FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-121506
PROSPECTUS
WEINGARTEN REALTY INVESTORS
140,260 COMMON SHARES
OF BENEFICIAL INTEREST
________________
This prospectus relates to the possible redemption by us of your Class A
Partnership Units (the "Units") of WRI/Utah Properties, L.P. for up to an
aggregate of 140,260 common shares of beneficial interest, par value $.03 per
share. You will receive 1.5 common shares for each Unit you redeem that was
issued before March 30, 2004 (after accounting for the three-for-two split of
our common shares effective in March 2004), and 1 common share for each Unit you
redeem that was issued after March 30, 2004. We will not receive any proceeds
from the issuance to you of the common shares.
We are registering the common shares being offered by this prospectus in
order to permit the recipient thereof to sell such shares without restriction,
in the open market or otherwise; however, the registration of such common shares
does not necessarily mean that any of the Units will be submitted for redemption
or that any of the common shares to be issued upon such redemption will be
offered or sold by the recipient thereof.
Our common shares are listed on the New York Stock Exchange under the
symbol "WRI." On December 17, 2004, the closing sale price on the New York Stock
Exchange for our common shares was $40.45 per share.
Our executive offices are located at 2600 Citadel Plaza Drive, Suite 300,
Houston, Texas 77008, and our telephone number is (713) 866-6000.
____________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES DISCUSSED IN THIS
PROSPECTUS, NOR HAVE THEY DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 11, 2005
You should rely only on the information contained or incorporated by
reference in this prospectus and any applicable prospectus supplement. We have
not authorized anyone else to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We will not make an offer to sell these securities in any state where the
offer or sale is not permitted. You should assume that the information
appearing in this prospectus, as well as the information we previously filed
with the Securities and Exchange Commission and incorporated by reference, is
accurate only as of the date of the documents containing the information.
TABLE OF CONTENTS
Cautionary Statement Concerning Forward-Looking Statements . . . . . . . . (i)
About This Prospectus. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Redemption of Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Federal Income Tax Consequences. . . . . . . . . . . . . . . . . . . . . . 3
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Where You Can Find More Information. . . . . . . . . . . . . . . . . . . . 16
Incorporation of Documents by Reference. . . . . . . . . . . . . . . . . . 17
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute forward-looking statements
as such term is defined in Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are not guarantees of performance. Our future
results, financial condition and business may differ materially from those
expressed in these forward-looking statements. You can find many of these
statements by looking for words such as "plans," "intends," "estimates,"
"anticipates," "expects," "believes" or similar expressions in this prospectus
and the applicable prospectus summary. These forward-looking statements are
subject to numerous assumptions, risks and uncertainties. Many of the factors
that will determine these items are beyond our ability to control or predict.
For these statements, we claim the protection of the safe harbor
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. You are cautioned not to place undue reliance on our
forward-looking statements, which speak only as of the date of this prospectus
and the applicable prospectus summary or the date of any document incorporated
by reference. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
section. We do not undertake any obligation to release publicly any revisions
to our forward-looking statements to reflect events or circumstances after the
date of this prospectus and the applicable prospectus summary.
i
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC. This prospectus only provides you with a general description of the
securities being issued. You should read this prospectus together with the
additional information described under the heading "Where You Can Find More
Information."
All references to "we," "our" and "us" in this prospectus mean Weingarten
Realty Investors and all entities owned or controlled by us, except where it is
made clear that the term means only the parent company. All references to the
"Operating Partnership" in this prospectus mean our controlled subsidiary,
WRI/Utah Properties, L.P.
THE COMPANY
We are a real estate investment trust based in Houston, Texas. We develop,
acquire and own neighborhood and community shopping centers. To a lesser degree,
we develop, acquire and own industrial real estate. We have engaged in these
activities since 1948.
As of September 30, 2004, we owned or had an equity interest in operating
properties consisting of approximately 46.1 million square feet of building
area. These properties consist of 284 shopping centers generally in the 100,000
to 400,000 square foot range and 62 industrial projects. Our properties are
located in 20 states that span the southern half of the United States from coast
to coast. Our shopping centers are anchored primarily by supermarkets,
drugstores and other retailers that sell basic necessity-type items. As of
September 30, 2004, we leased to approximately 5,000 different tenants under
approximately 6,800 separate leases. The weighted average occupancy rate of all
of our improved properties as of September 30, 2004 was 94.2%.
Our executive offices are located at 2600 Citadel Plaza Drive, Suite 300,
Houston, Texas 77008, and our telephone number is (713) 866-6000. Our website
address is www.weingarten.com. The information contained on our website is not
part of this prospectus supplement or the accompanying prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the common shares
offered by this prospectus.
PLAN OF DISTRIBUTION
This prospectus relates to the issuance of our common shares when you elect
to have us redeem your Class A Partnership Units in the Operating Partnership.
Pursuant to the Amended and Restated Agreement of Limited Partnership of
the Operating Partnership, on or after December 18, 2004, you have the right to
require us to redeem Units you hold. At our option, each Unit that was issued
before March 30, 2004 may be redeemed for 1.5 of our common shares, and each
Unit that was issued after March 30, 2004 may be redeemed for 1 of our common
shares. You may not redeem Units unless you redeem at least (1) 2,000 Units, or
(2) if you hold less than 2,000 Units, the total number of Units you hold. For a
more detailed description of how to redeem your Units, see "Redemption of
Units."
We are registering the common shares covered by this prospectus in order to
permit the recipient thereof to sell such shares without restriction, in the
open market or otherwise; however, the registration of such common shares does
not necessarily mean that any of the Units will be submitted for redemption or
that any of such common shares to be issued upon such redemption will be offered
or sold by the recipient thereof. We are registering the common shares pursuant
to the provisions of the registration rights agreement among us, the Operating
Partnership, you and certain other parties.
1
We will not receive any cash proceeds from the redemption of the Units and
the issuance of the common shares. We will pay all expenses incident to the
registration of the common shares.
REDEMPTION OF UNITS
Each Unit holder may, subject to certain limitations, require that the
Operating Partnership redeem its Units, by delivering a notice to Weingarten
Realty Investors, the general partner of the Operating Partnership. Upon
redemption, such Unit holder will receive 1.5 common shares for each Unit that
was issued before March 30, 2004 that is elected to be redeemed by such Unit
holder (after accounting for the three-for-two split of our common shares
effective March 2004), and 1 common share for each Unit that was issued after
March 30, 2004 that is elected to be redeemed.
We anticipate that we may elect to satisfy any redemption right exercised
by a Unit holder through our issuance of common shares, whereupon we will
acquire, and become the owner of, the Units being redeemed. Such an acquisition
of Units by us will be treated as a sale of the Units by the redeeming Unit
holders to us for federal income tax purposes. See "Federal Income Tax
Consequences - Tax Consequences of Redemption." Upon redemption, such Unit
holder's right to receive distributions from the Operating Partnership with
respect to the Units redeemed will cease. The Unit holder will have rights as
our shareholder, including the payment of dividends, from the time of its
acquisition of common shares issued in connection with the redemption of its
Units. If you receive common shares on a record date for certain distributions
as a holder of Units, such distributions shall be reduced by any dividend to
which you are entitled on such date as a holder of common shares.
