As
filed with the Securities and Exchange Commission on September 29,
2008
Registration
No. ___-_______
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
Form
S-3
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
_______________
Investors
Real Estate Trust
(Exact
name of registrant as specified in its charter)
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North
Dakota
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45-0311232
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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12
Main Street South
Minot,
ND 58701
(701)
837-4738
(Address,
Including Zip Code, and Telephone Number, Including Area Code,
of
Registrant’s Principal Executive Offices)
_______________
Karin
Wentz, Esq.
Associate
General Counsel
10050
Crosstown Circle, Suite 105
Eden
Prairie, MN 55344
(952)
401-6600
(Name,
Address, Including Zip Code, and Telephone Number,
Including
Area Code, of Agent for Service)
_______________
Approximate date of commencement of
proposed sale to the public: From time to time after the
registration statement becomes effective.
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, other
than securities offered only in connection with dividend or interest
reinvestment plans, 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, check the following box and list the Securities
Act registration statement number of earlier effective registration statement
for 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 same
offering. [ ]
If this
Form is a registration statement pursuant to General Instruction I.D. or a
post-effective amendment thereto that shall become effective upon filing with
the Commission pursuant to Rule 462(e) under the Securities Act, check the
following box. [ ]
If this
Form is a post-effective amendment to a registration statement filed pursuant to
General Instruction I.D. filed to register additional securities or additional
classes of securities pursuant to Rule 413(b) under the Securities Act, check
the following box. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated
filer [ ] Accelerated
filer [X] Non-accelerated
filer [ ] Smaller
reporting company [ ]
CALCULATION
OF REGISTRATION FEE
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Title
of securities to be Registered
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Amount
to be
registered
(1)
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Proposed
Maximum
offering
price(2)
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Proposed
maximum
Aggregate
offering
price (2)
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Amount
of
Registration
fee
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Common
Shares of Beneficial Interest, no par value, issuable upon redemption of
units of limited partnership interest
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5,886,949
shares (3)
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$ | 10.92 | $ | 64,285,483.08 | $ | 2,526.42 | ||||||
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(1)
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Pursuant
to Rule 416 promulgated under the Securities Act of 1933, as amended (the
“Securities Act”), this registration statement shall also cover any
additional common shares which become issuable by reason of any share
dividend, share split or similar
transaction.
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(2)
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Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(c) of Regulation C under the Securities Act of 1933, based on the
average of the high and low sales prices for the Registrant’s Common
Shares of Beneficial Interest, as reported on the NASDAQ Global Market on
September 22, 2008, which was within five business days prior to the date
of filing of this Registration Statement on Form
S-3.
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(3)
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This
registration statement registers 5,886,949 common shares issuable to the
holders of units of limited partnership interest in IRET Properties, a
North Dakota Limited Partnership, the registrant’s operating partnership
subsidiary.
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The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant files a
further amendment which specifically states that this Registration Statement
will thereafter become effective in accordance with Section 8(a) of the
Securities Act, or until the Registration Statement becomes effective on such
date as the Commission, acting pursuant to said Section 8(a), may
determine.
Information
contained in this Prospectus is not complete and may be changed. The
selling shareholders named in this Prospectus may not sell the securities
covered by this Prospectus until the Securities and Exchange Commission declares
effective the registration statement of which this Prospectus is a
part. This Prospectus is not an offer to sell these securities and it
is not an offer to buy these securities in any state where such an offer or sale
is not permitted.
Subject
to Completion, Dated September ___, 2008
PROSPECTUS
5,886,949
Common Shares of Beneficial Interest
This
prospectus relates to the possible issuance, from time to time, of up to
5,886,949 common shares of beneficial interest, no par value, to the holders of
limited partnership units, or LP Units, of our operating partnership, IRET
PROPERTIES, a North Dakota Limited Partnership, or IRET Properties. Our common
shares are the functional equivalent of common stock, having the rights and
preferences normally associated with common stock. We may issue the common
shares covered by this prospectus to the holders of LP Units to the extent that
they redeem their LP Units and we elect to issue common shares in connection
with such redemption. We may also elect to pay cash for redeemed LP Units in
lieu of issuing common shares. We will not receive any proceeds from any common
shares issued in exchange for the redemption of LP Units. The persons receiving
common shares covered by this prospectus upon redemption of LP Units are
referred to herein individually as a “selling shareholder,” and collectively as
the “selling shareholders.”
This
prospectus also relates to the offer and resale, from time to time, by the
selling shareholders of the common shares covered by this prospectus. We will
not receive any proceeds from the possible resale of common shares by any
selling shareholder.
We are
registering the common shares covered by this prospectus as required under the
Agreement of Limited Partnership of IRET Properties, dated January 31, 1997, and
as amended to date. The registration of the common shares does not necessarily
mean that any of the LP 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 selling shareholders.
The
selling shareholders may resell the common shares covered by this prospectus
from time to time on the NASDAQ Global Market or such other national securities
exchange or automated interdealer quotation system on which our common shares
are then listed or quoted, through negotiated transactions or otherwise at
market prices prevailing at the time of the sale or at negotiated prices. The
selling shareholders may engage brokers or dealers who may receive commissions
or discounts from such selling shareholders.
Our
common shares are traded on the NASDAQ Global Market under the symbol “IRET.” On
September 22, 2008, the last reported sale price of our common shares was $10.67
per share. Our principal executive office is located at 12 Main
Street South, Minot, North Dakota 58701, telephone number (701) 837-4738,
facsimile number (701) 838-7785 and web site: www.iret.com. The
information set forth on, or otherwise accessible through, our web site is not
incorporated into, and does not form a part of, this prospectus or any other
report or document we file with or furnish to the Securities and Exchange
Commission (SEC).
Neither the Securities and Exchange
Commission nor any state securities commission has approved or
disapproved these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
Investing in our common shares
involves risks. See “Risk Factors” beginning on page 3 of this
prospectus.
The date
of this Prospectus is __________ __, 2008.
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You
should not assume that the information appearing in this prospectus is accurate
as of any date other than the date on the front of this prospectus. Our
business, financial condition, results of operations and prospects may have
changed since then. Updated information may have been subsequently provided as
explained in this prospectus under “Where You Can Find More Information” and “
Incorporation of Certain Documents by Reference.”
It is
important for you to read and consider all of the information contained in this
prospectus in making your decision to invest in our common shares. You should
also read and consider the information in the documents we have referred you to
in “Where You Can Find More Information” and “ Incorporation of Certain
Documents by Reference.”
You
should rely only on the information contained or incorporated by reference in
this prospectus. We have not authorized any other person to provide you with
different or additional information. If anyone provides you with different or
additional information, you should not rely on it.
As used
in this prospectus supplement, references to “we,” “our,” “us,” the “Company,”
“IRET” and similar references are to Investors Real Estate Trust and its
consolidated subsidiaries, unless otherwise expressly stated or the context
otherwise requires. References to “common shares” are to our common shares of
beneficial interest, no par value. References to “Series A preferred shares” are
to our 8.25% Series A Cumulative Redeemable Preferred Shares of Beneficial
Interest, no par value. References to “shares of beneficial interest” are to all
of our shares of beneficial interest including, without limitation, our common
shares, our Series A preferred shares and any other shares of beneficial
interest that we may issue in the future.
Risks
Related to Our Properties and Business
Our performance and share value are
subject to risks associated with the real estate industry. Our
results of operations and financial condition, the value of our real estate
assets, and the value of an investment in us are subject to the risks normally
associated with the ownership and operation of real estate
properties. These risks include, but are not limited to, the
following factors which, among others, may adversely affect the income generated
by our properties:
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o
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downturns
in national, regional and local economic conditions (particularly
increases in unemployment);
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competition
from other commercial and multi-family residential
properties;
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local
real estate market conditions, such as oversupply or reduction in demand
for commercial and multi-family residential
space;
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changes
in interest rates and availability of attractive
financing;
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declines
in the economic health and financial condition of our tenants and our
ability to collect rents from our
tenants;
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vacancies,
changes in market rental rates and the need periodically to repair,
renovate and re-lease space;
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increased
operating costs, including real estate taxes, state and local taxes,
insurance expense, utilities, and security
costs;
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significant
expenditures associated with each investment, such as debt service
payments, real estate taxes and insurance and maintenance costs, which are
generally not reduced when circumstances cause a reduction in revenues
from a property;
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weather
conditions, civil disturbances, natural disasters, or terrorist acts or
acts of war which may result in uninsured or underinsured
losses; and
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decreases
in the underlying value of our real
estate.
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Our property acquisition activities
subject us to various risks which could adversely affect our operating results.
We have acquired in the past and intend to continue to pursue the
acquisition of properties and portfolios of properties, including large
portfolios that could increase our size and result in alterations to our capital
structure. Our acquisition activities and their success are subject to numerous
risks, including, but not limited to:
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even
if we enter into an acquisition agreement for a property, it is subject to
customary closing conditions, including completion of due diligence
investigations, and we may be unable to complete that acquisition after
making a non-refundable deposit and incurring other acquisition-related
costs;
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we
may be unable to obtain financing for acquisitions on favorable terms or
at all;
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acquired
properties may fail to perform as
expected;
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the
actual costs of repositioning or redeveloping acquired properties may be
greater than our estimates; and
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we
may be unable quickly and efficiently to integrate new acquisitions into
our existing operations.
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These
risks could have an adverse effect on our results of operations and financial
condition.
Acquired properties may subject us
to unknown liabilities which could adversely affect our operating results.
We may acquire properties subject to liabilities and without any
recourse, or with only limited recourse against prior owners or other third
parties, with respect to unknown liabilities. As a result, if
liability were asserted against us based upon ownership of these properties, we
might have to pay substantial sums to settle or contest it, which could
adversely affect our results of operations and cash flows. Unknown
liabilities with respect to acquired properties might include liabilities for
clean-up of undisclosed environmental contamination; claims by tenants, vendors
or other persons against the former owners of the properties; liabilities
incurred in the ordinary course of business; and claims for indemnification by
general partners, directors, officers and others indemnified by the former
owners of the properties.
Our geographic concentration in
Minnesota and North Dakota may result in losses due to our significant
exposure to the effects of economic and real estate conditions in those
markets. For the fiscal year ended April 30, 2008, we received
approximately 67.4% of our gross revenue from properties in Minnesota and North
Dakota. As a result of this concentration, we are subject to
substantially greater risk than if our investments were more geographically
dispersed. Specifically, we are more significantly exposed to the effects of
economic and real estate conditions in those particular markets, such as
building by competitors, local vacancy and rental rates and general levels of
employment and economic activity. To the extent that weak economic or
real estate conditions affect Minnesota and/or North Dakota more severely than
other areas of the country, our financial performance could be negatively
impacted.
If we are not able to renew leases
or enter into new leases on favorable terms or at all as our existing leases
expire, our revenue, operating results and cash flows will be
reduced. We may be unable to renew leases with our existing
tenants or enter into new leases with new tenants due to economic and other
factors as our existing leases expire or are terminated prior to the expiration
of their current terms. As a result, we could lose a significant
source of revenue while remaining responsible for the payment of our
obligations. In addition, even if we were able to renew existing
leases or enter into new leases in a timely manner, the terms of those leases
may be less favorable to us than the terms of expiring leases, because the
rental rates of the renewal or new leases may be significantly lower than those
of the expiring leases, or tenant installation costs, including the cost of
required renovations or concessions to tenants, may be
significant. If we are unable to enter into lease renewals or new
leases on favorable terms or in a timely manner for all or a substantial portion
of space that is subject to expiring leases, our revenue, operating results and
cash flows will be adversely affected. As a result, our ability to make
distributions to the holders of our shares of beneficial interest may be
adversely affected. As of July 31, 2008, approximately 1.0 million square feet,
or 8.7% of our total commercial property square footage, was vacant.
Approximately 853 of our 9,528 apartment units, or 9.0%, were vacant. As of July
31, 2008, leases covering approximately 5.4% of our total commercial segments
net rentable square footage will expire in fiscal year 2009, 10.7% in fiscal
year 2010, 13.0% in fiscal year 2011, 13.4% in fiscal year 2012, and 9.3% in
fiscal year 2013.
We face potential adverse effects
from commercial tenant bankruptcies or insolvencies. The
bankruptcy or insolvency of our commercial tenants may adversely affect the
income produced by our properties. If a tenant defaults, we may
experience delays and incur substantial costs in enforcing our rights as
landlord. If a tenant files for bankruptcy, we cannot evict the
tenant solely because of such bankruptcy. A court, however, may
authorize the tenant to reject and terminate its lease with us. In
such a case, our claim against the tenant for unpaid future rent would be
subject to a statutory cap that might be substantially less than the remaining
rent actually owed under the lease, and it is unlikely that a bankrupt tenant
would pay in full amounts it owes us under a lease. This shortfall
could adversely affect our cash flow and results of operations. If a
tenant experiences a downturn in its business or other types of financial
distress, it may be unable to make timely rental payments. Under some
circumstances, we may agree to partially or wholly terminate the lease in
advance of the termination date in consideration for a lease termination fee
that is less than the agreed rental amount. Additionally, without
regard to the manner in which a lease termination occurs, we are likely to incur
additional costs in the form of tenant improvements and leasing commissions in
our efforts to lease the space to a new tenant, as well as possibly lower rental
rates reflective of declines in market rents.
Because real estate investments are
generally illiquid, and various factors limit our ability to dispose of assets,
we may not be able to sell properties when appropriate. Real
estate investments are relatively illiquid and, therefore, we have limited
ability to vary our portfolio quickly in response to changes in economic or
other conditions. In addition, the prohibitions under the federal
income tax laws on REITs holding property for sale and related regulations may
affect our ability to sell properties. Our ability to dispose of
assets may also be limited by constraints on our ability to utilize disposition
proceeds to make acquisitions on financially attractive terms, and the
requirement that we take additional impairment charges on certain
assets. More specifically, we are required to distribute or pay tax
on all capital gains generated from the sale of assets, and, in addition, a
significant number of our properties were acquired using limited partnership
units of IRET Properties, our operating partnership, and are subject to certain
agreements which restrict our ability to sell such properties in transactions
that would create current taxable income to the former owners. As a
result, we are motivated to structure the sale of these assets as tax-free
exchanges. To accomplish this we must identify attractive
re-investment opportunities. Recently, while capital market
conditions have been favorable for dispositions, investment yields on
acquisitions have been less attractive due to the abundant capital inflows into
the real estate sector. These considerations impact our decisions on
whether or not to dispose of certain of our assets.
Inability to manage our rapid growth
effectively may adversely affect our operating results. We have
experienced significant growth in recent years, increasing our total assets from
approximately $1.2 billion at April 30, 2006, to $1.6 billion at April 30, 2008,
principally through the acquisition of additional real estate properties.
Subject to our continued ability to raise equity capital and issue limited
partnership units of IRET Properties and identify suitable investment
properties, we intend to continue our acquisition of real estate properties.
Effective management of this level of growth presents challenges,
including:
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the
need to expand our management team and
staff;
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the
need to enhance internal operating systems and
controls;
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increased
reliance on outside advisors and property managers;
and
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the
ability to consistently achieve targeted returns on individual
properties.
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We may
not be able to maintain similar rates of growth in the future, or manage our
growth effectively. Our failure to do so may have a material adverse
effect on our financial condition and results of operations and ability to make
distributions to the holders of our shares of beneficial interest.
