriction or limitation contained in the Charter. The phrase "known to us" is limited to the actual knowledge, without independent inquiry, of the lawyers at our firm who have performed legal services in connection with the issuance of this opinion. Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that: 1. The Company is a corporation duly incorporated and existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT. 2. The issuance of the Common Shares has been duly authorized and, when and to the extent issued in accordance with the Resolutions and in the manner described in the Registration Statement, the Common Shares will be (assuming that the sum of (a) all shares of Common Stock issued as of the date hereof, (b) any shares of Common Stock issued between the date hereof and the date on which any of the Common Shares are actually issued (not including any of the Common Shares) and (c) the Common Shares will not exceed the total number of shares of Common Stock that the Company is then authorized to issue) validly issued, fully paid and nonassessable. 3. The issuance of the Preferred Shares has been duly authorized and, when and to the extent issued in accordance with the Resolutions and in the manner described in the Registration Statement, the Preferred Shares will be (assuming that the sum of (a) all shares of Series A Preferred Stock issued as of the date hereof, (b) any shares of Series A Preferred Stock issued between the date hereof and the date on which any of the Preferred Shares are actually issued (not including any of the Preferred Shares) and (c) the Preferred Shares will not exceed the total number of shares of Series A Preferred Stock that the Company is then authorized to issue) validly issued, fully paid and nonassessable. The foregoing opinion is limited to the laws of the State of Maryland and we do not express any opinion herein concerning any other law. The opinion expressed herein is subject to the effect of judicial decisions which may permit the introduction of parol evidence to modify the terms or the interpretation of agreements. We express no opinion as to compliance with the securities (or "blue sky") laws of the State of Maryland. First Washington Realty Trust, Inc. April 30, 1998 Page 4 We assume no obligation to supplement this opinion if any applicable law changes after the date hereof or if we become aware of any fact that might change the opinion expressed herein after the date hereof. This opinion is being furnished to you solely for submission to the Commission as an exhibit to the Registration Statement and, accordingly, may not be relied upon by, quoted in any manner to, or delivered to any other person or entity without, in each instance, our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of the name of our firm therein. In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the 1933 Act. Very truly yours, Ballard Spahr Andrews & Ingersoll, LLP EX-5 3 OPINION LETTER First Washington Realty Trust, Inc. April 30, 1998 Page 1 LATHAM & WATKINS ATTORNEYS AT LAW 1001 PENNSYLVANIA AVENUE, N.W. SUITE 1300 WASHINGTON, D.C. 20004-2505 TELEPHONE (202) 637-2200 FAX (202) 637-2201 April 30, 1998 First Washington Realty Trust, Inc. 4350 East-West Highway, Suite 400 Bethesda, Maryland 20814 Re: Federal Income Tax Consequences Ladies and Gentlemen: We have acted as tax counsel to First Washington Realty Trust, Inc., a Maryland corporation (the "Company"), in connection with its issuance of up to 55,335 shares of common stock of the Company and 9,538 shares of 9.75% Series A Cumulative Participating Preferred Stock pursuant to a registration statement on Form S-3 under the Securities Act of 1933, as amended, filed with the Securities and Exchange Commission on April _, 1998 (and as so amended as of the time it becomes effective) (the "Registration Statement"). You have requested our opinion concerning certain of the federal income tax consequences to the Company in connection with the issuance described above. This opinion is based on various facts and assumptions, including the facts set forth in the Registration Statement concerning the business, properties and governing documents of the Company and First Washington Realty Limited Partnership (the "Operating Partnership"). We have also been furnished with, and with your consent have relied upon, certain representations made by the Company and the Operating Partnership with respect to certain factual matters through a certificate of an officer of the Company (the "Officer's Certificate"). In our capacity as tax counsel to the Company, we have made such legal and factual examinations and inquiries, including an examination of originals or copies certified or otherwise identified to our satisfaction of such documents, corporate records and other instruments as we have deemed necessary or appropriate for purposes of this opinion. In our examination, we have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures thereon, the legal capacity of natural persons executing such documents and the conformity to authentic original documents of all documents submitted to us as copies. First Washington Realty Trust, Inc. April 30, 1998 Page 2 We are opining herein as to the effect on the subject transaction only of the federal income tax laws of the United States and we express no opinion with respect to the applicability thereto, or the effect thereon, of other federal laws, the laws of any state or other jurisdiction or as to any matters of municipal law or the laws of any other local agencies within any state. Based on such facts, assumptions and representations, it is our opinion that the statements in the Registration Statement set forth under the caption "Federal Income Tax Considerations" to the extent such information constitutes matters of law, summaries of legal matters, or legal conclusions, have been reviewed by us and are accurate in all material respects. No opinion is expressed as to any matter not discussed herein. This opinion is based on various statutory provisions, regulations promulgated thereunder and interpretations thereof by the Internal Revenue Service and the courts having jurisdiction over such matters, all of which are subject to change either prospectively or retroactively. Also, any variation or difference in the facts from those set forth in the Registration Statement or the Officer's Certificate may affect the conclusions stated herein. Moreover, the Company's qualification and taxation as a real estate investment trust depends upon the Company's ability to meet, through actual annual operating results, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Code, the results of which have not been and will not be reviewed by Latham & Watkins. Accordingly, no assurance can be given that the actual results of the Company's operation for any one taxable year will satisfy such requirements. This opinion is rendered only to you, and is solely for your use in connection with the issuance of common stock and preferred stock by the Company pursuant to the Registration Statement. This opinion may not be relied upon by you for any other purpose, or furnished to, quoted to, or relied upon by any other person, firm or corporation, for any purpose, without our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Registration Statement. Very truly yours, Latham & Watkins EX-23 4 CONSENT LETTER CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in this Registration Statement of First Washington Realty Trust, Inc. (the "Company") on Form S-3, of our report dated January 31, 1998, except for Note 16, as to which the date is March 26, 1998, on our audits of the consolidated financial statements and financial statement schedules of the Company as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which report is included in the Company's 1997 Form 10-K. We also consent to the reference to our firm under the caption "Experts". COOPERS & LYBRAND L.L.P. Washington, D.C. April 28, 1998 -----END PRIVACY-ENHANCED MESSAGE-----