You must notify us of your desire to require the Operating Partnership to
redeem Units by sending a notice in the form attached as an exhibit to the
Partnership Agreement, a copy of which is available from us. You may not redeem
Units unless you redeem at least (1) 2,000 Units, or (2) if you hold less than
2,000 Units, the total number of Units you hold. No redemption can occur if the
delivery of common shares would be prohibited under the provisions of our
declaration of trust or under applicable federal or state securities laws or
regulations. In addition, we will not redeem any Units to the extent they are
subject to any liens or other encumbrances, if you cannot give us adequate
assurances that the Units will be free of such or if you refuse to fully
indemnify us in the event they are not.
2
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of material federal income tax consequences that may
be relevant to a Unit holder is based on current law, is for general information
only and is not intended as tax advice. The following discussion, which is not
exhaustive of all possible tax consequences, does not include a detailed
discussion of any state, local or foreign tax consequences, nor does it discuss
all of the aspects of federal income taxation that may be relevant to a Unit
holder in light of the Unit holder's particular circumstances or to certain
types of Unit holders (including insurance companies, tax-exempt entities,
financial institutions or broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States and persons holding
securities as part of a conversion transaction, a hedging transaction or as a
position in a straddle for tax purposes) who are subject to special treatment
under the federal income tax laws.
The statements in this discussion are based on current provisions of the
Internal Revenue Code, existing, temporary and currently proposed Treasury
Regulations under the Internal Revenue Code, the legislative history of the
Internal Revenue Code, existing administrative rulings and practices of the IRS
and judicial decisions. No assurance can be given that legislative, judicial or
administrative changes will not affect the accuracy of any statements in this
discussion with respect to transactions entered into or contemplated prior to
the effective date of such changes. Any such change could apply retroactively to
transactions preceding the date of the change. We do not plan to request any
rulings from the IRS concerning our tax treatment and the statements in this
discussion are not binding on the IRS or any court. Thus, we can provide no
assurance that these statements will not be challenged by the IRS or that such
challenge will not be sustained by a court.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
EACH UNIT HOLDER IS ADVISED TO CONSULT WITH THE UNIT HOLDER'S OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO THE UNIT HOLDER OF THE REDEMPTION OF
THE UNIT HOLDER'S UNITS AND THE PURCHASE, OWNERSHIP AND DISPOSITION OF
SECURITIES IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH REDEMPTION, PURCHASE,
OWNERSHIP, DISPOSITION AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
We have elected to be treated as a REIT under Sections 856 through 860 of
the Internal Revenue Code for federal income tax purposes commencing with our
taxable year ended December 31, 1985. We believe that we have been organized and
have operated in a manner that qualifies for taxation as a REIT under the
Internal Revenue Code. We also believe that we will continue to operate in a
manner that will preserve our status as a REIT. We cannot however, assure you
that such requirements will be met in the future.
We have received an opinion from Locke Liddell & Sapp LLP, our legal
counsel, to the effect that we qualified as a REIT under the Internal Revenue
Code for our taxable year ended December 31, 2003, and that our proposed manner
of operation and diversity of equity ownership should enable us to continue to
satisfy the requirements for qualification as a REIT in calendar year 2004 if we
operate in accordance with our representations concerning our intended method of
operation. However, you should be aware that opinions of counsel are not binding
on the IRS or on the courts, and, if the IRS were to challenge these
conclusions, no assurance can be given that these conclusions would be sustained
in court. The opinion of Locke Liddell & Sapp LLP is based on various
assumptions as well as on certain representations made by us as to factual
matters, including a factual representation letter provided by us. The rules
governing REITs are highly technical and require ongoing compliance with a
variety of tests that depend, among other things, on future operating results,
asset diversification, distribution levels and diversity of share ownership.
Locke Liddell & Sapp LLP will not monitor our compliance with these
requirements. While we expect to satisfy these tests, and will use our best
efforts to do so, no assurance can be given that we will qualify as a REIT for
any particular year, or that the applicable law will not change and adversely
affect us and our shareholders. See "-- Failure to Qualify as a REIT." The
following is a summary of the material federal income tax considerations
affecting us as a REIT and the holders of our securities. This summary is
qualified in its entirety by the applicable
3
Internal Revenue Code provisions, relevant rules and regulations promulgated
under the Internal Revenue Code, and administrative and judicial interpretations
of the Internal Revenue Code and these rules and regulations.
REIT QUALIFICATION
We must be organized as an entity that would, if we do not maintain our
REIT status, be taxable as a regular corporation. We cannot be a financial
institution or an insurance company. We must be managed by one or more trust
managers. Our taxable year must be the calendar year. Our beneficial ownership
must be evidenced by transferable shares. Our capital shares must be held by at
least 100 persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a taxable year of less than 12 months. Not more
than 50% of the value of the shares of our capital shares may be held, directly
or indirectly, applying the applicable constructive ownership rules of the
Internal Revenue Code, by five or fewer individuals at any time during the last
half of each of our taxable years. We must also meet certain other tests,
described below, regarding the nature of our income and assets and the amount of
our distributions.
Our outstanding common shares are owned by a sufficient number of investors
and in appropriate proportions to permit us to satisfy these share ownership
requirements. To protect against violations of these share ownership
requirements, our declaration of trust provides that no person is permitted to
own, applying constructive ownership tests set forth in the Internal Revenue
Code, more than 9.8% of our outstanding capital shares, unless the trust
managers (including a majority of the independent trust managers) are provided
evidence satisfactory to them in their sole discretion that our qualification as
a REIT will not be jeopardized. In addition, our declaration of trust contains
restrictions on transfers of capital shares, as well as provisions that
automatically convert common shares into excess securities to the extent that
the ownership otherwise might jeopardize our REIT status. These restrictions,
however may not ensure that we will, in all cases, be able to satisfy the share
ownership requirements. If we fail to satisfy these share ownership
requirements, except as provided below, our status as a REIT will terminate.
However, if we comply with the rules contained in applicable Treasury
Regulations that require us to ascertain the actual ownership of our shares and
we do not know, or would not have known through the exercise of reasonable
diligence, that we failed to meet the 50% requirement described above, we will
be treated as having met this requirement. See "-Failure to Qualify as a REIT."
We may also qualify for relief under certain other provisions. See the section
below entitled "-Relief from Certain Failures of the REIT Qualification
Requirements."
To monitor our compliance with the share ownership requirements, we are
required to and we do maintain records disclosing the actual ownership of our
common shares. To do so, we will demand written statements each year from the
record holders of certain percentages of shares in which the record holders are
to disclose the actual owners of the shares (i.e., the persons required to
include in gross income the REIT dividends). A list of those persons failing or
refusing to comply with this demand will be maintained as part of our records.
Shareholders who fail or refuse to comply with the demand must submit a
statement with their tax returns disclosing the actual ownership of the shares
and certain other information.
We currently satisfy, and expect to continue to satisfy, each of these
requirements discussed above. We also currently satisfy, and expect to continue
to satisfy, the requirements that are separately described below concerning the
nature and amounts of our income and assets and the levels of required annual
distributions.