Competition may negatively impact
our earnings. We compete with many kinds of institutions, including other
REITs, private partnerships, individuals, pension funds and banks, for tenants
and investment opportunities. Many of these institutions are active in the
markets in which we invest and have greater financial and other resources that
may be used to compete against us. With respect to tenants, this competition may
affect our ability to lease our properties, the price at which we are able to
lease our properties and the cost of required renovations or tenant
improvements. With respect to acquisition and development investment
opportunities, this competition may cause us
to pay
higher prices for new properties than we otherwise would have paid, or may
prevent us from purchasing a desired property at all.
An inability to make accretive
property acquisitions may adversely affect our ability to increase our
operating income. From our fiscal year ended April 30, 2005, to our
fiscal year ended April 30, 2008, our operating income increased from $9.9
million to $12.3 million. The acquisition of additional real estate
properties is critical to our ability to increase our operating
income. If we are unable to continue to make real estate acquisitions
on terms that meet our financial and strategic objectives, whether due to market
conditions, a changed competitive environment or unavailability of capital, our
ability to increase our operating income may be materially and adversely
affected.
High leverage on our overall
portfolio may result in losses. As of April 30, 2008, our ratio of total
indebtedness to total Net Assets (as that term is used in our Bylaws, which
usage is not in accordance with GAAP, “Net Assets” means our total assets at
cost before deducting depreciation or other non-cash reserves, less total
liabilities) was approximately 143.8%. As of April 30, 2007 and 2006, our
percentage of total indebtedness to total Net Assets was approximately 149.6%
and 138.0%, respectively. Under our Bylaws we may increase our total
indebtedness up to 300.0% of our Net Assets, or by an additional approximately
$1.2 billion. There is no limitation on the increase that may be permitted if
approved by a majority of the independent members of our board of trustees and
disclosed to the holders of our securitiest in the next quarterly report, along
with justification for any excess.
This
amount of leverage may expose us to cash flow problems if rental income
decreases. Under those circumstances, in order to pay our debt obligations we
might be required to sell properties at a loss or be unable to make
distributions to the holders of our shares of beneficial interest. A failure to
pay amounts due may result in a default on our obligations and the loss of the
property through foreclosure. Additionally, our degree of leverage
could adversely affect our ability to obtain additional financing and may have
an adverse effect on the market price of our securities.
Our inability to renew, repay or
refinance our debt may result in losses. We incur a significant amount of
debt in the ordinary course of our business and in connection with acquisitions
of real properties. In addition, because we have a limited ability to retain
earnings as a result of the REIT distribution requirements, we will generally be
required to refinance debt that matures with additional debt or
equity. We are subject to the normal risks associated with debt
financing, including the risk that:
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our
cash flow will be insufficient to meet required payments of principal and
interest;
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we
will not be able to renew, refinance or repay our indebtedness when due;
and
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the
terms of any renewal or refinancing will be less favorable than the terms
of our current indebtedness.
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These
risks increase when credit markets are tight, as they are now; in general, when
the credit markets are constrained, we may encounter resistance from lenders
when we seek financing or refinancing for properties or proposed acquisitions,
and the terms of such financing or refinancing are likely to be less favorable
to us than the terms of our current indebtedness.
We
anticipate that only a small portion of the principal of our debt will be repaid
prior to maturity. Therefore, we are likely to need to refinance at
least a portion of our outstanding debt as it matures. We cannot
guarantee that any refinancing of debt with other debt will be possible on terms
that are favorable or acceptable to us. If we cannot refinance,
extend or pay principal payments due at maturity with the proceeds of other
capital transactions, such as new equity capital, our cash flows may not be
sufficient in all years to repay debt as it matures. Additionally, if
we are unable to refinance our indebtedness on acceptable terms, or at all, we
may be forced to dispose of one or more of our properties on disadvantageous
terms, which may result in losses to us. These losses could have a material
adverse effect on us, our ability to make distributions to the holders of our
shares of beneficial interest and our ability to pay amounts due on our debt.
Furthermore, if a property is mortgaged to secure payment of indebtedness and we
are unable to meet mortgage payments, the mortgagee could foreclose upon the
property, appoint a receiver and receive an assignment of rents and leases or
pursue other remedies, all with a consequent loss of our revenues and asset
value. Foreclosures could also create taxable income without accompanying cash
proceeds, thereby hindering our ability to meet the REIT distribution
requirements of the Internal Revenue Code.
As of
July 31, 2008, approximately $16.2 million of our mortgage debt will come due in
the remainder of fiscal year 2009, and approximately $132.3 million of our
mortgage debt is due for repayment in fiscal year 2010. As of July 31,
2008, we had approximately $36.5 million of principal payments due on fixed and
variable-rate mortgages secured by our real estate in the remainder of fiscal
year 2009, and approximately $153.9 million due in fiscal year 2010. As of
July 31, 2008, we had approximately $50.4 million and approximately $61.2
million, respectively, of interest payments due on fixed and variable-rate
mortgages secured by our real estate in the remainder of fiscal year 2009 and
fiscal year 2010.
The cost of our indebtedness may
increase. Portions of our fixed-rate indebtedness incurred for past
property acquisitions come due on a periodic basis. Rising interest
rates could limit our ability to refinance this existing debt when it matures,
and would increase our interest costs, which could have a material adverse
effect on us, our ability to make distributions to the holders of our shares of
beneficial interest and our ability to pay amounts due on our
debt. In addition, we have incurred, and we expect to continue to
incur, indebtedness that bears interest at a variable rate. As of April 30,
2008, $11.7 million, or approximately 1.1%, of the principal amount of our total
mortgage indebtedness was subject to variable interest rate
agreements. If short-term interest rates rise, our debt service
payments on adjustable rate debt would increase, which would lower our net
income and could decrease our distributions to the holders of our shares of
beneficial interest.
We depend on distributions and other
payments from our subsidiaries that they may be prohibited from making to us,
which could impair our ability to make distributions to holders of our shares of
beneficial interest. Substantially all of our assets are held
through IRET Properties, our operating partnership, and other of our
subsidiaries. As a result, we depend on distributions and other payments from
our subsidiaries in order to satisfy our financial obligations and make
distributions to the holders of our shares of beneficial
interest. The ability of our subsidiaries to make such distributions
and other payments depends on their earnings, and may be subject to statutory or
contractual limitations. As an equity investor in our subsidiaries,
our right to receive assets upon their liquidation or reorganization effectively
will be subordinated to the claims of their creditors. To the extent
that we are recognized as a creditor of such subsidiaries, our claims may still
be subordinate to any security interest in or other lien on their assets and to
any of their debt or other obligations that are senior to our
claims.
Our current or future insurance may
not protect us against possible losses. We carry comprehensive liability,
fire, extended coverage and rental loss insurance with respect to our properties
at levels that we believe to be adequate and comparable to coverage customarily
obtained by owners of similar properties. However, the coverage limits of our
current or future policies may be insufficient to cover the full cost of repair
or replacement of all potential losses. Moreover, this level of coverage may not
continue to be available in the future or, if available, may be available only
at unacceptable cost or with unacceptable terms. Additionally, there
may be certain extraordinary losses, such as those resulting from civil unrest,
terrorism or environmental contamination, that are not generally, or fully,
insured against because they are either uninsurable or not economically
insurable. For example, we do not currently carry insurance against losses as a
result of environmental contamination. Should an uninsured or underinsured loss
occur to a property, we could be required to use our own funds for restoration
or lose all or part of our investment in, and anticipated revenues from, the
property. In any event, we would continue to be obligated on any mortgage
indebtedness on the property. Any loss could have a material adverse effect on
us, our ability to make distributions to the holders of our shares of beneficial
interest and our ability to pay amounts due on our debt. In addition,
in most cases we have to renew our insurance policies on an annual basis and
negotiate acceptable terms for coverage, exposing us to the volatility of the
insurance markets, including the possibility of rate increases. Any
material increase in insurance rates or decrease in available coverage in the
future could adversely affect our business and financial condition and results
of operations, which could cause a decline in the market value of our
securities.
We have significant investments in
medical properties and adverse trends in healthcare provider operations may
negatively affect our lease revenues from these properties. We have
acquired a significant number of specialty medical properties (including senior
housing/assisted living facilities) and may acquire more in the future. As
of July 31, 2008, our real estate portfolio consisted of 48 medical
properties, with a total real estate investment amount, net of accumulated
depreciation, of $325.5 million, or approximately 22.8% of the total real estate
investment amount, net of accumulated depreciation, of our entire real estate
portfolio. The healthcare industry is currently experiencing changes
in the demand for, and methods of delivery of, healthcare services; changes in
third-party reimbursement policies; significant unused capacity in certain
areas, which has created substantial competition
for
patients among healthcare providers in those areas; continuing pressure by
private and governmental payors to reduce payments to providers of services; and
increased scrutiny of billing, referral and other practices by federal and state
authorities. Sources of revenue for our medical property tenants may include the
federal Medicare program, state Medicaid programs, private insurance carriers
and health maintenance organizations, among others. Efforts by such payors to
reduce healthcare costs will likely continue, which may result in reductions or
slower growth in reimbursement for certain services provided by some of our
tenants. These factors may adversely affect the economic performance
of some or all of our medical services tenants and, in turn, our lease revenues.
In addition, if we or our tenants terminate the leases for these properties, or
our tenants lose their regulatory authority to operate such properties, we may
not be able to locate suitable replacement tenants to lease the properties for
their specialized uses. Alternatively, we may be required to spend substantial
amounts to adapt the properties to other uses. Any loss of revenues and/or
additional capital expenditures occurring as a result could hinder our ability
to make distributions to the holders of our shares of beneficial
interest.
Adverse changes in applicable laws
may affect our potential liabilities relating to our properties and
operations. Increases in real estate taxes and income, service and
transfer taxes cannot always be passed through to all tenants in the form of
higher rents. As a result, any increase may adversely affect our cash available
for distribution, our ability to make distributions to the holders of our shares
of beneficial interest and our ability to pay amounts due on our debt.
Similarly, changes in laws that increase the potential liability for
environmental conditions existing on properties, that increase the restrictions
on discharges or other conditions or that affect development, construction and
safety requirements may result in significant unanticipated expenditures that
could have a material adverse effect on us, our ability to make distributions to
the holders of our shares of beneficial interest and our ability to pay amounts
due on our debt. In addition, future enactment of rent control or rent
stabilization laws or other laws regulating multi-family residential properties
may reduce rental revenues or increase operating costs.
Complying with laws benefiting
disabled persons or other safety regulations and requirements may affect our
costs and investment
strategies. Federal, state and local laws and regulations designed to
improve disabled persons’ access to and use of buildings, including the
Americans with Disabilities Act of 1990, may require modifications to, or
restrict renovations of, existing buildings. Additionally, these laws and
regulations may require that structural features be added to buildings under
construction. Legislation or regulations that may be adopted in the
future may impose further burdens or restrictions on us with respect to improved
access to, and use of these buildings by, disabled persons. Noncompliance could
result in the imposition of fines by government authorities or the award of
damages to private litigants. The costs of complying with these laws
and regulations may be substantial, and limits or restrictions on construction,
or the completion of required renovations, may limit the implementation of our
investment strategy or reduce overall returns on our investments. This could
have an adverse effect on us, our ability to make distributions to the holders
of our shares of beneficial interest and our ability to pay amounts due on our
debt. Our properties are also subject to various other federal, state
and local regulatory requirements, such as state and local fire and life safety
requirements. If we fail to comply with these requirements, we could
incur fines or private damage awards. Additionally, in the event that
existing requirements change, compliance with future requirements may require
significant unanticipated expenditures that may adversely affect our cash flow
and results of operations.
We may be responsible for potential
liabilities under environmental laws. Under various federal, state and
local laws, ordinances and regulations, we, as a current or previous owner or
operator of real estate may be liable for the costs of removal of, or
remediation of, hazardous or toxic substances in, on, around or under that
property. These laws may impose liability without regard to whether we knew of,
or were responsible for, the presence of the hazardous or toxic substances. The
presence of these substances, or the failure to properly remediate any property
containing these substances, may adversely affect our ability to sell or rent
the affected property or to borrow funds using the property as collateral. In
arranging for the disposal or treatment of hazardous or toxic substances, we may
also be liable for the costs of removal of, or remediation of, these substances
at that disposal or treatment facility, whether or not we own or operate the
facility. In connection with our current or former ownership (direct or
indirect), operation, management, development and/or control of real properties,
we may be potentially liable for removal or remediation costs with respect to
hazardous or toxic substances at those properties, as well as certain other
costs, including governmental fines and claims for injuries to persons and
property. A finding of liability for an environmental condition as to any one or
more properties could have a material adverse effect on us, our ability to make
distributions to the holders of our shares of beneficial interest and our
ability to pay amounts due on our debt.
Environmental
laws also govern the presence, maintenance and removal of asbestos, and require
that owners or operators of buildings containing asbestos properly manage and
maintain the asbestos; notify and train those who may come into contact with
asbestos; and undertake special precautions if asbestos would be disturbed
during renovation or demolition of a building. Indoor air quality
issues may also necessitate special investigation and
remediation. These air quality issues can result from inadequate
ventilation, chemical contaminants from indoor or outdoor sources, or biological
contaminants such as molds, pollen, viruses and bacteria. Such
asbestos or air quality remediation programs could be costly, necessitate the
temporary relocation of some or all of the property’s tenants or require
rehabilitation of an affected property.
It is
generally our policy to obtain a Phase I environmental study on each property
that we seek to acquire. A Phase I environmental study generally
includes a visual inspection of the property and the surrounding areas, an
examination of current and historical uses of the property and the surrounding
areas and a review of relevant state and federal documents, but does not involve
invasive techniques such as soil and ground water sampling. If the Phase I
indicates any possible environmental problems, our policy is to order a Phase II
study, which involves testing the soil and ground water for actual hazardous
substances. However, Phase I and Phase II environmental studies, or any other
environmental studies undertaken with respect to any of our current or future
properties, may not reveal the full extent of potential environmental
liabilities. We currently do not carry insurance for environmental
liabilities.
We may be unable to retain or
attract qualified management. We are dependent upon our senior officers
for essentially all aspects of our business operations. Our senior officers have
experience in the specialized business segments in which we operate, and the
loss of them would likely have a material adverse effect on our operations, and
could adversely impact our relationships with lenders, industry personnel and
potential tenants. We do not have employment contracts with any of
our senior officers. As a result, any senior officer may terminate his or her
relationship with us at any time, without providing advance
notice. If we fail to manage effectively a transition to new
personnel, or if we fail to attract and retain qualified and experienced
personnel on acceptable terms, our business and prospects could be
harmed. The location of our company headquarters in Minot, North
Dakota, may make it more difficult and expensive to attract, relocate and retain
current and future officers and employees.