SOURCES OF GROSS INCOME. In order to qualify as a REIT for a particular
year, we also must meet two tests governing the sources of our income - a 75%
gross income test and a 95% gross income test. These tests are designed to
ensure that a REIT derives its income principally from passive real estate
investments.
The Internal Revenue Code allows a REIT to own and operate a number of its
properties through wholly-owned subsidiaries which are "qualified REIT
subsidiaries." The Internal Revenue Code provides that a qualified REIT
subsidiary is not treated as a separate corporation, and all of its assets,
liabilities and items of income, deduction and credit are treated as assets,
liabilities and items of income, deduction and credit of the REIT.
In the case of a REIT which is a partner in a partnership or any other
entity such as a limited liability company that is treated as a partnership for
federal income tax purposes, Treasury Regulations provide that the
4
REIT will be deemed to own its proportionate share of the assets of the
partnership. Also, the REIT will be deemed to be entitled to its proportionate
share of the income of the partnership. The character of the assets and gross
income of the partnership retains the same character in the hands of the REIT
for purposes of Section 856 of the Internal Revenue Code, including satisfying
the gross income tests and the asset tests. Thus, our proportionate share of the
assets and items of income of any partnership in which we own an interest are
treated as our assets and items of income for purposes of applying the
requirements described in this discussion, including the income and asset tests
described below.
75% GROSS INCOME TEST. At least 75% of a REIT's gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to us
are:
- rents from real property;
- interest on loans secured by real property;
- gains from the sale of real property or loans secured by real property
(excluding gain from the sale of property held primarily for sale to
customers in the ordinary course of our business, referred to below as
"dealer property");
- income from the operation and gain from the sale of property acquired
in connection with the foreclosure of a mortgage securing that
property ("foreclosure property");
- distributions on, or gain from the sale of, shares of other qualifying
REITs;
- abatements and refunds of real property taxes;
- amounts received as consideration for entering into agreements to make
loans secured by real property or to purchase or lease real property;
and - "qualified temporary investment income" (described below).
In evaluating our compliance with the 75% gross income test, as well as the
95% gross income test described below, gross income does not include gross
income from "prohibited transactions." In general, a prohibited transaction is
one involving a sale of dealer property, not including foreclosure property and
not including certain dealer property we have held for at least four years.
We expect that substantially all of our operating gross income will be
considered rent from real property and interest income. Rent from real property
is qualifying income for purposes of the gross income tests only if certain
conditions are satisfied. Rent from real property includes charges for services
customarily rendered to tenants, and rent attributable to personal property
leased together with the real property so long as the personal property rent is
not more than 15% of the total rent received or accrued under the lease for the
taxable year. We do not expect to earn material amounts in these categories.
Rent from real property generally does not include rent based on the income
or profits derived from the property. However, rent based on a percentage of
gross receipt or sales is permitted as rent from real property and we will have
leases where rent is based on a percentage of gross receipt or sales. We
generally do not intend to lease property and receive rentals based on the
tenant's income or profit. Also excluded from "rents from real property" is rent
received from a person or corporation in which we (or any of our 10% or greater
owners) directly or indirectly through the constructive ownership rules
contained in Section 318 and Section 856(d)(5) of the Internal Revenue Code, own
a 10% or greater interest.
A third exclusion from qualifying rent income covers amounts received with
respect to real property if we furnish services to the tenants or manage or
operate the property, other than through an "independent contractor" from whom
we do not derive any income or through a "taxable REIT subsidiary." A taxable
REIT subsidiary is a corporation in which a REIT owns stock, directly or
indirectly, and with respect to which the corporation and the
5
REIT have made a joint election to treat the corporation as a taxable REIT
subsidiary. The obligation to operate through an independent contractor or a
taxable REIT subsidiary generally does not apply, however, if the services we
provide are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not considered rendered primarily for the
convenience of the tenant (applying standards that govern in evaluating whether
rent from real property would be unrelated business taxable income when received
by a tax-exempt owner of the property). Further, if the gross income from
non-customary services with respect to a property, valued at no less than 150%
of our direct cost of performing such services, is 1% or less of the total
income derived from the property, then the provision of such non-customary
services shall not prohibit the rental income (except the non-customary service
income) from qualifying as "rents from real property."
We believe that the only material services generally to be provided to
tenants will be those usually or customarily rendered in connection with the
rental of space for occupancy only. We do not intend to provide services that
might be considered rendered primarily for the convenience of the tenants, such
as hotel, health care or extensive recreational or social services.
Consequently, we believe that substantially all of our rental income will
be qualifying income under the gross income tests, and that our provision of
services will not cause the rental income to fail to be included under that
test.
Upon the ultimate sale of our properties, any gains realized also are
expected to constitute qualifying income, as gain from the sale of real property
(not involving a prohibited transaction).
95% GROSS INCOME TEST. In addition to earning 75% of our gross income from
the sources listed above, 95% of our gross income for each taxable year must
come either from those sources, or from dividends, interest or gains from the
sale or other disposition of stock or other securities that do not constitute
dealer property. This test permits a REIT to earn a significant portion of its
income from traditional "passive" investment sources that are not necessarily
real estate related. The term "interest" (under both the 75% and 95% tests) does
not include amounts that are based on the income or profits of any person,
unless the computation is based only on a fixed percentage of receipts or sales.
FAILING THE 75% OR 95% TESTS; REASONABLE CAUSE. As a result of the 75% and
95% tests, REITs generally are not permitted to earn more than 5% of their gross
income from active sources, including brokerage commissions or other fees for
services rendered. We may receive certain types of that income. This type of
income will not qualify for the 75% test or 95% test but is not expected to be
significant and that income, together with other nonqualifying income, is
expected to be at all times less than 5% of our annual gross income. While we do
not anticipate that we will earn substantial amounts of nonqualifying income, if
nonqualifying income exceeds 5% of our gross income, we could lose our status as
a REIT. We may establish taxable REIT subsidiaries to hold assets generating
non-qualifying income. The gross income generated by these subsidiaries would
not be included in our gross income. However, dividends we receive from these
subsidiaries would be included in our gross income and qualify for the 95%
income test.
Beginning in 2005, if we fail to meet either the 75% or 95% income tests
during a taxable year, we may still qualify as a REIT for that year if,
following the identification of such failure, (1) we file a description of each
item of our gross income in accordance with regulations prescribed by Treasury,
and (2) the failure to meet the tests is due to reasonable cause and not to
willful neglect. It is not possible, however, to state whether in all
circumstances we would be entitled to the benefit of this relief provision. For
example, if we fail to satisfy the gross income tests because nonqualifying
income that we intentionally accrue or receive causes us to exceed the limits on
nonqualifying income, the IRS could conclude that our failure to satisfy the
tests was not due to reasonable cause. If these relief provisions do not apply
to a particular set of circumstances, we will not qualify as a REIT. As
discussed below, even if these relief provisions apply, and we retain our status
as a REIT, a tax would be imposed with respect to our non-qualifying income. We
would be subject to a 100% tax based on the greater of the amount by which we
fail either the 75% or 95% income tests for that year times a fraction intended
to reflect our profitability. See "-Taxation as a REIT."