Failure to comply with changing
regulation of corporate governance and public disclosure could have a material
adverse effect on our business, operating results and stock price, and
continuing compliance will result in additional expenses. The
Sarbanes-Oxley Act of 2002, as well as new rules and standards subsequently
implemented by the Securities and Exchange Commission and NASDAQ, have required
changes in some of our corporate governance and accounting practices, and are
creating uncertainty for us and many other public companies, due to varying
interpretations of the rules and their evolving application in
practice. We expect these laws, rules and regulations to increase our
legal and financial compliance costs, and to subject us to additional
risks. In particular, if we fail to maintain the adequacy of our
internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of
2002, as such standards may be modified, supplemented or amended from time to
time, a material misstatement could go undetected, and we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting. Failure to maintain an effective
internal control environment could have a material adverse effect on our
business, operating results, and stock price. Additionally, our
efforts to comply with Section 404 of the Sarbanes-Oxley Act and the related
regulations have required, and we believe will continue to require, the
commitment of significant financial and managerial resources.
Risks
Related to Our Structure and Organization
We may incur tax liabilities as a
consequence of failing to qualify as a REIT. Although our management
believes that we are organized and have operated and are operating in such a
manner to qualify as a REIT, as that term is defined under the Internal Revenue
Code, we may not in fact have operated, or may not be able to continue to
operate, in a manner to qualify or remain so qualified. Qualification as a REIT
involves the application of highly technical and complex Internal Revenue Code
provisions for which there are only limited judicial or administrative
interpretations. Even a technical or inadvertent mistake could
endanger our REIT status. The determination that we qualify as a REIT
requires an ongoing analysis of various factual matters and circumstances, some
of which may not be within our control. For example, in order to qualify as a
REIT, at least 95% of our gross income in any year must come from certain
passive sources that are itemized in the REIT tax laws, and we are prohibited
from owning specified amounts of debt or equity securities of some
issuers. Thus, to the extent revenues from non-qualifying sources,
such as income from third-party management services, represent more than five
percent of our gross
income in
any taxable year, we will not satisfy the 95% income test and may fail to
qualify as a REIT, unless certain relief provisions contained in the Internal
Revenue Code apply. Even if relief provisions apply, however, a tax would be
imposed with respect to excess net income. We are also required to make
distributions to the holders of our securities of at least 90% of our REIT
taxable income, excluding net capital gains. The fact that we hold
substantially all of our assets (except for qualified REIT subsidiaries) through
IRET Properties, our operating partnership, and its subsidiaries, and our
ongoing reliance on factual determinations, such as determinations related to
the valuation of our assets, further complicates the application of the REIT
requirements for us. Additionally, if IRET Properties, our operating
partnership, or one or more of our subsidiaries is determined to be taxable as a
corporation, we may fail to qualify as a REIT. Either our failure to qualify as
a REIT, for any reason, or the imposition of taxes on excess net income from
non-qualifying sources, could have a material adverse effect on us, our ability
to make distributions to the holders of our shares of beneficial interest and
our ability to pay amounts due on our debt. Furthermore, new legislation,
regulations, administrative interpretations or court decisions could change the
tax laws with respect to our qualification as a REIT or the federal income tax
consequences of our qualification.
If we
failed to qualify as a REIT, we would be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates, which would likely have a material adverse effect on
us, our ability to make distributions to the holders of our shares of beneficial
interest and our ability to pay amounts due on our debt. In addition, we could
be subject to increased state and local taxes, and, unless entitled to relief
under applicable statutory provisions, we would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
we lost our qualification. This treatment would reduce funds available for
investment or distributions to the holders of our securities because of the
additional tax liability to us for the year or years involved. In addition, we
would no longer be able to deduct, and would not be required to make,
distributions to holders of our securities. To the extent that distributions to
the holders of our securities had been made in anticipation of qualifying as a
REIT, we might be required to borrow funds or to liquidate certain investments
to pay the applicable tax.
Failure of our operating partnership
to qualify as a partnership would have a material adverse effect on
us. We believe that IRET Properties, our operating
partnership, qualifies as a partnership for federal income tax
purposes. No assurance can be given, however, that the Internal
Revenue Service will not challenge its status as a partnership for federal
income tax purposes, or that a court would not sustain such a
challenge. If the Internal Revenue Service were to be successful in
treating IRET Properties as an entity that is taxable as a corporation (such as
a publicly traded partnership taxable as a corporation), we would cease to
qualify as a REIT because the value of our ownership interest in IRET Properties
would exceed 5% of our assets, and because we would be considered to hold more
than 10% of the voting securities and value of the outstanding securities of
another corporation. Also, the imposition of a corporate tax on IRET
Properties would reduce significantly the amount of cash available for
distribution by it.
Certain provisions of our Articles
of Amendment and Third Restated Declaration of Trust may limit a change in control and deter a
takeover. In order to maintain our qualification as a REIT, our Third
Restated Declaration of Trust provides that any transaction, other than a
transaction entered into through the NASDAQ National Market, (renamed the NASDAQ
Global Market), or other similar exchange, that would result in our
disqualification as a REIT under Section 856 of the Internal Revenue Code,
including any transaction that would result in (i) a person owning in excess of
the ownership limit of 9.8%, in number or value, of our outstanding securities,
(ii) less than 100 people owning our securities, (iii) our being “closely held”
within the meaning of Section 856(h) of the Internal Revenue Code, or (iv) 50%
or more of the fair market value of our securities being held by persons other
than “United States persons,” as defined in Section 7701(a)(30) of the Internal
Revenue Code, will be void ab initio. If the transaction is not void ab initio,
then the securities in excess of the ownership limit, that would cause us to be
closely held, that would result in 50% or more of the fair market value of our
securities to be held by persons other than United States persons or that
otherwise would result in our disqualification as a REIT, will automatically be
exchanged for an equal number of excess shares, and these excess shares will be
transferred to an excess share trustee for the exclusive benefit of the
charitable beneficiaries named by our board of trustees. These limitations may
have the effect of preventing a change in control or takeover of us by a third
party, even if the change in control or takeover would be in the best interests
of the holders of our securities.
In order to maintain our REIT
status, we may be forced to borrow funds during unfavorable market
conditions. In order to maintain our REIT status, we may need
to borrow funds on a short-term basis to meet the REIT
distribution
requirements, even if the then-prevailing market conditions are not favorable
for these borrowings. To qualify as a REIT, we generally must
distribute to our shareholders at least 90% of our net taxable income each year,
excluding net capital gains. In addition, we will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
made by us with respect to the calendar year are less than the sum of 85% of our
ordinary income, 95% of our capital gain net income for that year, and any
undistributed taxable income from prior periods. We intend to make
distributions to our shareholders to comply with the 90% distribution
requirement and to avoid the nondeductible excise tax and will rely for this
purpose on distributions from our operating partnership. However, we
may need short-term debt or long-term debt or proceeds from asset sales or sales
of common shares to fund required distributions as a result of differences in
timing between the actual receipt of income and the recognition of income for
federal income tax purposes, or the effect of non-deductible capital
expenditures, the creation of reserves or required debt or amortization
payments. The inability of our cash flows to cover our distribution
requirements could have an adverse impact on our ability to raise short and
long-term debt or sell equity securities in order to fund distributions required
to maintain our REIT status.
Complying with REIT requirements may
force us to forego otherwise attractive opportunities or liquidate otherwise
attractive investments. To qualify and maintain our status as
a REIT, we must satisfy certain requirements with respect to the character of
our assets. If we fail to comply with these requirements at the end
of any quarter, we must correct such failure within 30 days after the end of the
quarter (by, possibly, selling asses not withstanding their prospects as an
investment) to avoid losing our REIT status. If we fail to comply
with these requirements at the end of any quarter, and the failure exceeds a
minimum threshold, we may be able to preserve our REIT status if (a) the failure
was due to reasonable cause and not to willful neglect, (b) we dispose of the
assets causing the failure within six months after the last day of the quarter
in which we identified the failure, (c) we file a schedule with the IRS
describing each asset that caused the failure, and (d) we pay an additional tax
of the greater of $50,000 or the product of the highest applicable tax rate
multiplied by the net income generated on those assets. As a result,
compliance with the REIT requirements may require us to liquidate or forego
otherwise attractive investments. These actions could have the effect
of reducing our income and amounts available for distribution to our
shareholders.
Even if we qualify as a REIT, we may
face other tax liabilities that reduce our cash flow. Even if
we qualify for taxation as a REIT, we may be subject to certain federal, state
and local taxes on our income and assets, including taxes on any undistributed
income, tax on income from some activities conducted as a result of a
foreclosure, and state or local income, property and transfer taxes, such as
mortgage recording taxes. Any of these taxes would decrease cash
available for distribution to our shareholders. In addition, in order
to meet the REIT qualification requirements, or to avert the imposition of a
100% tax that applies to certain gains derived by a REIT from dealer property or
inventory, we may in the future hold some of our assets through a taxable REIT
subsidiary.
We may be subject to adverse
legislative or regulatory tax changes that could reduce the market price of our
common shares. At any time, the federal income tax laws
governing REITs or the administrative interpretations of those laws may be
amended. Any of those new laws or interpretations may take effect
retroactively and could adversely affect us or the market price of our common
shares of beneficial interest.
The U.S. federal income tax laws
governing REITs are complex. We intend to operate in a manner
that will qualify us as a REIT under the U.S. federal income tax
laws. The REIT qualification requirements are extremely complex,
however, and interpretations of the U.S. federal income tax laws governing
qualification as a REIT are limited. Accordingly, we cannot be certain that we
will be successful in operating so we can continue to qualify as a
REIT. At any time, new laws, interpretations, or court decisions may
change the federal tax laws or the U.S. federal income tax consequences of our
qualification as a REIT.
Our board of trustees may make
changes to our major policies without approval of the holders of our shares of
beneficial interest. Our operating and financial policies, including
policies relating to development and acquisition of real estate, financing,
growth, operations, indebtedness, capitalization and distributions, are
exclusively determined by our board of trustees. Our board of trustees may amend
or revoke those policies, and other policies, without advance notice to, or the
approval of, the holders of our shares of beneficial
interest. Accordingly, our shareholders do not control these
policies, and policy changes could adversely affect our financial condition and
results of operations.
Risks
Related to the Purchase of our Shares of Beneficial Interest
Our future growth depends, in part,
on our ability to raise additional equity capital, which will have the
effect of diluting the interests of the holders of our common shares.
Our future growth depends upon, among other things, our ability to raise
equity capital and issue limited partnership units of IRET Properties. The
issuance of additional common shares, and of limited partnership units for which
we subsequently issue common shares upon the redemption of the limited
partnership units, will dilute the interests of the current holders of our
common shares. Additionally, sales of substantial amounts of our
common shares or preferred shares in the public market, or issuances of our
common shares upon redemption of limited partnership units in our operating
partnership, or the perception that such sales or issuances might occur, could
adversely affect the market price of our common shares.
We may issue additional classes or
series of our shares of beneficial interest with rights and preferences
that are superior to the rights and preferences of our common shares.
Without the approval of the holders of our common shares, our board of
trustees may establish additional classes or series of our shares of beneficial
interest, and such classes or series may have dividend rights, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences or other rights and preferences that are superior to the rights of
the holders of our common shares.
Payment of distributions on our
shares of beneficial interest is not guaranteed. Our board of
trustees must approve our payment of distributions and may elect at any time, or
from time to time, and for an indefinite duration, to reduce the distributions
payable on our shares of beneficial interest or to not pay distributions on our
shares of beneficial interest. Our board of trustees may reduce distributions
for a variety of reasons, including, but not limited to, the
following:
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operating
and financial results below expectations that cannot support the current
distribution payment;
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unanticipated
costs or cash requirements; or
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a
conclusion that the payment of distributions would cause us to breach the
terms of certain agreements or contracts, such as financial ratio
covenants in our debt financing
documents.
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Our distributions are not eligible
for the lower tax rate on dividends except in limited
situations. The tax rate applicable to qualifying corporate
dividends received by shareholders taxed at individual rates prior to 2010 has
been reduced to a maximum rate of 15%. This special tax rate is
generally not applicable to distributions paid by a REIT, unless such
distributions represent earnings on which the REIT itself had been taxed. As a
result, distributions (other than capital gain distributions) paid by us to
shareholders taxed at individual rates will generally be subject to the tax
rates that are otherwise applicable to ordinary income which, currently, are as
high as 35%. Although the earnings of a REIT that are distributed to
its shareholders are still generally subject to less federal income taxation
than earnings of a non-REIT C corporation that are distributed to its
shareholders net of corporate-level income tax, this law change may make an
investment in our securities comparatively less attractive relative to an
investment in the shares of other entities which pay dividends but are not
formed as REITs.
Changes in market conditions could
adversely affect the price of our securities. As is the case
with any publicly-traded securities, certain factors outside of our control
could influence the value of our common shares, Series A preferred shares and
any other securities to be issued in the future. These conditions include, but
are not limited to:
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market
perception of REITs in general;
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market
perception of REITs relative to other investment
opportunities;
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market
perception of our financial condition, performance, distributions and
growth potential;
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prevailing
interest rates;
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general
economic and business conditions;
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government
action or regulation, including changes in the tax laws;
and
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relatively
low trading volumes in securities of
REITS.
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Higher market interest rates may
adversely affect the market price of our securities, and low trading volume on
the NASDAQ Global Select Market may prevent the timely resale of our securities. One
of the factors that investors may consider important in deciding whether to buy
or sell shares of a REIT is the distribution with respect to such REIT’s shares
as a percentage of the price of those shares, relative to market interest
rates. If market interest rates rise, prospective purchasers of REIT
shares may expect a higher distribution rate in order to maintain their
investment. Higher market interest rates would likely increase our
borrowing costs and might decrease funds available for
distribution. Thus, higher market interest rates could cause the
market price of our common shares to decline. In addition, although
our common shares of beneficial interest are listed on the NASDAQ Global Select
Market, the daily trading volume of our shares may be lower than the trading
volume for other companies. The average daily trading volume for the
period of May 1, 2007, through April 30, 2008, was 194,469 shares and the
average monthly trading volume for the period of May 1, 2007 through April 30,
2008 was 4,100,054 shares. As a result of this trading volume, an
owner of our securities may encounter difficulty in selling our shares in a
timely manner and may incur a substantial loss.
We are a
self-advised equity REIT organized under the laws of North Dakota. Our business
consists of owning and operating income-producing real properties. We are
structured as an Umbrella Partnership Real Estate Investment Trust, or UPREIT.
Our investments include multi-family residential properties, consisting of
apartment buildings, complexes and communities, and commercial properties,
consisting of office, industrial, medical and retail properties. These
properties are located primarily in the upper Midwest states of Minnesota and
North Dakota.
Our
primary source of income and cash is rents associated with multi-family
residential and commercial property leases. Our commercial properties are
typically leased to tenants under long term lease arrangements, with no single
tenant currently accounting for more than approximately 10% of our total annual
commercial rental revenues. At July 31, 2008, the economic occupancy rate for
our stabilized multi-family residential properties was approximately 92.8%, and
the economic occupancy rates of our commercial office, medical, industrial and
retail properties, respectively, on a stabilized property basis, were
approximately 88.9%, 95.7%, 95.9%, and 86.6%. We define “economic occupancy” as
actual rental revenues recognized for the period indicated as a percentage of
scheduled rental revenues for the period. Percentage rents, tenant
concessions, straightline adjustments and expense reimbursements are not
considered in computing either actual revenues or scheduled rent
revenues. Scheduled rental revenues are determined by valuing
occupied units or square footage at contract rates and vacant units or square
footage at market rates. “Stabilized properties” are those properties that we
owned for the entirety of both periods being compared, and include properties
that were redeveloped or expanded during the period being compared. Properties
purchased or sold during the periods being compared are excluded from our
stabilized property analysis. Results reported on a stabilized property basis
are not computed in accordance with accounting principles generally accepted in
the United States of America (“GAAP”).