PROHIBITED TRANSACTION INCOME. Any gain that we realize on the sale of any
property held as inventory or other property held primarily for sale to
customers in the ordinary course of business (including our share of any
6
such gain realized by any subsidiary partnerships), will be treated as income
from a prohibited transaction that is subject to a 100% penalty tax. This
prohibited transaction income may also adversely affect our 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 depends on all the facts and circumstances
surrounding the particular transaction. We intend to hold our and our subsidiary
partnerships intend to hold their properties for investment with a view to
long-term appreciation, to engage in the business of acquiring, developing and
owning properties, and to make occasional sales of the properties as are
consistent with their investment objectives. The IRS may contend, however, that
one or more of these sales is subject to the 100% penalty tax.
CHARACTER OF ASSETS OWNED. At the close of each calendar quarter of our
taxable year, we also must meet three tests concerning the nature of our
investments. First, at least 75% of the value of our total assets generally must
consist of real estate assets, cash, cash items (including receivables) and
government securities. For this purpose, "real estate assets" include interests
in real property, interests in loans secured by mortgages on real property or by
certain interests in real property, shares in other REITs and certain options,
but excluding mineral, oil or gas royalty interests. The temporary investment of
new capital in debt instruments also qualifies under this 75% asset test, but
only for the one-year period beginning on the date we receive the new capital.
Second, although the balance of our assets generally may be invested
without restriction, other than certain debt securities, we will not be
permitted to own (1) securities of any one non-governmental issuer (other than a
taxable REIT subsidiary) that represent more than 5% of the value of our total
assets, (2) securities possessing more than 10% of the voting power of the
outstanding securities of any single issuer or (3) securities having a value of
more than 10% of the total value of the outstanding securities of any one
issuer. A REIT, however, may own 100% of the stock of a qualified REIT
subsidiary, in which case the assets, liabilities and items of income, deduction
and credit of the subsidiary are treated as those of the REIT. A REIT may also
own more than 10% of the voting power or value of a taxable REIT subsidiary.
Third, securities of a single taxable REIT subsidiary may represent more than 5%
of the value of the total assets but not more than 20% of the value of a REIT's
total assets may be represented by securities of one or more taxable REIT
subsidiaries. In evaluating a REIT's assets, if the REIT invests in a
partnership, it is deemed to own its proportionate share of the assets of the
partnership.
After initially meeting the asset tests at the close of any quarter, we
will not lose our status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If we fail
to satisfy the asset tests because we acquire securities or other property
during a quarter, we can cure this failure by disposing of sufficient
nonqualifying assets within 30 days after the close of that quarter. We intend
to take such action within the 30 days after the close of any quarter as may be
required to cure any noncompliance. If we fail to cure noncompliance with the
asset tests within this time period, we could cease to qualify as a REIT.
Beginning in the 2005 taxable year, if we fail to satisfy one or more of
the asset tests for any quarter of a taxable year, we nevertheless may qualify
as a REIT for such year if we qualify for relief under certain provisions of the
Code. Those relief provisions generally will be available for failures of the
5% asset test and the 10% asset tests if (i) the failure is due to the ownership
of assets that do not exceed the lesser of 1% of our total assets or $10
million, and the failure is corrected within 6 months following the quarter in
which it was discovered, or (ii) the failure is due to ownership of assets that
exceed the amount in (i) above, the failure is due to reasonable cause and not
due to willful neglect, we file a schedule with a description of each asset
causing the failure in accordance with regulations prescribed by the Treasury,
the failure is corrected within 6 months following the quarter in which it was
discovered, and we pay a tax consisting of the greater of $50,000 or a tax
computed at the highest corporate rate on the amount of net income generated by
the assets causing the failure from the date of failure until the assets are
disposed of or we otherwise return to compliance with the asset test. We may
not qualify for the relief provisions in all circumstances.
ANNUAL DISTRIBUTIONS TO SHAREHOLDERS. To maintain our REIT status, we
generally must distribute as a dividend to our shareholders in each taxable year
at least 90% of our net ordinary income. Capital gain is not required to be
distributed. More precisely, we must distribute an amount equal to (1) 90% of
the sum of (a) our "REIT Taxable Income" before deduction of dividends paid and
excluding any net capital gain and (b) any net income from foreclosure property
less the tax on such income, minus (2) certain limited categories of "excess
noncash income," including income attributable to leveled stepped rents,
cancellation of indebtedness and original issue discount income. REIT Taxable
Income is defined to be the taxable income of the REIT, computed as if it
7
were an ordinary corporation, with certain modifications. For example, the
deduction for dividends paid is allowed, but neither net income from foreclosure
property, nor net income from prohibited transactions, is included. In addition,
the REIT may carry over, but not carry back, a net operating loss for 20 years
following the year in which it was incurred.
A REIT may satisfy the 90% distribution test with dividends paid during the
taxable year and with certain dividends paid after the end of the taxable year.
Dividends paid in January that were declared during the last calendar
quarter of the prior year and were payable to shareholders of record on a date
during the last calendar quarter of that prior year are treated as paid on
December 31 of the prior year. Other dividends declared before the due date of
our tax return for the taxable year, including extensions, also will be treated
as paid in the prior year if they are paid (1) within 12 months of the end of
that taxable year and (2) no later than our next regular distribution payment.
Dividends that are paid after the close of a taxable year that do not qualify
under the rule governing payments made in January (described above) will be
taxable to the shareholders in the year paid, even though we may take them into
account for a prior year. A nondeductible excise tax equal to 4% will be imposed
for each calendar year to the extent that dividends declared and distributed or
deemed distributed on or before December 31 are less than the sum of (a) 85% of
our "ordinary income" plus (b) 95% of our capital gain net income plus (c) any
undistributed income from prior periods.
To be entitled to a dividends paid deduction, the amount distributed by a
REIT must not be preferential. For example, every shareholder of the class of
shares to which a distribution is made must be treated the same as every other
shareholder of that class, and no class of shares may be treated otherwise than
in accordance with its dividend rights as a class.
We will be taxed at regular corporate rates to the extent that we retain
any portion of our taxable income. For example, if we distribute only the
required 90% of our taxable income, we would be taxed on the retained 10%. Under
certain circumstances we may not have sufficient cash or other liquid assets to
meet the distribution requirement. This could arise because of competing demands
for our funds, or due to timing differences between tax reporting and cash
receipts and disbursements (i.e., income may have to be reported before cash is
received, or expenses may have to be paid before a deduction is allowed).
Although we do not anticipate any difficulty in meeting this requirement,
no assurance can be given that necessary funds will be available. In the event
these circumstances do occur, then in order to meet the 90% distribution
requirement, we may have to arrange for short-term, or possibly long-term,
borrowings to permit the payment of required dividends.
If we fail to meet the 90% distribution requirement because of an
adjustment to our taxable income by the IRS, we may be able to cure the failure
retroactively by paying a "deficiency dividend," as well as applicable interest
and penalties, within a specified period.
TAXATION AS A REIT
As a REIT, we generally will not be subject to corporate income tax to the
extent we currently distribute our REIT taxable income to our shareholders. This
treatment effectively eliminates the "double taxation" imposed on investments in
most corporations. Double taxation refers to taxation that occurs once at the
corporate level when income is earned and once again at the shareholder level
when such income is distributed. We generally will be taxed only on the portion
of our taxable income that we retain, which will include any undistributed net
capital gain, because we will be entitled to a deduction for dividends paid to
shareholders during the taxable year. A dividends paid deduction is not
available for dividends that are considered preferential within any given class
of shares or as between classes except to the extent that class is entitled to a
preference. We do not anticipate that we will pay any of those preferential
dividends. Because excess shares will represent a separate class of outstanding
shares, the fact that those shares will not be entitled to dividends should not
adversely affect our ability to deduct our dividend payments.
Even as a REIT, we will be subject to tax in certain circumstances as
follows:
8
- we would be subject to tax on any income or gain from foreclosure
property at the highest corporate rate (currently 35%);
- a confiscatory tax of 100% applies to any net income from prohibited
transactions;
- if we fail to meet either the 75% or 95% source of income tests
described above, but still qualify for REIT status under the
reasonable cause exception to those tests, a 100% tax would be imposed
equal to the amount obtained by multiplying (a) the greater of the
amount, if any, by which it failed either the 75% income test or the
95% income test, times (b) a fraction intended to reflect our
profitability;
- beginning in the 2005 taxable year, if we fail, in more than a de
minimis fashion, to satisfy one or more of the asset tests for any
quarter of a taxable year, but nonetheless continue to qualify as a
REIT because we qualify under certain relief provisions, we may be
required to pay a tax of the greater of $50,000 or a tax computed at
the highest corporate rate on the amount of net income generated by
the assets causing the failure from the date of failure until the
assets are disposed of or we otherwise return to compliance with the
asset test;
- beginning in the 2005 taxable year, if we fail to satisfy one or more
of the requirements for REIT qualification (other than the income
tests or the asset tests), we nevertheless may avoid termination of
our REIT election in such year if the failure is due to reasonable
cause and not due to willful neglect and we pay a penalty of $50,000
for each failure to satisfy the REIT qualification requirements;
- we will be subject to the alternative minimum tax on items of tax
preference, excluding items specifically allocable to our
shareholders;
- if we should fail to distribute with respect to each calendar year at
least the sum of (a) 85% of our REIT ordinary income for that year,
(b) 95% of our REIT capital gain net income for that year, and (c) any
undistributed taxable income from prior years, we would be subject to
a 4% excise tax on the excess of the required distribution over the
amounts actually distributed;
- we also may be taxed at the highest regular corporate tax rate on any
built-in gain attributable to assets that we acquire in certain
tax-free corporate transactions, to the extent the gain is recognized
during the first ten years after we acquire those assets. Built-in
gain is the excess of (a) the fair market value of the asset over (b)
our adjusted basis in the asset, in each case determined as of the
beginning of the ten-year recognition period; and
- we will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains.
In addition, a tax is imposed on a REIT equal to 100% of redetermined
rents, redetermined deductions and excess interest. Redetermined rents are
generally rents from real property which would otherwise be reduced on
distribution, apportionment or allocation to clearly reflect income as a result
of services furnished or rendered by a taxable REIT subsidiary to tenants of the
REIT. There are a number of exceptions with regard to redetermined rents, which
are summarized below.
- Through the 2004 taxable year, redetermined rents do not include
amounts received directly or indirectly by a REIT for customary
services. Beginning with the 2005 taxable year, this exception does
not apply.
- Redetermined rents do not include de minimis payments received by the
REIT with respect to non-customary services rendered to the tenants of
a property owned by the REIT that do not exceed 1% of all amounts
received by the REIT with respect to the property.
- The redetermined rent provisions do not apply with respect to any
services rendered by a taxable REIT subsidiary to the tenants of the
REIT, as long as the taxable REIT subsidiary renders a significant
9
amount of similar services to persons other than the REIT and to
tenants who are unrelated to the REIT or the taxable REIT subsidiary
or the REIT tenants, and the charge for these services is
substantially comparable to the charge for similar services rendered
to such unrelated persons.
- The redetermined rent provisions do not apply to any services rendered
by a taxable REIT subsidiary to a tenant of a REIT if the rents paid
by tenants leasing at least 25% of the net leasable space in the
REIT's property who are not receiving such services are substantially
comparable to the rents paid by tenants leasing comparable space who
are receiving the services and the charge for the services is
separately stated.
- The redetermined rent provisions do not apply to any services rendered
by a taxable REIT subsidiary to tenants of a REIT if the gross income
of the taxable REIT subsidiary from these services is at least 150% of
the taxable REIT subsidiary's direct cost of rendering the service.
- The Secretary of the Treasury has the power to waive the tax that
would otherwise be imposed on redetermined rents if the REIT
establishes to the satisfaction of the Secretary that rents charged to
tenants were established on an arm's length basis even though a
taxable REIT subsidiary provided services to the tenants.
Redetermined deductions are deductions, other than redetermined rents, of a
taxable REIT subsidiary if the amount of these deductions would be decreased on
distribution, apportionment or allocation to clearly reflect income between the
taxable REIT subsidiary and the REIT. Excess interest means any deductions for
interest payments made by a taxable REIT subsidiary to the REIT to the extent
that the interest payments exceed a commercially reasonable rate of interest.
RELIEF FROM CERTAIN FAILURES OF THE REIT QUALIFICATION PROVISIONS
Beginning in the 2005 taxable year, if we fail to satisfy one or more of
the requirements for REIT qualification (other than the income tests or the
asset tests), we nevertheless may avoid termination of our REIT election in such
year if the failure is due to reasonable cause and not due to willful neglect
and we pay a penalty of $50,000 for each failure to satisfy the REIT
qualification requirements. We may not qualify for this relief provision in all
circumstances.
FAILURE TO QUALIFY AS A REIT
For any taxable year in which we fail to qualify as a REIT and certain
relief provisions do not apply, we would be taxed at regular corporate rates,
including alternative minimum tax rates on all of our taxable income.
Distributions to our shareholders would not be deductible in computing that
taxable income, and distributions would no longer be required to be made. Any
corporate level taxes generally would reduce the amount of cash available for
distribution to our shareholders and, because the shareholders would continue to
be taxed on the distributions they receive, the net after tax yield to the
shareholders from their investment likely would be reduced substantially. As a
result, failure to qualify as a REIT during any taxable year could have a
material adverse effect on an investment in our common shares. If we lose our
REIT status, unless certain relief provisions apply, we would not be eligible to
elect REIT status again until the fifth taxable year which begins after the
taxable year during which our election was terminated. It is not possible to
state whether in all circumstances we would be entitled to this statutory
relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As used herein, the term "taxable U.S. shareholder" means a holder of our
shares that for U.S. federal income tax purposes is
- a citizen or resident of the United States;
10
- a corporation, partnership, or other entity created or organized in or
under the laws of the United States, any of its states or the District
of Columbia;
- an estate whose income is subject to U.S. federal income taxation
regardless of its source; or
- any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one
or more U.S. persons have the authority to control all substantial
decisions of the trust. Notwithstanding the preceding sentence, to the
extent provided in the Treasury Regulations, some trusts in existence
on August 20, 1996, and treated as United States persons prior to this
date that elect to continue to be treated as United States persons,
shall be considered taxable U.S. shareholders.