We
operate in a manner intended to enable us to qualify as a REIT under the
Internal Revenue Code. We own our assets and conduct our day-to-day business
operations through an operating partnership, IRET Properties, a North Dakota
Limited Partnership, of which IRET, Inc., a North Dakota corporation and our
wholly-owned subsidiary, is the sole general partner.
We will
not receive any proceeds from the issuance of the common shares, if any, covered
by this prospectus or from the resale of the common shares, if any, covered by
this prospectus by the selling shareholders. All of the proceeds from the resale
of the common shares covered by this prospectus will go to the selling
shareholders who offer and sell their shares.
We may
issue the common shares covered by this prospectus to the selling shareholders
in exchange for LP Units if and to the extent that the selling shareholders
redeem LP Units and we elect to issue common shares in exchange for such LP
Units. The selling shareholders will have received all common shares that they
may offer for sale under the prospectus by redeeming the LP Units to which this
prospectus relates. The following table, to our
knowledge,
sets forth certain information with respect to the selling shareholders and
their ownership of common shares as of September 22, 2008. Mr. W.
David Scott and members of his immediate family hold controlling interests in
all of the selling shareholders listed in the following table; Mr. Scott has
been a member of our Board of Trustees since September 2006.
Since the
selling shareholders may sell all, some or none of the common shares issued upon
redemption of LP Units, and since to our knowledge there are currently no
agreements, arrangements or understandings with respect to the sale of any of
such common shares, no estimate can be given as to the number or percentage of
common shares that will be held by the selling shareholders upon termination of
any offering made hereby. The common shares covered by this prospectus represent
approximately 9.2% of the sum of our total common shares outstanding as of
September 22, 2008, plus all common shares to be issued in exchange for LP Units
by the selling shareholders pursuant to this prospectus, assuming redemption of
all LP Units in exchange for common shares.
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Name
of Selling Shareholder
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Shares
Owned Prior to the Offering (1)
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Shares
Being Offered (2)
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Shares
Owned After the Offering (3)
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Percentage
of Shares Owned After the Offering
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MR
Inc. No 2
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751,823 | 751,823 | - | 1.2 | % | |||||||||||
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Tetrad
Corporation
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1,250,202 | 1,250,202 | - | 1.9 | % | |||||||||||
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108
Farnam LLC
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487,711 | 487,711 | - | * | ||||||||||||
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MR
No. 14, LLC
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503,406 | 503,406 | - | * | ||||||||||||
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MR
No. 15, LLC
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188,117 | 188,117 | - | * | ||||||||||||
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13690
Riverport, LLC
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786,015 | 786,015 | - | 1.2 | % | |||||||||||
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114
Timberlands, LLC
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496,275 | 496,275 | - | * | ||||||||||||
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Flagship
Building, LLC
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1,052,167 | 1,052,167 | - | 1.6 | % | |||||||||||
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MR
No. 18, LLC
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371,233 | 371,233 | - | * | ||||||||||||
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(1)
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Represents
common shares currently owned by and registered in the name of the selling
shareholder or issuable in exchange for an equal number of currently
redeemable LP Units owned by the selling shareholder, including the LP
Units to be redeemed for common shares covered by this
prospectus.
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(2)
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Assumes
that all LP Units to be redeemed for common shares covered by this
prospectus are exchanged for common shares and that all such common shares
are being resold pursuant to this
prospectus.
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(3)
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Assumes
the sale of all of the common shares covered by this prospectus and issued
upon redemption of LP Units. The selling shareholders may, however, sell
all, some or none of the common shares covered by this prospectus and
issued upon redemption of LP Units and, to our knowledge, as of the date
of this prospectus, there are no agreements, arrangements or
understandings with respect to the sale of such common
shares.
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*
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Less
than one percent.
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This
prospectus relates to the possible issuance of up to 5,886,949 common shares if,
and to the extent that, the holders of an equal number of LP Units submit such
LP Units for redemption and we issue common shares in exchange for such redeemed
LP Units. We will not receive any proceeds from any issuance of common shares in
exchange for LP Units. This prospectus also relates to the possible offer and
sale by the selling shareholders, from time to time, of any common shares we
issue in exchange for LP Units. We will not receive any proceeds from the sale
of the common shares by the selling shareholders.
We are
registering the common shares covered by this prospectus for resale pursuant to
our obligations under the Agreement of Limited Partnership of IRET Properties in
order to provide the transferees of the selling shareholders with freely
tradable securities. Registration does not, however, necessarily mean that any
LP 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 selling
shareholders.
The
selling shareholders, or their pledgees, donees, transferees or other successors
in interest, may offer and sell the common shares covered by this prospectus in
the following manner:
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·
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on
the NASDAQ Global Market or other quotation system or national exchange on
which our common shares are listed or traded at the time of
sale;
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in
the over-the-counter market;
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·
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in
privately negotiated transactions;
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·
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in
underwritten transactions; or
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·
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otherwise,
at prices then prevailing or related to the then current market price or
at negotiated prices.
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The
offering price of the common shares covered by this prospectus and offered from
time to time will be determined by the selling shareholders and, at the time of
determination, may be higher or lower than the market price of the common shares
on the NASDAQ Global Market.
In
connection with an underwritten offering, underwriters or agents may receive
compensation in the form of discounts, concessions or commissions from a selling
shareholder or from purchasers of offered common shares for whom they may act as
agents, and underwriters may sell offered common shares to or through dealers,
and such dealers may receive compensation in the form of discounts, concessions
or commissions from the underwriters and/or commissions from the purchasers from
whom they may act as agents.
Offered
common shares may be sold directly or through broker-dealers acting as principal
or agent, or pursuant to a distribution by one or more underwriters on a firm
commitment or best-efforts basis. The methods by which offered common shares may
be sold include:
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·
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a
block trade in which the broker-dealer so engaged will attempt to sell
offered common shares as agent but may position and resell a portion of
the block as principal to facilitate the
transaction;
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·
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purchases
by a broker-dealer as principal and resale by such broker-dealer for its
own account pursuant to this
prospectus;
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·
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ordinary
brokerage transactions and transactions in which the broker solicits
purchases;
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·
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an
exchange distribution in accordance with the rules of the exchange or
quotation system;
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·
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privately
negotiated transactions; and
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·
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underwritten
transactions.
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The
selling shareholders and any underwriters, dealer or agents participating in the
distribution of offered common shares may be deemed to be “underwriters” within
the meaning of the Securities Act of 1933. Any profit on the sale of offered
common shares by the selling shareholders and any commissions received by any
such broker-dealers may be deemed to be underwriting commissions under the
Securities Act of 1933.
When a
selling shareholder elects to make a particular offer of common shares, a
prospectus supplement, if required, will be distributed that identifies any
underwriters, dealers or agents and any discounts, commissions and other terms
constituting compensation from such selling shareholder and any other required
information.
In order
to comply with state securities laws, if applicable, offered common shares may
be sold only through registered or licensed brokers or dealers. In addition, in
certain states, offered common shares may not be sold unless they have been
registered or qualified for sale in such state or an exemption from such
registration or qualification requirement is available and complied
with.
We have
agreed to pay all costs and expenses incurred in connection with the
registration under the Securities Act of 1933 of the common shares covered by
this prospectus, including, but not limited to, all registration and filing
fees, printing expenses and fees and disbursements of our legal counsel and
accountants. The selling shareholders will pay any brokerage fees and
commissions, fees and disbursements of legal counsel for the selling
shareholders and stock transfer and other taxes attributable to the sale of
common shares covered by this prospectus.
The following is a summary of the
material terms of our shares of beneficial interest. This summary is
not a complete legal description of the common shares offered by this
prospectus or our Series A preferred shares and is qualified in its entirety by
reference to our Third Restated Declaration of Trust, the Articles Supplementary to
our Third Restated Declaration of Trust classifying and designating our
Series A preferred shares and our Bylaws. We have filed copies of our Third
Restated Declaration of Trust, the Articles Supplementary to our Third Restated
Declaration of Trust classifying and designating our Series A preferred
shares and our Bylaws with the Securities and Exchange Commission and have
incorporated by reference such documents as exhibits to the registration
statement of which this prospectus is a part.
General
We are
authorized, under our Third Restated Declaration of Trust, to issue an unlimited
number of our shares of beneficial interest. Our board of trustees is
authorized, under our Third Restated Declaration of Trust, to provide for the
issuance of shares of beneficial interest upon terms and conditions and pursuant
to agreements as the board of trustees may determine and, further, to establish
by resolution more than one class or series of shares of beneficial interest and
to fix the relative rights and preferences of these different classes or series.
The rights and preferences of any class or series of shares of beneficial
interest will be stated in the articles supplementary to our Third Restated
Declaration of Trust establishing the terms of that class or series adopted by
our board of trustees and will become part of our Third Restated Declaration of
Trust. As of September 22, 2008, our authorized shares of beneficial interest
consisted of an unlimited number of common shares, of which 58,270,296 were
issued and outstanding, and an unlimited number of Series A preferred shares, of
which 1,150,000 were issued and outstanding.
The
voting rights and rights to distributions of the holders of common shares are
subject to the prior rights of the holders of our Series A preferred shares and
any other subsequently-issued classes or series of preferred shares. Unless
otherwise required by applicable law or regulation, other classes or series of
preferred shares are issuable without further authorization by holders of the
common shares and on such terms and for such consideration as may be determined
by our board of trustees. Other classes or series of preferred shares may have
varying voting rights, redemption and conversion features, distribution
(including liquidating distribution) rights and preferences, and other rights,
including rights of approval of specified transactions. Any subsequently-issued
class or series of preferred shares could be given rights that are superior to
rights of holders of common shares and a class or series having preferential
distribution rights could limit common share distributions and reduce the amount
holders of common shares would otherwise receive on dissolution.
Ownership
and Transfer Restrictions
Our Third
Restated Declaration of Trust contains provisions that are intended to help
preserve our status as a REIT for federal income tax purposes. Specifically, our
Third Restated Declaration of Trust provides that any transaction, other than a
transaction entered into through NASDAQ Global Market or other similar exchange,
that would result in our disqualification as a REIT under Section 856 of the
Internal Revenue Code, including any transaction that would result in (i) a
person owning shares of beneficial interest in excess of the ownership limit,
which as of the date of this prospective supplement is 9.8%, in number or value,
of our outstanding shares of beneficial interest, (ii) less than 100 people
owning our shares of beneficial interest, (iii) us being closely held, or (iv)
50% or more of the fair market value of our shares of beneficial interest being
held by persons other than United States persons, will be void ab initio. If
such transaction is not void ab initio, then the shares of beneficial interest
that are in excess of the ownership limit, that would cause us to be closely
held, that would result in 50% or more of the fair market value of our shares of
beneficial interest to be held by persons other than United States persons or
that otherwise would result in our disqualification as a REIT, would
automatically be exchanged for an equal number of “excess shares,” and these
excess shares will be transferred to an “excess share trustee” for the exclusive
benefit of the charitable beneficiaries named by our board of
trustees.
In such
event, any distributions on excess shares will be paid to the excess share trust
for the benefit of the charitable beneficiaries. The excess share trustee will
be entitled to vote the excess shares, if applicable, on any matter. The excess
share trustee may only transfer the excess shares held in the excess share trust
as follows:
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·
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if
shares of beneficial interest were transferred to the excess share trustee
due to a transaction or event that would have caused a violation of the
ownership limit or would have caused us to be closely held then,
at
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the
direction of our board of trustees, the excess share trustee will transfer
the excess shares to the person who makes the highest offer for the excess
shares, pays the purchase price and whose ownership will not violate the
ownership limit or cause us to be closely held;
or
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·
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if
excess shares were transferred to the excess share trustee due to a
transaction or event that would have caused persons other than United
States persons to own more than 50% of the value of our shares of
beneficial interest then, at the direction of our board of trustees, the
excess share trustee will transfer the excess shares to the United States
person who makes the highest offer for the excess shares and pays the
purchase price.
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We have
certain rights to purchase excess shares from the excess share trustee and must
have waived these rights prior to a transfer as described above.
Common
Shares
General.
Our Third Restated Declaration of Trust authorizes the issuance of an unlimited
number of our common shares. As of September 22, 2008, there were 58,270,296 of
our common shares outstanding and 21,409,361 of our common
shares to be issued upon conversion of previously issued LP Units, and there
were no warrants, options or other contractual arrangements, other than the LP
Units, requiring the issuance of our common shares or any other shares of
beneficial interest.
All of
our common shares offered by this prospectus will be duly authorized, fully paid
and nonassessable when exchanged for LP Units in accordance with the terms of
the Agreement of Limited Partnership of IRET Properties.
Voting
Rights. Subject to the provisions of our Third Restated Declaration of
Trust regarding the restriction on the transfer of our common shares, our common
shares have non-cumulative voting rights at the rate of one vote per common
share on all matters submitted to the shareholders, including the election of
members of our board of trustees.
Our Third
Restated Declaration of Trust generally provides that whenever any action is to
be taken by the holders of our common shares, including the amendment of our
Third Restated Declaration of Trust if such amendment is previously approved by
our board of trustees, such action will be authorized by a majority of the
voting power of the holders of our common shares present in person or by proxy
at a meeting at which a quorum is present, except as otherwise required by law,
our Third Restated Declaration of Trust or our Bylaws. Our Third Restated
Declaration of Trust further provides the following:
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(i)
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that
the following actions will be authorized by the affirmative vote of the
holders of our common shares holding common shares possessing a majority
of the voting power of our common shares then outstanding and entitled to
vote on such action:
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our
termination;
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our
merger with or into another entity;
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·
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our
consolidation with one or more other entities into a new
entity;
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·
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the
disposition of all or substantially all of our assets;
and
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·
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the
amendment of the Third Restated Declaration of Trust, if such amendment
has not been previously approved by our board of
trustees.
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(ii)
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that
a member of our board of trustees may be removed with or without cause by
the holders of our common shares by the affirmative vote of not less than
two-thirds of our common shares then outstanding and entitled to vote on
such matter.
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Our Third
Restated Declaration of Trust also permits our board of trustees, by a
two-thirds vote and without any action by the holders of our common shares, to
amend our Third Restated Declaration of Trust from time to time as necessary to
enable us to continue to qualify as a real estate investment trust under the
Internal Revenue Code.
Dividend,
Distribution, Liquidation and Other Rights. Subject to the preferential
rights of our Series A preferred shares, any other preferred shares of
beneficial interest that we may issue in the future and the
provisions
of the
Third Restated Declaration of Trust regarding the restriction on the transfer of
our common shares, holders of our common shares are entitled to receive
dividends on their common shares if, as and when authorized and declared by our
board of trustees and to share ratably in our assets legally available for
distribution to our shareholders in the event of our liquidation, dissolution or
winding up after payment of, or adequate provision for, all known debts and
liabilities. Our common shares have equal dividend, distribution, liquidation
and other rights. Our common shares have no preference, conversion, exchange,
sinking fund or redemption rights.
Listing.
Our common shares are listed on the NASDAQ Global Market under the symbol
“IRET.”