If a partnership, including an entity that is treated as a partnership
for U.S. federal income tax purposes, is a beneficial owner of our stock, the
treatment of a partner in the partnership will generally depend on the status of
the partner and the activities of the partnership.
Except as discussed below, distributions generally will be taxable to
taxable U.S. shareholders as ordinary income to the extent of our current or
accumulated earnings and profits. We may generate cash in excess of our net
earnings. If we distribute cash to shareholders in excess of our current and
accumulated earnings and profits (other than as a capital gain dividend), the
excess cash will be deemed to be a return of capital to each shareholder to the
extent of the adjusted tax basis of the shareholder's shares. Distributions in
excess of the adjusted tax basis will be treated as gain from the sale or
exchange of the shares. A shareholder who has received a distribution in excess
of current and our accumulated earnings and profits may, upon the sale of the
shares, realize a higher taxable gain or a smaller loss because the basis of the
shares as reduced will be used for purposes of computing the amount of the gain
or loss. Distributions we make, whether characterized as ordinary income or as
capital gains, are not eligible for the dividends received deduction for
corporations. For purposes of determining whether distributions to holders of
common shares are out of current or accumulated earnings and profits, our
earnings and profits will be allocated first to the outstanding preferred
shares, if any, and then to the common shares.
Dividends we declare in October, November or December of any year and
payable to a shareholder of record on a specified date in any of these months
shall be treated as both paid by us and received by the shareholder on December
31 of that year, provided we actually pay the dividend on or before January 31
of the following calendar year. Shareholders may not include in their own income
tax returns any of our net operating losses or capital losses.
Distributions that we properly designate as capital gain dividends will be
taxable to taxable U.S. shareholders as gains from the sale or disposition of a
capital asset to the extent that they do not exceed our actual net capital gain
for the taxable year. Depending on the period of time the tax characteristics of
the assets which produced these gains, and on certain designations, if any,
which we may make, these gains may be taxable to non-corporate U.S. shareholders
at a 15% or 25% rate. U.S. shareholders that are corporations may, however, be
required to treat up to 20% of certain capital gain dividends as ordinary
income.
We may elect to retain, rather than distribute as a capital gain dividend,
our net long-term capital gains. If we make this election, we would pay tax on
our retained net long-term capital gains. In addition, to the extent we
designate, a U.S. shareholder generally would:
- include its proportionate share of our undistributed long-term capital
gains in computing its long-term capital gains in its return for its
taxable year in which the last day of our taxable year falls;
- be deemed to have paid the capital gains tax imposed on us on the
designated amounts included in the U.S. shareholder's long-term
capital gains;
- receive a credit or refund for the amount of tax deemed paid by it;
11
- increase the adjusted basis of its common shares by the difference
between the amount of includable gains and the tax deemed to have been
paid by it; and - in the case of a U.S. shareholder 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.
Distributions we make and gain arising from the sale or exchange by a U.S.
shareholder of our shares will not be treated as income from a passive activity,
within the meaning of Section 469 of the Internal Revenue Code, since income
from a passive activity generally does not include dividends and gain
attributable to the disposition of property that produces dividends. As a
result, U.S. shareholders subject to the passive activity rules will generally
be unable to apply any "passive losses" against this income or gain.
Distributions we make, to the extent they do not constitute a return of
capital, generally will be treated as investment income for purposes of
computing the investment interest limitation. Gain arising from the sale or
other disposition of our shares, however, will be treated as investment income
if a shareholder so elects, in which case the capital gain is taxed at ordinary
income rates.
Generally, gain or loss realized by a shareholder upon the sale of shares
will be reportable as capital gain or loss. If a shareholder receives a
long-term capital gain dividend from us and has held the shares for six months
or less, any loss incurred on the sale or exchange of the shares is treated as a
long-term capital loss to the extent of the corresponding long-term capital gain
dividend received. All or a portion of any loss a taxable U.S. shareholder
realizes upon a taxable disposition of shares may be disallowed if the taxable
U.S. shareholder purchases substantially identical shares within the 61-day
period beginning 30 days before and ending 30 days after the disposition.
In any year in which we fail to qualify as a REIT, the shareholders
generally will continue to be treated in the same fashion described above,
except that none of our dividends will be eligible for treatment as capital
gains dividends, corporate shareholders will qualify for the dividends received
deduction and the shareholders will not be required to report any share of our
tax preference items. Also, dividend distributions would be "qualified dividend
income," which in the hands of individual shareholders is taxable at the
long-term capital gain rates for individuals.
The tax rate on both dividends and long-term capital gains for most
non-corporate taxpayers is 15% until 2008. This reduced maximum tax rate
generally does not apply to ordinary REIT dividends, which continue to be
subject to tax at the higher tax rates applicable to ordinary income (a maximum
rate of 35%). The 15% maximum tax rate, however, does apply to (1) long-term
capital gains recognized on the disposition of REIT shares; (2) REIT capital
gain distributions (except to the extent attributable to real estate
depreciation, in which case such distributions continue to be subject to a 25%
tax rate), (3) REIT dividends attributable to dividends received by the REIT
from non-REIT corporations, such as taxable REIT subsidiaries, and (4) REIT
dividends attributable to income that was subject to corporate income tax at the
REIT level (e.g., when the REIT distributes taxable income that had been
retained and taxed at the REIT level in the prior taxable year).
BACKUP WITHHOLDING
We will report to our shareholders and the IRS the amount of dividends paid
during each calendar year and the amount of tax withheld, if any. If a
shareholder is subject to backup withholding, we will be required to deduct and
withhold a tax from any dividends payable to that shareholder. These rules may
apply (1) when a shareholder fails to supply a correct taxpayer identification
number, (2) when the IRS notifies us that the shareholder is subject to the
rules or has furnished an incorrect taxpayer identification number, or (3) in
the case of corporations or others within certain exempt categories, when they
fail to demonstrate that fact when required. A shareholder that does not provide
a correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount withheld as backup withholding may be credited
against the shareholder's federal income tax liability. We also may be required
to withhold a portion of capital gain distributions made to shareholders who
fail to certify their non-foreign status.
12
TAXATION OF TAX-EXEMPT ENTITIES
In general, a tax-exempt entity that is a shareholder will not be subject
to tax on distributions or gain realized on the sale of shares. The IRS has
confirmed that a REIT's distributions to a tax-exempt employees' pension trust
do not constitute unrelated business taxable income. A tax-exempt entity may be
subject to unrelated business taxable income, however, to the extent that it has
financed the acquisition of its shares with "acquisition indebtedness" within
the meaning of the Internal Revenue Code. In determining the number of
shareholders a REIT has for purposes of the 5/50 rule described above under
"-REIT Qualification," generally, any shares held by tax-exempt employees'
pension and profit sharing trusts which qualify under Section 401(a) of the
Internal Revenue Code and are exempt from tax under Section 501(a) of the
Internal Revenue Code will be treated as held directly by its beneficiaries in
proportion to their interests in the trust and will not be treated as held by
the trust.