Transfer Agent
and Registrar. We act as our own transfer agent and registrar with
respect to our common shares.
Series
A Preferred Shares
General.
Our Third Restated Declaration of Trust, as amended by the Articles
Supplementary, authorizes the issuance of an unlimited number of our Series A
preferred shares. As of January 31, 2008, there were 1,150,000 of our Series A
preferred shares outstanding and there were no warrants, options or other
contractual arrangements requiring the issuance of additional Series A preferred
shares or any other shares of beneficial interest. Unless redeemed, our Series A
preferred shares have a perpetual term with no stated maturity
date.
Ranking.
With respect to the payment of distributions and distribution of our assets and
rights upon our liquidation, dissolution or winding up, whether voluntary or
involuntary, our Series A preferred shares will rank:
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senior
to our common shares and to all other shares of beneficial interest that,
by their terms, rank junior to our Series A preferred
shares,
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·
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on
a parity with all shares of beneficial interest that we issue, the terms
of which specifically provide that those shares of beneficial interest
rank on a parity with our Series A preferred shares,
and
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junior
to all shares of beneficial interest issued by us whose senior ranking is
consented to as described under “— Voting Rights”
below.
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We do not
currently have any other shares of beneficial interest outstanding that rank on
a parity with, or senior to, our Series A preferred shares.
Distributions.
Holders of our Series A preferred shares will be entitled to receive, when, as
and if declared by our board of trustees, out of funds legally available for
that purpose, cumulative quarterly cash distributions at the rate of 8.25% of
the $25.00 liquidation preference per year (equivalent to an annual rate of
$2.0625 per Series A preferred share). Distributions on our Series A preferred
shares will accrue and be cumulative from and including the date of initial
issuance or from and including the day immediately following the most recent
date as to which distributions have been paid. Distributions will be payable
quarterly in arrears on March 31, June 30, September 30 and December 31 of each
year, or, if not a business day, the succeeding business day (without interest
for the intervening period). Distributions will accrue regardless of whether we
have earnings, whether we have funds legally available for payment or whether
the distributions are declared. The first distribution on our Series A preferred
shares was paid on June 30, 2004. Distributions will be computed on the basis of
a 360-day year consisting of twelve 30-day months. Each payment of distributions
will include distributions accrued to and including the date on which paid.
Distributions will be payable to record holders of our Series A preferred shares
as they appear in our records at the close of the business on the applicable
record date, which will be the 15th day of
the calendar month in which the applicable distribution payment date falls or
such other date designated by our board of trustees for the payment of
distributions that is not more than 30 nor less than 10 days prior to the
distribution payment date.
No full
distributions will be authorized or paid or set apart for payment on any class
or series of shares of beneficial interest ranking, as to distributions, on a
parity with our Series A preferred shares unless all accrued distributions on
our Series A preferred shares for all past distribution periods and the then
current distribution period have been, or contemporaneously are, authorized and
paid in full or a sum sufficient for the payment in full of such distributions
is set apart for that payment. When distributions are not paid in full (or a sum
sufficient for their full payment is not so set apart) on our Series A preferred
shares and any other class or series of shares of beneficial interest ranking on
a parity as to distributions with our Series A preferred shares, all
distributions declared upon our Series A preferred shares and any other such
shares of beneficial interest will be authorized pro rata so that
the
amount of
distributions authorized per share on our Series A preferred shares and all
other such shares of beneficial interest will in all cases bear to each other
the same ratio that accrued and unpaid distributions per share on our Series A
preferred shares and all other shares of beneficial interest bear to each
other.
Except as
provided in the immediately preceding paragraph, unless all accrued
distributions on our Series A preferred shares for all past distribution periods
and the then current distribution period have been, or contemporaneously are,
authorized and paid in full or a sum sufficient for the payment in full of such
distributions is set apart for payment, no distributions (other than in the form
of our common shares or any other shares of beneficial interest ranking junior
to our Series A preferred shares as to distributions and upon our liquidation,
dissolution or winding up, whether voluntary or involuntary) or other
distribution will be authorized, paid or set aside for payment or made upon our
common shares or any other shares of beneficial interest ranking junior to, or
on a parity with, our Series A preferred shares as to distributions or upon our
liquidation, dissolution or winding up, whether voluntary or involuntary, nor
will any common shares or any other shares of beneficial interest ranking junior
to or on a parity with our Series A preferred shares as to distributions or upon
our liquidation, dissolution or winding up, whether voluntary or involuntary, be
redeemed, purchased or otherwise acquired for any consideration (or any monies
be paid to or made available for a sinking fund for the redemption of any such
shares of beneficial interest) by us (except by conversion into or exchange for
other shares of beneficial interest ranking junior to our Series A preferred
shares as to distributions and upon our liquidation, dissolution or winding up,
whether voluntary or involuntary, and except for the acquisition of shares of
beneficial interest that have been designated as “excess shares” in accordance
with the terms of our Third Restated Declaration of Trust).
Distributions
on our Series A preferred shares will accrue whether or not we have earnings,
whether or not there are funds legally available for the payment of the
distributions and whether or not the distributions are authorized. Accrued but
unpaid distributions on our Series A preferred shares will not bear interest and
holders of our Series A preferred shares will not be entitled to any
distributions in excess of full accrued distributions as described above. No
distributions on our Series A preferred shares will be authorized by our board
of trustees or will be paid or set apart for payment by us at such time as the
terms and provisions of any agreement of ours, including any agreement relating
to our indebtedness, prohibits the authorization, payment or setting apart for
payment or provides that the authorization, payment or setting apart for payment
would constitute a breach of any agreement or a default under any agreement, or
if the authorization, payment or setting apart for payment is restricted or
prohibited by law.
Any
distribution payment made on our Series A preferred shares will first be
credited against the earliest accrued but unpaid distribution due with respect
to the shares which remains payable.
Liquidation.
In the event of our liquidation, dissolution or winding up, whether voluntary or
involuntary, the holders of our Series A preferred shares will be entitled to be
paid out of our assets legally available for distribution to the holders of our
shares of beneficial interest a liquidation preference of $25.00 per share, plus
an amount equal to any accrued and unpaid distributions to and including the
date of the liquidation, dissolution or winding up, before any distribution or
payment may be made to the holders of our common shares or any other class or
series of shares of beneficial interest issued by us ranking junior to our
Series A preferred shares as to liquidation rights. In the event that, upon our
liquidation, dissolution or winding up, whether voluntary or involuntary, our
legally available assets are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of Series A preferred shares and the
corresponding amounts payable on all other classes or series of shares of
beneficial interest issued by us ranking on a parity with our Series A preferred
shares as to liquidation rights, then the record holders of our Series A
preferred shares and all other classes or series of shares of beneficial
interest issued by us ranking on a parity with our Series A preferred shares as
to liquidation rights will share ratably in any distribution of assets in
proportion to the full liquidating distributions to which they would otherwise
be respectively entitled. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of our Series A preferred
shares will have no right or claim to any of our remaining assets.
The
record holders of our Series A preferred shares will be entitled to written
notice of any liquidation, dissolution or winding up. Our consolidation or
merger with or into any other trust, partnership, limited liability company,
corporation or other entity, or the consolidated or merger of any other trust,
partnership, limited liability company, corporation or other entity with or into
us, will not be deemed to constitute our liquidation, dissolution or the winding
up if, following the transaction, our Series A preferred shares remain
outstanding as duly authorized shares of beneficial interest of us or any
successor entity having the same rights and preferences as prior to the
transaction.
Redemption at Our
Option. Our Series A preferred shares will not be redeemable at our
option prior to April 26, 2009, except that in order to ensure that we remain
qualified as a REIT for federal income tax purposes, our Series A preferred
shares will be subject to the provisions of our Third Restated Declaration of
Trust that provide that Series A preferred shares owned by a shareholder in
excess of the ownership limit described in that document will be automatically
designated “excess shares” and be transferred as described below under
“Restrictions on Ownership.”
On or
after April 26, 2009, we, at our option upon not less than 30 nor more than 60
days’ written notice, may redeem our Series A preferred shares, in whole or in
part, at any time or from time to time, for cash at a redemption price of $25.00
per share, plus accrued and unpaid distributions thereon to and including the
date of redemption (except as provided below), if any, and without interest.
Unless all accrued distributions for all past distribution periods and the then
current distribution period on all Series A preferred shares and any other of
our shares of beneficial interest ranking on a parity with our Series A
preferred shares as to distributions or upon our liquidation, dissolution or
winding up, whether voluntary or involuntary, have been, or contemporaneously
are, authorized and paid in full or a sum sufficient for the payment in full of
such distributions is set apart for payment, no Series A preferred shares or
other shares of beneficial interest ranking on a parity will be redeemed unless
all outstanding Series A preferred shares and other shares of beneficial
interest ranking on a parity are simultaneously redeemed. However, the foregoing
will not prevent the purchase or acquisition of Series A preferred shares
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding Series A preferred shares and other shares of beneficial
interest ranking on a parity. If fewer than all of the outstanding Series A
preferred shares are to be redeemed, our Series A preferred shares to be
redeemed will be determined pro rata (as nearly as practicable without creating
fractional shares) or in such other equitable manner prescribed by our board of
trustees that will not result in a violation of the restrictions specified below
under “Restrictions on Ownership.”
We are
required to give the holders of our Series A preferred shares prior written
notice of redemption of our Series A preferred shares. Notice of redemption will
be mailed by us, postage prepaid, not less than 30 days nor more than 60 days
prior to the date fixed for redemption, addressed to the respective record
holders of our Series A preferred shares to be redeemed at their respective
addresses as they appear on our records. No failure to give such notice or
defect in the notice or in the mailing of the notice will affect the validity of
the proceedings for the redemption of any Series A preferred shares except as to
the holder to whom notice was defective or not given. Each notice will
state:
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the
date fixed for redemption;
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the
redemption price, including all accrued and unpaid distributions, if
any;
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the
number of Series A preferred shares to be
redeemed;
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the
time, place and manner in which the certificates evidencing our Series A
preferred shares are to be surrendered for payment of the redemption
price, including the steps that a holder should take with respect to any
certificates that have been lost, stolen or destroyed or with respect to
uncertificated shares; and
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that
distributions on the Series A preferred shares to be redeemed will cease
to accrue from and after the redemption date and the shares will no longer
be deemed outstanding.
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If fewer
than all of the outstanding Series A preferred shares are to be redeemed, the
notice mailed to each holder will also specify the number of Series A preferred
shares to be redeemed from each such holder and the method by which shares will
be selected for redemption.
On or
after the redemption date, once a record holder of Series A preferred shares to
be redeemed surrenders the certificates representing their Series A preferred
shares at the place designated in the redemption notice, the redemption price of
such Series A preferred shares, including any accrued and unpaid distributions
payable, will be paid to the person who surrendered such certificates and each
surrendered certificate will be canceled. In the event that fewer than all our
Series A preferred shares represented by any certificate are to be redeemed, a
new certificate will be issued representing the unredeemed Series A preferred
shares.
At our
election, we may, prior to the redemption date, irrevocably deposit the
redemption price (including accrued and unpaid distributions) of our Series A
preferred shares called for redemption in trust for the holders
thereof
with a bank or trust company, in which case the notice to holders of our Series
A preferred shares to be redeemed will:
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specify
the office of such bank or trust company as the place of payment of the
redemption price, and
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·
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direct
such holders to surrender the certificates representing our Series A
preferred shares at such place to receive payment of the redemption price
(including all accrued and unpaid distributions to and including the
redemption date).
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Any
monies deposited that remain unclaimed at the end of two years after the
redemption date will be returned to us by such bank or trust company and after
that time the holder must look to us for payment.
Except as
provided above, we will make no payment or allowance for unpaid distributions,
whether or not in arrears, on Series A preferred shares to be
redeemed.
If notice
of redemption of any Series A preferred shares has been given and if the funds
necessary for that redemption have been set apart by us in trust for the benefit
of the holders of any Series A preferred shares so called for redemption, then
from and after the redemption date distributions will cease to accrue on those
Series A preferred shares, those Series A preferred shares will no longer be
deemed outstanding, those Series A preferred shares will not thereafter be
transferred (except with our consent) on our books and all rights of the holders
of those Series A preferred shares will terminate, except the right to receive
the redemption price (including all accrued and unpaid distributions to and
including the redemption date).
Our
Series A preferred shares have no stated maturity date and will not be subject
to any sinking fund.
Redemption at the
Holder’s Option. If at any time there has been a change in control (as
defined below), each holder of Series A preferred shares will have the right,
for a period of 90 days from the date of the change in control, to require us to
redeem all or any portion of that holder’s Series A preferred shares. Not later
than 130 days after the date of the change in control (or, if that date is a
Saturday, Sunday or legal holiday, the next day that is not a Saturday, Sunday
or legal holiday), we will redeem all Series A preferred shares the holder has
elected to have redeemed in a written notice delivered to us on or prior to the
90th
day after the change in control. The redemption price will be $25.00 per share,
plus accrued and unpaid distributions, if any, to and including the date of
redemption.
A “change
in control” will have occurred if any of the following events have taken
place:
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any
person, entity or affiliated group, other than us or any employee benefit
plan sponsored by us, acquires more than 50% of the then outstanding
common shares and shares of all other classes or series of shares of
beneficial interest upon which like voting rights have been conferred and
are exercisable,
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the
consummation of any merger or consolidation of us into another company,
such that the holders of our common shares and shares of all other classes
or series of shares of beneficial interest upon which like voting rights
have been conferred and are exercisable immediately prior to such merger
or consolidation hold less than 50% of the voting power of the securities
of the surviving company or the parent of such surviving company,
or
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our
liquidation, dissolution or winding up, whether voluntary or involuntary,
or the sale or disposition of all or substantially all of our assets, such
that after the transaction, the holders of our common shares and shares of
all other classes or series of shares of beneficial interest upon which
like voting rights have been conferred and are exercisable immediately
prior to the transaction hold less than 50% of the voting securities of
the acquiror or the parent of the
acquiror.
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There is
no precise, established definition of the term “all or substantially all of our
assets” under applicable law and accordingly there may be uncertainty as to
whether the foregoing provision would apply to a sale of less than all of our
assets.
Voting
Rights. Except as indicated below, the holders of our Series A preferred
shares will not have any voting rights other than as required by applicable law.
On any matter on which our Series A preferred shares are entitled to vote,
including any action by written consent, each Series A preferred share will be
entitled to one vote.
Whenever
distributions payable on our Series A preferred shares are in arrears for six or
more quarterly periods, whether or not consecutive, holders of our Series A
preferred shares (voting together as a class with holders of all other classes
or series of shares of beneficial interest ranking on a parity with our Series A
preferred shares as to distributions and upon our liquidation, dissolution or
winding up, whether voluntary or involuntary, upon which like voting rights have
been conferred and are exercisable) will be entitled to elect two additional
trustees to serve on our board of trustees, who will be elected for one-year
terms (subject to earlier termination as described below). Such election will be
at a special meeting called by the record holders of at least 10% of the Series
A preferred shares or the record holders of any other class or series of shares
of beneficial interest upon which like voting rights have been conferred and are
exercisable (or at our next special meeting or annual meeting if notice of such
meeting is given less than 90 days before our next special meeting or annual
meeting) and each subsequent annual meeting until all of the distributions on
the Series A preferred shares and all other classes of our shares of beneficial
interest upon which like voting rights have been conferred and are exercisable
for the past distribution periods and the then current distribution period have
been fully paid or authorized and a sum sufficient for payment thereof set aside
in full. Election will require a vote of the holders of a majority of the Series
A preferred shares and shares of all other classes or series of our shares of
beneficial interest upon which like voting rights have been conferred and are
exercisable then outstanding, voting as a single class. Upon such election, the
size of our board of trustees will be increased by two trustees. If and when all
such accumulated distributions have been paid on the Series A preferred shares
and all other classes or series of shares of beneficial interest upon which like
voting rights have been conferred and are exercisable, the term of office of
each of the additional trustees so elected will terminate and the size of our
board of trustees will be reduced accordingly. So long as a distribution default
continues, any vacancy in the office of additional trustees elected as described
in this paragraph may be filled by written consent of the other additional
trustee who remains in office or, if no additional trustee remains in office, by
a vote of the holders of a majority of the Series A preferred shares and shares
of all other classes or series of our shares of beneficial interest upon which
like voting rights have been conferred and are exercisable then outstanding,
voting as a single class. Each of the trustees elected as described in this
paragraph will be entitled to one vote on any matter.
The
affirmative vote or consent of the holders of at least two-thirds of the then
outstanding Series A preferred shares and shares of each other class or series
of shares of beneficial interest ranking on a parity with respect to the payment
of distributions or the distribution of assets upon our liquidation, dissolution
or winding up, whether voluntary or involuntary, that is similarly affected,
voting as a single class, will be required to:
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authorize
or create (including by reclassification), or increase the authorized or
issued amount of, any class or series of shares of beneficial interest, or
any obligation or security convertible into, exchangeable for or
evidencing the right to purchase or otherwise acquire any shares of any
class or series of shares of beneficial interest, that rank senior to
those classes and series of our preferred shares of beneficial interest
with respect to payment of distributions or the distribution of assets
upon our liquidation, dissolution or winding up, whether voluntary or
involuntary; or
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amend,
alter or repeal the provisions of our Third Restated Declaration of Trust
or the articles supplementary, whether by merger, consolidation, share
exchange or otherwise, or consummate a merger, consolidation, share
exchange or transfer involving us, in either case so as to materially and
adversely affect any right, preference, privilege or voting power of the
holders of the affected classes or
series.
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With
respect to any of the events described in the preceding paragraph, the
occurrence of any such event will not be deemed to materially adversely affect
any right, preference, privilege or voting power of any class or series of
shares of beneficial interest or the holders of such shares if, immediately
after any such event:
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we
are the surviving entity and there are no outstanding shares of beneficial
interest ranking, as to the payment of distributions or the distribution
of assets upon our liquidation, dissolution or winding up, whether
voluntary or involuntary, senior to the affected series or series or class
or classes other than shares of beneficial interest outstanding
immediately prior to such event the terms of which remain unchanged and
remain outstanding and the terms of those shares of beneficial interest
remain unchanged; or
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we
are not the surviving entity and as a result of the event, the holders of
the affected series or series or class or classes receive shares of equity
securities with preferences, rights and privileges substantially similar
to the preferences, rights and privileges of the affected series or series
or class or classes and there are no outstanding shares of equity
securities of the surviving entity ranking, as to the payment of
distributions or the distribution of assets upon our liquidation,
dissolution or winding up, whether
voluntary
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or
involuntary, senior to the affected series or series or class or classes
other than equity securities issued in respect of shares of beneficial
interest outstanding immediately prior to such event the terms of which
are substantially similar to the terms immediately prior to such
event.
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Except as
may be required by law, holders of our Series A preferred shares will not be
entitled to vote with respect to (i) the authorization or issuance of shares of
beneficial interest ranking on a parity with or junior to our Series A preferred
shares with respect to the payment of dividends and the distribution of assets
upon our liquidation, dissolution or winding up, whether voluntary or
involuntary; or (ii) any increase, decrease or issuance of any of our Series A
preferred shares or other shares of beneficial interest ranking on a parity with
or junior to our Series A preferred shares with respect to the payment of
distributions and the distribution of assets upon our liquidation, dissolution
or winding up, whether voluntary or involuntary. Except as provided above and
required by law, the holders of Series A preferred shares are not entitled to
vote on any merger or consolidation involving us, on any share exchange or on a
sale of all or of substantially all of our assets.
The
foregoing voting provisions will not apply if, at or prior to the time when the
act with respect to which the vote would otherwise be required will be effected,
all outstanding shares of Series A preferred shares have been redeemed or called
for redemption and sufficient funds have been deposited in trust to effect the
redemption.
Conversion.
Our Series A preferred shares are not convertible into or exchangeable for any
other securities or property, except that, in limited circumstances, our Series
A preferred shares may be automatically converted into or exchanged for excess
shares. See “Restrictions on Ownership” above.
Listing.
Our Series A preferred shares are listed on the NASDAQ Global Market under the
symbol “IRETP.”
Transfer
Agent. We act as our own transfer agent, registrar and distribution
disbursing agent with respect to our Series A preferred shares.
THE
AGREEMENT OF LIMITED PARTNERSHIP OF IRET PROPERTIES
The following is a summary of the
material terms of the LP Units, including a summary of certain
provisions of the Agreement of Limited Partnership of IRET Properties. This
summary is not a complete legal description of the LP Units and is
qualified in its entirety by reference to the applicable provisions of North
Dakota law and the Agreement of Limited Partnership of IRET Properties. For
a comparison of the rights of holders of LP Units and our the holders of our
common shares, see the section of this prospectus entitled “Comparison of
Ownership of LP Units and Common Shares” beginning on Page
28.
General
We
conduct all of our day-to-day real estate activities through our operating
partnership, IRET Properties. The operation of IRET Properties is governed by
the Agreement of Limited Partnership of IRET Properties. We are the sole
shareholder of IRET, Inc., a North Dakota corporation, which is the general
partner of IRET Properties. The holders of LP Units are the limited partners of
IRET Properties. As of July 31, 2008, IRET, Inc. owned approximately 73.2% of
IRET Properties.
Issuance
of LP Units
We are
structured as an Umbrella Partnership Real Estate Investment Trust, or UPREIT,
which enables us to acquire property by issuing LP Units to a seller as a form
of consideration. All LP Units have redemption rights that enable them to cause
IRET Properties to redeem their LP Units for cash or, at the option of IRET,
Inc., common shares on a one-for-one basis after a minimum one-year holding
period. No LP Units have been registered pursuant to the federal or state
securities laws and they are not listed on any exchange or quoted on any
national market system. As of September 22, 2008, we had 21,409,361 LP Units
outstanding, of which, in addition to the 5,886,949 LP Units to which this
prospectus relates, 12,648,548 were also redeemable for common
shares.
IRET,
Inc. is authorized, in its sole and absolute discretion and without the approval
of any limited partner, to issue additional LP Units to itself, to us, to any
limited partner or to any other person for such consideration and on such terms
and condition as established by IRET, Inc. The issuance of LP Units to IRET,
Inc. or us is subject to certain conditions. IRET, Inc. is authorized to cause
IRET Properties to issue general partnership interests or LP Units for less than
fair market value if IRET, Inc. has concluded in good faith that such issuance
is in our best
interests
and in the best interests of IRET Properties. IRET, Inc. is also authorized to
issue additional partnership interests in different series or classes, which may
have rights and preferences that are senior to the LP Units.
Purpose,
Business and Management of IRET Properties
The
purpose of IRET Properties is to conduct any business that may be lawfully
conducted by a limited partnership organized pursuant to the North Dakota
Uniform Limited Partnership Act, provided that such business is limited to and
conducted in such a manner as to permit us at all times to qualify as a REIT.
Subject to the foregoing, IRET Properties may enter into any partnership, joint
venture or other similar arrangement.
IRET,
Inc., as the sole general partner, has full, exclusive and complete
responsibility and discretion in the management and control of IRET Properties,
and the limited partners have no authority in their capacity as limited partners
to transact business for, or participate in the management activities or
decisions of, IRET Properties except as otherwise required by applicable
law.
Operation
and Payment of Expenses
The
Agreement of Limited Partnership of IRET Properties requires that the
partnership be operated in a manner that will enable us to satisfy the
requirements for being classified as a REIT for federal tax purposes, to avoid
any federal income or excise tax liability imposed by the Internal Revenue Code
and to ensure that IRET Properties will not be classified as a “publicly traded
partnership” for purposes of Section 7704 of the Internal Revenue
Code.
In
addition to the administrative and operating costs and expenses incurred by IRET
Properties, IRET Properties pays all of the administrative costs and expenses
incurred by us and IRET, Inc. All of our expenses are considered expenses of
IRET Properties. Our expenses generally include: (i) all expenses relating to
the operation and continuity of our existence and the existence of IRET, Inc.;
(ii) all expenses relating to the public offering and registration of shares of
beneficial interest by us; (iii) all expenses associated with the preparation
and filing of our periodic reports under federal, state or local laws or
regulations; (iv) all expenses incurred by us and IRET, Inc. associated with
compliance with laws, rules and regulations promulgated by any regulatory body;
and (v) all other operating or administrative costs of IRET, Inc. incurred in
the ordinary course of its business on behalf of IRET Properties.
Ability
to Engage in Other Business; Conflict of Interest
IRET,
Inc. may have business interests and engage in business activities outside of
IRET Properties, including interests and activities in direct or indirect
competition with IRET Properties. IRET Properties may not purchase, sell or
lease any property, borrow or loan any money, or invest in any joint ventures
with any member of our board of trustees, or with any director, employee or
affiliate of us, except in connection with a transaction approved by a majority
of the trustees who are not in any way involved in the transaction as being a
fair, competitive and commercially reasonable transaction that is no less
favorable to IRET Properties than a similar transaction between unaffiliated
parties under the same circumstances.
Distributions
and Liquidation
The
Agreement of Limited Partnership of IRET Properties provides that IRET
Properties shall distribute cash from operations on a quarterly basis, in
amounts determined by IRET, Inc., in its sole discretion, to the partners in
accordance with their respective percentage interests in IRET Properties. Upon
liquidation of IRET Properties, and after payment of, or adequate provision for,
debts and obligations, any remaining assets will be distributed to all partners
with positive capital accounts in accordance with their respective positive
capital account balances. If we have a negative balance in our capital account
following a liquidation, we will be obligated to contribute cash equal to the
negative balance in our capital account.
Allocations
Income,
gain and loss of IRET Properties for each fiscal year is allocated among the
general partner and the limited partners in accordance with their respective
interests, subject to compliance with the provisions of Sections 704(b) and
704(c) of the Internal Revenue Code, and the regulations issued
thereunder.
Borrowing
by IRET Properties
The
Agreement of Limited Partnership of IRET Properties provides that if IRET
Properties requires additional funds at any time or from time to time in excess
of funds available to IRET Properties from borrowing or capital contributions,
IRET, Inc. may cause IRET Properties to obtain such funds from outside
borrowings or IRET, Inc. may elect to borrow such funds or have us borrow such
funds and subsequently lend such funds to IRET Properties on the same terms and
conditions as are applicable to our or IRET, Inc.’s borrowing of such
funds.
Liability
of IRET, Inc. and the Limited Partners
IRET,
Inc., as the general partner of IRET Properties, is liable for all general
recourse obligations of IRET Properties to the extent not paid by IRET
Properties. The limited partners will only be liable to IRET Properties to make
payments of their capital contributions, if any. No limited partner will be
liable for any debts, liabilities, contracts or obligations of IRET
Properties.
Exculpation and Indemnification of
IRET, Inc.
The
Agreement of Limited Partnership of IRET Properties provides that IRET, Inc.
will not be responsible for losses sustained or liabilities incurred as a result
of errors in judgment or from any act or omission, provided that IRET, Inc.
acted in good faith. The Agreement of Limited Partnership of IRET Properties
also provides for the indemnification of us, IRET, Inc., the directors,
trustees, officers and employees of both us and IRET, Inc., and such other
persons as IRET, Inc. may designate from time to time in its sole discretion,
against liabilities relating to the operations of IRET Properties, unless it is
established that (i) the act or omission of the indemnitee was material to the
matter giving rise to the proceeding and either was committed in bad faith or
was the result of active and deliberate dishonesty; (ii) the indemnitee actually
received an improper personal benefit in money, property or service; or (iii) in
the case of any criminal proceeding, the indemnitee had reasonable cause to
believe that the act or omission was unlawful.
Transferability
of LP Units and General Partnership Interests
As the
general partner, IRET, Inc., may not voluntarily withdraw as the general partner
of IRET Properties or transfer or assign its general partnership interests in
IRET Properties unless the transaction in which such withdrawal or transfer
occurs results in the limited partners receiving property in an amount equal to
the amount they would have received had they exercised their right to redeem
their LP Units immediately prior to such transaction, or unless the successor to
IRET, Inc. contributes substantially all of its assets to IRET Properties in
return for an interest in IRET Properties.
With
certain limited exceptions, the limited partners may not transfer their LP
Units, in whole or in part, without the written consent of IRET, Inc., which
consent may be withheld in the sole discretion of IRET, Inc. IRET, Inc. may not
consent to any transfer that would cause IRET Properties to be treated as a
corporation for federal income tax purposes.
IRET
Properties may not engage in any transaction resulting in a change of control,
unless in connection with the transaction the limited partners receive or have
the right to receive cash or other property equal to the product of the number
of common shares into which each LP Units is then exchangeable and the greatest
amount of cash, securities or other property paid in the transaction to the
holder of one common share in consideration of one such common share. If, in
connection with the transaction, a purchase, tender or exchange offer is made to
and accepted by the holders of more than fifty percent (50%) of the common
shares, each holder of LP Units will receive, or will have the right to elect to
receive, the greatest amount of cash, shares of beneficial interest or other
property that such holder would have received had he, she or it exercised his,
her or its right to redeem LP Units and received common shares in exchange for
its LP Units immediately prior to the expiration of such purchase, tender or
exchange offer and had accepted such purchase, tender or exchange
offer.
Despite
the foregoing, we may merge, or otherwise combine our assets, with another
entity if, immediately after such merger or other combination, substantially all
of the assets of the surviving entity, other than its ownership in IRET
Properties, are contributed to IRET Properties as a capital contribution in
exchange for general partnership interests of IRET Properties with a fair market
value, as reasonable determined by us, equal to the agreed value of the assets
so contributed.
For any
transaction described in the preceding two paragraphs, we are required to use
commercially reasonable efforts to structure such transaction to avoid causing
the limited partners to recognize gain for federal income tax purposes by virtue
of the occurrence of, or their participation in, such transaction, provided such
efforts are consistent with the exercise of our trustees’ fiduciary duties under
applicable law.
Fiduciary
Duties
Before
becoming a limited partner, each limited partner must agree that in the event of
any conflict in the fiduciary duties owed by us to our shareholders and by IRET,
Inc., as the general partner of IRET Properties, to the limited partners, IRET,
Inc. will fulfill its fiduciary duties to such limited partners by acting in the
best interests of our shareholders.
Tax
Matters
IRET,
Inc. is the tax matters partner of IRET Properties and, as such, has authority
to handle tax audits and to make tax elections under the Internal Revenue Code
on behalf of IRET Properties and the limited partners.