One of these trusts owning more than 10% of a REIT may be required to treat
a percentage of dividends from the REIT as UBTI. The percentage is determined by
dividing the REIT's gross income (less direct expenses related thereto) derived
from an unrelated trade or business for the year (determined as if the REIT were
a qualified trust) by the gross income of the REIT for the year in which the
dividends are paid. However, if this percentage is less than 5%, dividends are
not treated as UBTI. These UBTI rules apply only if the REIT qualifies as a REIT
because of the "look-thru" rule with respect to the 5/50 rule discussed above
and if the trust is "predominantly held" by qualified trusts. A REIT is
predominantly held by qualified trusts if at least one pension trust owns more
than 25% of the value of the REIT or a group of pension trusts each owning more
than 10% of the value of the REIT collectively own more than 50% of the value of
the REIT. We do not currently meet either of these requirements.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Internal Revenue Code, respectively, income from an investment in our
capital shares will constitute UBTI unless the organization is able to deduct an
amount properly set aside or placed in reserve for certain purposes so as to
offset the UBTI generated by the investment in our capital shares. These
prospective investors should consult their own tax advisors concerning the "set
aside" and reserve requirements.
TAXATION OF FOREIGN INVESTORS
The rules governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders are complex and no attempt will be made herein to provide more than
a summary of such rules. Prospective non-U.S. shareholders should consult with
their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in common shares, including any
reporting requirements, as well as the tax treatment of such an investment under
the laws of their home country.
Dividends that are not attributable to gain from any sales or exchanges we
make of United States real property interests and which we do not designate as
capital gain dividends will be treated as dividends of ordinary income to the
extent that they are made out of our current or accumulated earnings and
profits. Those dividends ordinarily will be subject to a withholding tax equal
to 30% of the gross amount of the dividend unless an applicable tax treaty
reduces or eliminates that tax. However, if income from the investment in the
common shares is treated as effectively connected with the non-U.S.
shareholder's conduct of a United States trade or business, the non-U.S.
shareholder generally will be subject to a tax at graduated rates, in the same
manner as U.S. shareholders are taxed with respect to those dividends, and may
also be subject to the 30% branch profits tax in the case of a shareholder that
is a foreign corporation. For withholding tax purposes, we are currently
required to treat all distributions as if made out of our current and
accumulated earnings and profits and thus we intend to withhold at the rate of
30%, or a reduced treaty rate if applicable, on the amount of any distribution
(other than distributions designated as capital gain dividends) made to a
non-U.S. shareholder unless (1) the non-U.S. shareholder files on IRS Form
W-8BEN claiming that a lower treaty rate applies or (2) the non-U.S. shareholder
files an IRS Form W-8ECI claiming that the dividend is effectively connected
income.
Under certain Treasury Regulations, we would not be required to withhold at
the 30% rate on distributions we reasonably estimate to be in excess of our
current and accumulated earnings and profits. Dividends in excess of our current
and accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's shares,
but rather will reduce the adjusted basis of those shares. To the
13
extent that those dividends exceed the adjusted basis of a non-U.S.
shareholder's shares, they will give rise to tax liability if the non-U.S.
shareholder would otherwise be subject to tax on any gain from the sale or
disposition of his shares, as described below. If it cannot be determined at the
time a dividend is paid whether or not a dividend will be in excess of current
and accumulated earnings and profits, the dividend will be subject to such
withholding. We do not intend to make quarterly estimates of that portion of
dividends that are in excess of earnings and profits, and, as a result, all
dividends will be subject to such withholding. However, the non-U.S. shareholder
may seek a refund of those amounts from the IRS.
For periods through the 2004 taxable year in which we qualify as a REIT,
distributions that are attributable to gain from our sales or exchanges of
United States real property interests will be taxed to a non-U.S. shareholder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980,
commonly known as "FIRPTA." Under FIRPTA, those dividends are taxed to a
non-U.S. shareholder as if the gain were effectively connected with a United
States business. Non-U.S. shareholders would thus be taxed at the normal capital
gain rates applicable to U.S. shareholders subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals. Also, dividends subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a corporate non-U.S. shareholder not entitled
to treaty exemption. We are required by the Internal Revenue Code and applicable
Treasury Regulations to withhold 35% of any dividend that could be designated as
a capital gain dividend. This amount is creditable against the non-U.S.
shareholder's FIRPTA tax liability.
Beginning in the 2005 taxable year, the above taxation under FIRPTA of
distributions attributable to gains from our sales or exchanges of United States
real property interests (or such gains that are retained and deemed to be
distributed) will not apply, provided our common shares are "regularly traded"
on an established securities market in the United States, and the non-U.S.
shareholder does not own more than 5% of the common stock at any time during the
taxable year. Instead, such amounts will be taxable as a dividend of ordinary
income not effectively connected to a U.S. trade or business, as described
earlier.
Gain recognized by a non-U.S. shareholder upon a sale of shares generally
will not be taxed under FIRPTA if we are a "domestically controlled REIT,"
defined generally as a REIT in which at all times during a specified testing
period less than 50% in value of the shares was held directly or indirectly by
foreign persons. It is currently anticipated that we will be a "domestically
controlled REIT," and therefore the sale of shares will not be subject to
taxation under FIRPTA. Because the common shares will be publicly traded,
however, no assurance can be given that we will remain a "domestically
controlled REIT." However, gain not subject to FIRPTA will be taxable to a
non-U.S. shareholder if (1) investment in the common shares is effectively
connected with the non-U.S. shareholder's United States trade or business, in
which case the non-U.S. shareholder will be subject to the same treatment as
U.S. shareholders with respect to that gain, and may also be subject to the 30%
branch profits tax in the case of a corporate non-U.S. shareholder, or (2) the
non-U.S. shareholder is a nonresident alien individual who was 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% withholding tax on the individual's capital gains. If we were
not a domestically controlled REIT, whether or not a non-U.S. shareholder's sale
of shares would be subject to tax under FIRPTA would depend on whether or not
the common shares were regularly traded on an established securities market
(such as the NYSE) and on the size of selling non-U.S. shareholder's interest in
our capital shares. If the gain on the sale of shares were to be subject to
taxation under FIRPTA, the non-U.S. shareholder will be subject to the same
treatment as U.S. shareholders with respect to that gain (subject to applicable
alternative minimum tax and 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 our common
shares may be required to withhold 10% of the gross purchase price.
STATE AND LOCAL TAXES
We, and our shareholders, 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. Consequently, Unit holders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in our capital shares.
14
TAX CONSEQUENCES OF REDEMPTION
The following summarizes certain United States federal income tax
considerations that may be relevant to a Unit holder who exercises the right to
require the redemption of Units.
If a Unit holder exercises the right to require the redemption of Units and
we elect to acquire the Units in exchange for common shares and/or cash, the
acquisition will be treated as a sale of Units for federal income tax purposes.
The sale will be fully taxable to the Unit holder. The selling Unit holder
generally will be treated as realizing for tax purposes an amount equal to the
sum of either the cash or the fair market value of the shares received and the
amount of any Operating Partnership liabilities allocable to the redeemed Units
at the time of the sale.