Amendment
of the Agreement of Limited Partnership of IRET Properties
Any
amendment to the Agreement of Limited Partnership of IRET Properties that would
(i) adversely affect the right to redeem LP Units, (ii) adversely affect the
limited partners’ rights to receive cash distributions, or (iii) alter the
limited partnership’s allocations of capital of IRET Properties, requires the
consent of the limited partners holding more than fifty percent (50%) of the LP
Units held by such limited partners.
Term
IRET
Properties will continue until April 30, 2050, or until sooner dissolved upon:
(i) the bankruptcy, dissolution or withdrawal of IRET, Inc.; (ii) the sale or
other disposition of all or substantially all of its assets; (iii) the
redemption of all of the LP Units; or (iv) the election by the general
partner.
General
Pursuant
to the Agreement of Limited Partnership of IRET Properties, the limited partners
have redemption rights that enable them to cause IRET Properties to redeem their
LP Units for cash or, at the option of IRET, Inc., common shares on a
one-for-one basis after a minimum one-year holding period. The redemption price
will be paid in cash in the event that the issuance of common shares would: (i)
result in any person owning, directly or indirectly, common shares in excess of
the ownership limitation of 50% of the outstanding Shares; (ii) result in Shares
being owned by fewer than 100 persons; (iii) result in us being “closely held”
within the meaning of Section 856(h) of the Code; (iv) cause us to own, actually
or constructively, 10% or more of the ownership interest in a tenant of our or
IRET Properties’ real estate, within the meaning of Section 856(d)(2)(B) of the
Internal Revenue Code; or (v) cause the acquisition of common shares by such
redeeming holder of LP Units to be “integrated” with any other distribution of
common shares for purposes of complying with the Securities Act of
1933.
The
limited partners may exercise the redemption at any time after the first
anniversary of the date of acquisition of LP Units, provided that the limited
partner is not subject to any other restrictions relating to the redemption of
LP Units. Redemption rights are exercised pursuant to a notice of exchange
delivered by the holder of LP Units to IRET Properties. Except as otherwise
agreed between IRET Properties and a limited partner, no limited partner will be
permitted more than two redemptions during any calendar year and no redemption
may be made for less than 1,000 LP Units or, if such limited partner owns less
than 1,000 LP Units, all of the LP Units held by such limited
partner.
The
number of common shares issuable upon redemption of LP Units will be adjusted
upon the occurrence of share splits, mergers, consolidations or similar pro rata
share transactions, which otherwise would have the effect of diluting the
ownership interest of the limited partners or our shareholders.
Tax
Treatment of Redemption of LP Units
The
following discussion summarizes certain federal income tax considerations that
may be relevant to a holder of LP Units that exercises his, her or its right to
redeem LP Units.
The
Agreement of Limited Partnership of IRET Properties provides that the redemption
of LP Units will be treated by us, IRET Properties and the redeeming holder of
LP Units as a sale of LP Units by such holder to us. Such sale will be fully
taxable to the redeeming holder of LP Units.
The
determination of gain or loss from the sale or other disposition will be based
on the difference between the amount realized for tax purposes by the redeeming
holder of LP Units and his, her or its tax basis in such LP Units. The amount
realized will be the sum of the fair market value of property received (e.g.,
the common shares) by the holder plus the portion of the liabilities of IRET
Properties that was allocable to the redeemed LP Units. In general, the tax
basis of a holder of LP Units is the holder’s initial basis in the LP Units –
the adjusted basis of the property contributed for the LP Units plus any cash
contributed for the LP Units, reduced by any liabilities assumed by IRET
Properties and increased by the holder’s share of IRET Properties’ liabilities –
and then is increased to reflect the redeeming holder’s allocable share of
income of IRET Properties and decreased, but not below zero, to reflect the
redeeming holder’s allocable share of loss and distributions of IRET Properties.
The basis also can change based on changes in the holder’s share of liabilities
of IRET Properties. To the extent that the amount realized exceeds the redeeming
holder’s basis for the redeemed LP Units, such redeeming 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 fair market value of the
Shares received upon redemption. Each redeeming holder of LP
Units should consult
with his, her or its own tax advisor for the specific tax consequences resulting from
redemption of LP Units.
Generally,
any gain recognized upon a sale or other disposition of LP Units will be treated
as gain attributable to the sale or disposition of a capital asset. To the
extent that money or property received by a holder in exchange for all or part
of his LP Units is attributable to the redeeming holder’s share of “unrealized
receivables” and inventory items of IRET Properties (as defined in Section 751
of the Internal Revenue Code), the gain or loss is ordinary income or loss.
Unrealized receivables include, to the extent not previously included in the
income of IRET Properties, any rights to payment for services rendered or to be
rendered. Unrealized receivables also include amounts that would be subject to
recapture as ordinary income if IRET Properties had sold its assets at their
fair market value at the time of the transfer of LP Units.
For
individuals, trusts and estates, the current 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
for “unrecaptured Section 1250 gain” (that is, depreciation deductions not
otherwise recaptured as ordinary income under the existing depreciation
recapture rules). Treasury Regulations provide that individuals, trusts and
estates are subject to a 25% tax, or the “25% Amount”, to the extent of their
allocable share of unrecaptured Section 1250 gain immediately prior to their
sale or disposition of the LP Units. (A 28% rate, which applies to gains on
certain collectibles and the excludable gain on the sale of qualified small
business stock held for more than five years, is unlikely to be applicable to
IRET Properties’ gains.) Provided that the LP Units are held as a long-term
capital asset, such redeeming holder’s LP Units 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 LP Units and the 25% Amount.
There is
a risk that a redemption by IRET Properties of LP Units issued in exchange for a
contribution of property to IRET Properties may cause the original transfer of
property to IRET Properties in exchange for LP Units to be treated as a
“disguised sale” of property. Section 707 of the Internal Revenue Code and the
Treasury Regulations thereunder, commonly referred to as the Disguised Sale
Regulations, generally provide that, unless one of the prescribed exceptions is
applicable, a partner’s contribution of property to a partnership and a
simultaneous or subsequent transfer of money or other consideration (which may
include the assumption of or taking subject to a liability) from the partnership
to the partner will be presumed to be a sale, in whole or in part, of such
property by the partner to the partnership. Further, the Disguised Sale
Regulations provide generally that, in the absence of an applicable exception,
if money or other consideration is transferred by a partnership to a partner
within two years of the partner’s contribution of property, the transactions are
presumed to be a sale of the contributed property unless the facts and
circumstances clearly establish that the transfers do not constitute a sale. The
Disguised Sale Regulations also provide that if two years have passed between
the transfer of money or other consideration and the
contribution
of property, the transactions will be presumed not to be a sale unless the facts
and circumstances clearly establish that the transfers constitute a sale. Each redeeming holder of LP Units
should consult with his,
her or its own tax advisor to determine whether a redemption of LP Units could be subject to the
disguised sale regulations.
The following is a comparative
summary of the material terms of the LP Units and our common shares,
including summaries of certain provisions of the Agreement of Limited Partnership of
IRET Properties, our Third Restated Declaration of Trust and our Bylaws.
This summary is not a complete legal description of the LP Units, our
common shares, the Agreement of Limited Partnership of IRET Properties, our
Third Restated Declaration of Trust or our Bylaws, and is qualified in its
entirety by reference to the applicable provisions of North Dakota law, the
Agreement of Limited Partnership of IRET Properties, our Third Restated
Declaration of Trust and our Bylaws, as applicable.
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IRET
Properties
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IRET
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Form
of Organization and Assets Owned
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IRET
Properties is organized as a North Dakota limited partnership and owns
interests (both directly and through subsidiaries) in
properties.
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We
are a North Dakota real estate investment trust. We believe that we have
operated so as to qualify as a REIT under the Code since our organization
on July 31, 1970, and we intend to continue to so operate. Our interest in
IRET Properties gives us an indirect investment in the properties owned by
IRET Properties. In addition, we own (either directly or through interests
in subsidiaries other than IRET Properties) interests in other
properties.
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Length
of Investment
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IRET
Properties has a stated termination date of April 30, 2050, unless sooner
dissolved upon: (i) the bankruptcy, dissolution or withdrawal of IRET,
Inc.; (ii) the sale or other disposition of all or substantially all of
its assets; (iii) the redemption of all of the LP Units; or (iv) the
election by IRET, Inc., as the general partner.
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Under
our Third Restated Declaration of Trust, subject to the provisions of any
class or series of shares of beneficial interest at the time outstanding,
we may be terminated at any meeting of the holders of our shares of
beneficial interest called for such purpose, by the affirmative vote of
the holders of our shares of beneficial interest holding shares possessing
a majorityof the voting power of our shares then outstanding and entitled
to vote thereon.
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Purpose
and Permitted Investments
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The
Agreement of Limited Partnership of IRET Properties provides that the
purpose of IRET Properties is to conduct any business that may be lawfully
conducted by a limited partnership organized pursuant to the North Dakota
Uniform Limited Partnership Act, provided that such business is limited to
and conducted in such a manner as to permit us at all times to qualify as
a REIT, unless we otherwise case to qualify as a REIT.
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Under
our Third Restated Declaration of Trust, our purpose is to purchase, hold,
lease, manage, sell, exchange, develop, subdivide and improve real
property and interests in real property and to invest in notes, bonds and
other obligations secured by mortgages on real property, and in general,
to do all other things in connection with the foregoing and to have and
exercise all powers conferred by North Dakota law. It is intended that our
business shall be conducted so that we will qualify (so long as such
qualification, in the opinion of our board of trustees, is advantageous to
the holders of our shares of beneficial interest) as a REIT.
We
are permitted by the Agreement of Limited Partnership of IRET Properties
to engage in business activities in addition to those relating to IRET
Properties, including activities that are in
competition
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IRET
Properties
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IRET
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with
IRET Properties. We have no obligation to present opportunities to IRET
Properties and the limited partners of IRET Properties have no rights by
virtue of the Agreement of Limited Partners business
activities.
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Additional
Equity
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IRET
Properties is authorized to issue LP Units and other partnership interests
(including partnership interests of different series or classes that may
be senior to the LP Units) as determined by IRET, Inc., as the general
partner in its sole discretion. The issuance of LP Units to IRET, Inc. or
us, however, is subject to certain conditions.
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Our
Third Restated Declaration of Trust authorizes the issuance of an
unlimited number of shares of beneficial interest, including an unlimited
number of common shares. Our Third Restated Declaration of Trust also
authorizes our board of trustees to provide for the issuance of shares of
beneficial interest upon terms and conditions and pursuant to agreements
as the board of trustees may determine and, further, to establish by
resolution more than one class or series of shares of beneficial interest
and to fix the relative rights and preferences of such different classes
or series. The rights and preferences of any class or series of shares of
beneficial interest will be stated in the articles supplementary to our
Third Restated Declaration of Trust establishing the terms of that class
or series adopted by our board of trustees and will become part of our
Third Restated Declaration of Trust. As of the date of this prospectus,
our board has authorized common shares and Series A preferred
shares.
|
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|
Borrowing
Policies
|
|||
|
IRET,
Inc., as the general partner, has full power and authority to borrow money
on behalf of IRET Properties. IRET Properties has no restrictions on
borrowings.
|
Our
Bylaws provide that our aggregate borrowings, secured and unsecured, shall
be reasonable in relation to our Net Assets, and shall be reviewed by our
board of trustees at least quarterly. As used in our Bylaws, which usage
is not in accordance with GAAP, “Net Assets” means our total assets at
cost before deducting depreciation or other non-cash reserves less total
liabilities, calculated at least quarterly on a basis consistently
applied. The maximum amount of such borrowings in relation to our Net
Assets shall, in the absence of a satisfactory showing that a higher level
of borrowing is appropriate, not exceed 300%. Any excess in borrowing over
such 300% level shall be approved by a majority of the independent members
of our board of trustees and disclosed to the holders of our shares of
beneficial interest in our next quarterly report, along with justification
for such excess.
|
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|
Other
Investment Restrictions
|
|||
|
Other
than restrictions precluding investments by IRET Properties that would
adversely affect our qualification as a REIT, there are no restrictions on
the investment activities of IRET Properties.
|
Our
Third Restated Declaration of Trust requires that any transaction between
us and any member of our board of trustees or his or her affiliates shall
be approved: (i) by a majority of our board of trustees (whether or not
constituting a quorum for the transaction of business) not otherwise
interested in such
|
||
|
IRET
Properties
|
IRET
|
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|
transaction
as being fair and reasonable to us; and (ii) by a majority of the
independent members of our board of trustees not otherwise interested in
such transaction as being fair and reasonable to us. In no event shall we
or any of our affiliates purchase any asset from any member of our board
of trustees or his or her affiliates at a cost exceeding the current
appraised value of said asset. In no event shall we or any of our
affiliates sell any asset to any member of our board of trustees or his or
her affiliates at a cost less than the current appraised value of said
asset.
Further,
our Bylaws provide the following:
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|
· Our
primary investment objectives are to obtain current income and capital
appreciation for the holders of our shares of beneficial
interest.
|
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|
· The
independent members of our board of trustees shall review our investment
policies with sufficient frequency and at least annually to determine that
our policies at any time are in the best interests of the holders of our
shares of beneficial interest.
|
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|
· We
shall not invest in equity securities unless a majority of the members of
our board of trustees (including a majority of independent members of our
board of trustees) not otherwise interested in such transaction approve
the transaction as being fair, competitive and commercially
reasonable.
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|
· We
shall not invest more than 10% of our total assets in unimproved real
property or mortgage loans on unimproved real property. “Unimproved real
property” shall mean real property that has the following three
characteristics: (i) an equity interest in real property that was not
acquired for the purpose of producing rental or other operating income;
(ii) has no development or construction in process on such land; and (iii)
no development or construction on such land is planned in good faith to
commence on such land within one year.