If we elect not to acquire the Units and instead redeem the Unit holder's
Units for cash, the tax consequences would be as described in the previous
paragraph. If the Operating Partnership redeems less than all of a Unit holder's
Units, we intend to treat the transaction as a sale by the Unit holder of the
Unit holder's Units to us, and expect that the sale will be taxable to the Unit
holder. However, in such event, and subject to the "disguised sale" rules
discussed below, the Unit holder may be able to take the position that the
transaction is a partnership distribution and as such the Unit holder would
recognize taxable gain only to the extent that the cash plus the amount of any
Operating Partnership liabilities allocable to the redeemed Units exceeded the
Unit holder's adjusted basis in all of such Unit holder's Units immediately
before the redemption. In either event, however, upon a partial redemption of
Units, the Unit holder would not recognize any loss occurring on the
transaction. EACH UNIT HOLDER SHOULD CONSULT WITH THE UNIT HOLDER'S OWN TAX
ADVISOR FOR THE SPECIFIC TAX CONSEQUENCES RESULTING FROM A REDEMPTION OF UNITS.
The method used by the Operating Partnership to allocate its liabilities to
its partners may result in varying amounts of such liabilities being allocated
to different Unit holders. Under the method of allocation used by the Operating
Partnership, it is possible that Unit holders who hold an identical amount of
Units are allocated different amounts of liabilities of the Operating
Partnership for federal income tax purposes.
If a holder's Units are redeemed or a Unit holder otherwise disposes of the
Unit holder's Units, the determination of the gain or loss from the redemption
or other disposition will be based on the difference between the amount realized
for tax purposes and the tax basis in those Units. Upon the sale of Units, the
amount realized will be the sum of the cash or fair market value of common
shares or other property received plus the reduction in the amount of any
Operating Partnership liabilities allocable to the Unit holder. To the extent
that the amount of cash or property received plus the reduction in the allocable
share of any Operating Partnership liabilities exceeds the Unit holder's basis
in the Unit holder's Units, such Unit holder will recognize gain. It is possible
that the amount of gain recognized or even the tax liability resulting from such
gain could exceed the amount of cash or the value of the shares received upon
such disposition.
Except as described below, any gain recognized upon a sale or other
disposition of Units should be treated as gain attributable to the sale or
disposition of a capital asset. To the extent that the amount realized upon the
sale or other disposition of a Unit attributable to a Unit holder's share of
unrealized receivables of the Operating Partnership (as defined in section 751
of the Internal Revenue Code) exceeds the basis attributable to those assets,
however, this excess will be treated as ordinary income. Unrealized receivables
include, to the extent not previously included in Operating Partnership income,
any rights to payment for services rendered or to be rendered. Unrealized
receivables also include amounts that would be subject to recapture if the
Operating Partnership had sold its assets at their fair market value at the time
of the transfer of the Unit.
For individuals, trusts and estates, the maximum rate of tax on the net
capital gain from a sale or exchange of a long-term capital asset (i.e., a
capital asset held for more than 12 months) is 15%. The maximum rate for net
capital gains attributable to the sale of depreciable real property held for
more than 12 months is 25% to the extent of the prior depreciation deductions
constituting "unrecaptured Section 1250 gain" (that is, depreciation deductions
not otherwise recaptured as ordinary income under the existing depreciation
recapture rules). Treasury Regulations provide that the individuals, trusts and
estates are subject to a 25% tax to the extent of their allocable share of
15
unrecaptured Section 1250 gain immediately prior to their sale or disposition of
the Units (the "25% Amount"). Provided that the Units are held as a long-term
capital asset, such Unit holders would be subject to a maximum rate of tax of
15% of the difference, if any, between any gain on the sale or disposition of
the Units and the 25% Amount.
There is a risk that a redemption of the Units may cause the original
transfer of property to the Operating Partnership in exchange for Units to be
treated as a "disguised sale" of property. Section 707 of the Internal Revenue
Code and Treasury Regulations thereunder generally provide that a partner's
contribution of property to a partnership and the partnership's simultaneous or
subsequent transfer of money or other consideration (including the assumption of
or taking subject to a liability) to the partner, which would not have been made
but for the transfer of property, will be presumed to be a sale, in whole or in
part, of such property by the partner to the partnership, unless one of the
prescribed exceptions is applicable. Further the disguised sale rules generally
provide that, if a partner's transfer of property to the partnership is within
two years of the partnership's transfer of money or other consideration to a
partner, the transfers are presumed to be a sale of the property unless the
facts and the circumstances clearly establish that the transfers do not
constitute a sale. These rules also provide that if the transfers are made more
than two years apart, the transfers are presumed not to be a sale unless the
facts and circumstances clearly establish that the transfers do constitute a
sale.
Accordingly, if a Unit is redeemed, the IRS could contend that the
disguised sale rules apply because the Unit holder will receive consideration
subsequent to the Unit holder's (or the Unit holder's predecessor) previous
contribution of property to the Operating Partnership. In that event, the IRS
could contend that any of the transactions where Unit holders received Units
that may be redeemed for common shares that may in turn be sold are taxable as a
disguised sale under those rules. Any gain recognized as a result of the
disguised sale treatment may be eligible for installment reporting under section
453 of the Internal Revenue Code, subject to certain limitations. EACH UNIT
HOLDER SHOULD CONSULT WITH THE UNIT HOLDER'S OWN TAX ADVISOR TO DETERMINE
WHETHER A REDEMPTION OF UNITS COULD BE SUBJECT TO THE DISGUISED SALE RULES.
LEGAL MATTERS
Unless otherwise noted in a prospectus supplement, Locke Liddell & Sapp
LLP, Dallas, Texas, will pass on the legality of the securities offered through
this prospectus.
EXPERTS
The financial statements and the related financial statement schedules
incorporated in this prospectus by reference from our Annual Report on Form 10-K
for the year ended December 31, 2003, as amended in the Current Report on Form
8-K filed on September 8, 2004, and the Current Report on Form 8-K filed on
September 9, 2004, have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their reports, which are
incorporated herein by reference, and have been so incorporated in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities and Exchange
Act of 1934, as amended, and file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
document we file at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of these documents by writing to
the SEC and paying a fee for the copying cost. Please call the SEC at
1-800-SEC-0330 for more information about the operation of the public reference
room. Our SEC filings are also available to the public at the SEC's web site at
http://www.sec.gov. In addition, you may read and copy our SEC filings at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005. Our website address is http://www.weingarten.com.
This prospectus is only part of a registration statement we filed with the
SEC under the Securities Act of 1933, as amended, and therefore omits certain
information contained in the registration statement. We have also
16
filed exhibits and schedules to the registration statement that we have excluded
from this prospectus, and you should refer to the applicable exhibit or schedule
for a complete description of any statement referring to any contract or
document. You may inspect or obtain a copy of the registration statement,
including exhibits and schedules, as described in the previous paragraph.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with it. This means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and the information we file later with
the SEC will automatically update and supersede this information.
We incorporate by reference the documents listed below and any future
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until this offering is completed:
- Annual Report on Form 10-K for the year ended December 31, 2003
- Current Reports on Form 8-K filed on September 8, 2004 and September
9, 2004.
- Quarterly Report on Form 10-Q for the quarter ended September 30,
2004.
- The description of our common shares of beneficial interest contained
in our registration statement on Form 8-A filed March 17, 1988
You may request copies of these filings at no cost by writing or
telephoning our Investor Relations Department at the following address and
telephone number:
Weingarten Realty Investors
2600 Citadel Plaza Drive Suite 300
Houston, Texas 77008
(713) 866-6000.
17