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|
· We
shall not invest in commodities or commodity future contracts. Such
limitation is not intended to apply to future contracts, when used solely
for hedging purposed in connection with our ordinary business of investing
in real estate assets and mortgages.
|
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|
· We
shall not invest in or make mortgage loans unless an appraisal is obtained
concerning the underlying property, except for those loans insured or
guaranteed by a government or government agency. In cases in which a
majority of the independent members of our board of trustees so determine,
and in all cases in which
|
|||
|
IRET
Properties
|
IRET
|
||
|
the
transaction is with a member of our board of trustees or his or her
affiliates, such an appraisal must be obtained from an independent expert
concerning the underlying property. This appraisal shall be maintained in
our records for at least five years, and shall be available for inspection
and duplication by any holder of our shares of beneficial interest. In
addition to the appraisal, a mortgagee’s or owner’s title insurance policy
or commitment as to the priority of the mortgage or the condition of the
title must be obtained. Further, our board of trustees shall observe the
following policies in connection with investing in or making mortgage
loans: (i) we shall not invest in real estate contracts of sale, otherwise
known as land sale contracts, unless such contracts of sale are in
recordable form and appropriately recorded in the chain of title; (ii) we
shall not make or invest in mortgage loans, including construction loans,
on any one property if the aggregate amount of all mortgage loans
outstanding on the property, including our loans (and including all
interest (excluding contingent participation in income and/or appreciation
in value of the mortgaged property) the current payment of which may be
deferred pursuant to the terms of such loans, to the extent that deferred
interest on each loan exceeds 5% per annum of the principal balance of the
loan) would exceed an amount equal to 85% of the appraised value of the
property, as determined by appraisal, unless substantial justification
exists because of the presence of other underwriting criteria; and (iii)
we shall not make or invest in any mortgage loans that are subordinate to
any mortgage or equity interest of a member of our board of trustees or
his or heraffiliate. The policies outlined in (i) through (iii) above may
be exceeded or avoided for a particular transaction provided a
commercially reasonable justification exists and is approved by a majority
of the members of our board of trustees (including a majority of the
independent members of our board of trustees) not otherwise interested in
the transaction.
|
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|
IRET
Properties
|
IRET
|
||
|
Management
Control
|
|||
|
IRET,
Inc., as the sole general partner, has full, exclusive and complete
responsibility and discretion in the management and control of IRET
Properties. The limited partners have no authority in their capacity as
limited partners to transact business for, or participate in the
management activities or decisions of, IRET Properties except as is
otherwise required by applicable law.
|
Our
board of trustees has exclusive control over our business and affairs
subject only to the restrictions set forth in our Third Restated
Declaration of Trust or our Bylaws. Our board of trustees currently
consists of nine trustees. Such number may be increased or decreased from
time to time as determined by our board of trustees, but may not be less
than five or more than fifteen. Our trustees are elected annually at our
annual meeting of shareholders and serve for a term of one year or until
the election and qualification of his or her successor. Our Bylaws and the
ordinary business policies adopted by our board of trustees may be altered
or eliminated without a vote of the holders of our shares of beneficial
interest. Accordingly, except for holders of common shares who vote in the
election of our trustees, the holders of our shares of beneficial interest
have no control over our ordinary business policies.
|
||
|
Fiduciary
Duties
|
|||
|
IRET,
Inc., as the general partner, has fiduciary duties to the limited
partners. Before becoming a limited partner, each limited partner must
agree, however, that in the event of any conflict in the fiduciary duties
owed by us to our shareholders and by IRET, Inc., as the general partner
of IRET Properties, to the limited partners, IRET, Inc. will fulfill its
fiduciary duties to such limited partners by acting in the best interests
of our shareholders.
|
Our
Third Restated Declaration of Trust is silent regarding the fiduciary
relationship between our board of trustees and the holders of our shares
of beneficial interest; however, we believe that, pursuant to general
principles of law and equity, our board of trustees would be deemed to be
in a fiduciary relationship with the holders of our shares of beneficial
interest.
|
||
|
Management
Liability and Indemnification
|
|||
|
As
the general partner, IRET, Inc. has liability for the payment of the
obligations and debts of IRET Properties. Under the Agreement of Limited
Partnership of IRET Properties, IRET, Inc. will not be responsible for
losses sustained or liabilities incurred as a result of errors in judgment
or for any act or omission, if IRET, Inc. acted in good faith. The
Agreement of Limited Partnership of IRET Properties also provides for the
indemnification of us, IRET, Inc., the directors, trustees, officers and
employees of both us and IRET, Inc., and such other persons as IRET, Inc.
may designate from time to time in its sole discretion, against
liabilitiesrelating to the operations of IRET Properties unless it is
established that (i) the act or omission of the indemnitee was material to
the matter giving rise to the proceeding and either was committed in bad
faith or was the result of active and deliberate dishonesty; (ii) the
indemnitee actually received an improper personal benefit in money,
property or service; or (iii) in the case of
|
Our
Third Restated Declaration of Trust provides that we will indemnify
members of our board of trustees to the fullest extent permitted by law in
connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she was a member of our board of trustees or
is or was serving at our request as a director, trustee, officer, partner,
manager, member, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, limited liability company,
other enterprise or employee benefit plan, from all claims and liabilities
to which such person may become subject by reason of service in such
capacity, and further we will pay or reimburse reasonable expenses
(including without limitation attorneys’ fees), as such expenses are
incurred, of each member of our board of trustees in connection with any
such proceedings. Our Third Restated Declaration of Trust further provides
that we will indemnify each of our officers and employees, and will have
the power to indemnify each
|
||
|
IRET
Properties
|
IRET
|
||
|
any
criminal proceeding, the indemnitee had reasonable cause to believe that
the act or omission was unlawful.
|
of
our agents, to the fullest extent permitted by North Dakota law, as
amended from time to time, in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she was
our officer, employee or agent or is or was serving at our request as a
director, trustee, officer, partner, manager, member, employee or agent of
another foreign or domestic corporation, partnership, joint venture,
trust, limited liability company, other enterprise or employee benefit
plan, from all claims and liabilities to which such person may become
subject by reason of service in such capacity and will pay or reimburse
reasonable expenses, as such expenses are incurred, of each officer,
employee or agent in connection with any such proceedings. For purposes of
providing indemnification for members of our board of trustees, and all of
our officers, employees and agents, our Third Restated Declaration of
Trust provides that we will have the authority to enter into insurance or
other arrangements, with persons or entities that are regularly engaged in
the business of providing insurance coverage, to indemnify all of the
members of our board of trustees, and all of our officers, employees and
agents against any and all liabilities and expenses incurred by them by
reason of their being members of our board of trustees, or our officers,
employees or agents, whether or not we would otherwise have the power to
indemnify such persons against such liability. Without limiting our power
to procure or maintain any kind of insurance or other arrangement, our
Third Restated Declaration of Trust provides that we may, for the benefit
of persons indemnified by us, (i) create a trust fund, (ii) establish any
form of self-insurance, (iii) secure our indemnity obligation by grant of
any security interest or other lien on our assets, or (iv) establish a
letter of credit, guaranty or surety arrangement. Any such insurance or
other arrangement may be procured, maintained or established within us or
with any insurer or other person deemed appropriate by our board of
trustees regardless of whether all or part of the shares or other
securities thereof are owned in whole or in part by us. In the absence of
fraud, the judgment of the board of trustees as to the terms and
conditions of insurance or other arrangement and the identity of the
insurer or other person participating in any arrangement will be
conclusive, and such insurance or other arrangement will not be subject to
voidability, nor subject the members of our board of trustees approving
such insurance or other arrangement to liability, on any ground,
regardless of whether the members participating in and approving such
insurance or other arrangement will be beneficiaries thereof.
We
|
||
|
IRET
Properties
|
IRET
|
||
|
currently
maintain insurance covering members of the board and officers against
liability as a result of their actions or inactions on our
behalf.
|
|||
|
Voting
Rights
|
|||
|
All
decisions relating to the operation and management of the IRET Properties
are made by IRET, Inc., as the general partner.
|
We
are managed and controlled by our board of trustees, which currently
consists of eight members. Each member of our board of trustees is elected
annually at our annual meeting of shareholders and serves for a term of
one year or until the election and qualification of his or her
successor.
Subject
to the provisions of our Third Restated Declaration of Trust regarding the
restriction on the transfer of our common shares, our common shares have
non-cumulative voting rights at the rate of one vote per common share on
all matters submitted to the shareholders, including the election of
members of our board of trustees.
Our
Third Restated Declaration of Trust generally provides that whenever any
action is to be taken by the holders of our common shares, including the
amendment of our Third Restated Declaration of Trust if such amendment is
previously approved by our board of trustees, such action will be
authorized by a majority of the holders of our common shares present in
person or by proxy at a meeting at which a quorum is present, except as
otherwise required by law, our Third Restated Declaration of Trust or our
Bylaws. Our Third Restated Declaration of Trust further provides the
following: (i) that the following actions will be authorized by the
affirmative vote of the holders of our common shares holding common shares
possessing a majority of the voting power of our common shares then
outstanding and entitled to vote on such action:
· our
termination;
· our
merger with or into another entity;
· our
consolidation with one or more other entities into a new
entity;
· the
disposition of all or substantially all of our assets; and
· the
amendment of the Third Restated Declaration of Trust, if such amendment
has not been previously approved by our board of trustees; and (ii) that a
member of our board
|
||
|
IRET
Properties
|
IRET
|
||
|
of
trustees may be removed with or without cause by the holders of our common
shares by the affirmative vote of not less than two-thirds of our common
shares then outstanding and entitled to vote on such
matter.
|
|||
|
Amendment
of the Agreement of Limited Partnership of IRET Properties or
Third
Restated Declaration of Trust
|
|||
|
The
consent of IRET, Inc. is required for any amendment to the Agreement of
Limited Partnership of IRET Properties. IRET, Inc. may amend the Agreement
of Limited Partnership of IRET Properties without the consent of the
limited partners; provided, however, that the consent of the limited
partners holding more than 50% of the partnership interests (other than
IRET, Inc.) is required to make any amendment (i) affecting the redemption
right in a manner adverse to the limited partners; (ii) adversely
affecting the rights of the limited partners to receive distributions
payable to them; (iii) that would alter the allocation of profit and loss
to the limited partners; or (iv) that would impose on the limited partners
any obligation to make additional capital contributions.
|
Generally,
our Third Restated Declaration of Trust may be amended only by the
affirmative vote or written consent of holders of our shares of beneficial
interest holding shares possessing a majority of the voting power of
shares then outstanding and entitled to vote thereon.
Our
Third Restated Declaration of Trust also permits our board of trustees, by
a two-thirds vote and without any action by the holders of our shares of
beneficial interest entitled to vote thereon, to amend our Third Restated
Declaration of Trust from time to time as necessary to enable us to
continue to qualify as a real estate investment trust under the Internal
Revenue Code.
|
||
|
Compensation,
Fees and Distributions
|
|||
|
IRET,
Inc. does not receive any compensation for its services as general partner
of IRET Properties. IRET, Inc. has the same right to distributions as the
other partners of IRET Properties. IRET Properties pays all of our and
IRET, Inc.’s administrative costs and expenses and all of our expenses are
considered expenses of IRET Properties. Our expenses generally include:
(i) all expenses relating to the operation and continuity of our existence
and the existence of IRET, Inc.; (ii) all expenses relating to the public
offering and registration of securities by us; (iii) all expenses
associated with the preparation and filing of our periodic reports under
federal, state or local laws or regulations; (iv) all of the expenses of
us and IRET, Inc. associated with compliance with laws, rules and
regulations promulgated by any regulatory body; and (v) all other
operating or administrative costs of IRET, Inc. incurred in the ordinary
course of its business on behalf of IRET Properties.
|
Members
of our board of trustees who are not employed by us receive annual fees
and meeting fees for each board and committee meeting attended in person
or via conference call. Additionally, the chairperson and vice chairperson
of each board committee receives additional annual fees, and each member
of our audit committee receives an additional annual fee. Members of our
board of trustees who are employed by us do not receive any separate
compensation or other consideration, direct or indirect, for service as a
trustee but do receive compensation for their service as our
employee.
|
||
|
IRET
Properties
|
IRET
|
||
|
Liability
of Investors
|
|||
|
Under
the Agreement of Limited Partnership of IRET Properties, the limited
partners will only be liable to IRET Properties to make payments of their
capital contributions, if any, and no limited partner will be liable for
any debts, liabilities, contracts or obligations of IRET
Properties.
|
Our
Third Restated Declaration of Trust provides that holders of our shares of
beneficial interest shall not be personally or individually liable in any
manner whatsoever for any debt, act, omission or obligation incurred by us
or our board of trustees and shall be under no obligation to us or our
creditors with respect to their shares of beneficial interest other than
the obligation to pay to us the full amount of the consideration for which
the shares of beneficial interest were issued or to be issued. The holders
of our shares of beneficial interest shall not be liable to assessment and
our board of trustees shall have no power to bind the holders of our
shares of beneficial interest personally. We shall indemnify and hold each
holder of our shares of beneficial interest harmless from and against all
claims and liabilities, whether they proceed to judgment or are settled or
otherwise brought to a conclusion, to which such holder of our shares of
beneficial interest may become subject by reason of his or her being or
having been a holder of our shares of beneficial interest, and shall
reimburse such holder of our shares of beneficial interest for all legal
and other expenses reasonably incurred by him, her or it in connection
with any such claim or liability; provided, however, that such holder of
our shares of beneficial interest must give prompt notice as to any such
claims or liabilities or suits and must take such action as will permit us
to conduct the defense thereof.
The
rights accruing to a holder of our shares of beneficial interest under our
Third Restated Declaration of Trust shall not exclude any other right to
which such holder may be lawfully entitled, nor shall anything contained
herein restrict our right to indemnify or reimburse a holder in any
appropriate situation even though not specifically provided herein;
provided, however, that we shall have no liability to reimburse the
holders of our shares of beneficial interest for taxes assessed against
them by reason of their ownership of shares, nor for any losses suffered
by reason of changes in the market value of shares.
No
amendment to our Third Restated Declaration of Trust increasing or
enlarging the liability of the holders of our shares of beneficial
interest shall be made without the unanimous vote or written consent of
all of the holders.
|
||
|
Nature
of Investment
|
|||
|
The
LP Units constitute equity interests in IRET Properties. The Agreement of
Limited Partnership of IRET Properties provides that IRET Properties must
distribute cash from operations on a quarterly
|
Common
shares constitute equity interests in us. Each holder of common shares is
entitled to his, her or its pro rata share of any distributions paid with
respect to the common shares. Dividends payable to holders
of
|
||
|
IRET
Properties
|
IRET
|
||
|
basis,
in amounts determined by IRET, Inc., in its sole discretion, to the
partners in accordance with their respective percentage interests in IRET
Properties.
|
common
shares are not fixed in amount and are only paid if, when and as declared
by our board of trustees. Further, our Series A preferred shares have
preferential rights with respect to dividends. In order to continue to
qualify as a REIT, we must generally distribute at least 90% of our net
taxable income (excluding capital gains). Any taxable income(including
capital gains) not distributed will be subject to corporate income
tax.
|
||
|
Potential
Dilution of Rights
|
|||
|
IRET,
Inc., as the general partner, is authorized, in its sole and absolute
discretion and without the approval of any limited partner, to issue
additional LP Units to itself, us, any limited partner or any other person
for such consideration and on such terms and conditions as established by
IRET, Inc. The issuance of LP Units to IRET, Inc. or us is subject to
certain conditions. IRET, Inc. is also authorized to cause IRET Properties
to issue general partnership interests or LP Units for less than fair
market value if IRET, Inc. has concluded in good faith that such issuance
is in our best interests and in the best interests of IRET her or it in
connection with any such claim or liability; provided, however, that such
holder of our shares of beneficial interest must give prompt notice as to
any such claims or liabilities or suits and must take such action as will
permit us to conduct the defense thereof.
The
rights accruing to a holder of our shares of beneficial interest under our
Third Restated Declaration of Trust shall not exclude any other right to
which such holder may be lawfully entitled, nor shall anything contained
herein restrict our right to indemnify or reimburse a holder in any
appropriate situation even though not specifically provided herein;
provided, however, that we shall have no liability to reimburse the
holders of our shares of beneficial interest for taxes assessed against
them by reason of their ownership of shares, nor for any losses suffered
by reason of changes in the market value of shares.
No
amendment to our Third Restated Declaration of Trust increasing or
enlarging the liability of the holders of our shares of beneficial
interest shall be made without the unanimous vote or written consent of
all of the holders. Properties. IRET, Inc. is also authorized to issue
additional partnership interests in different series or classes, which may
have rights and preferences that are senior to the LP
Units.
|
Our
board of trustees may issue, in its discretion, an unlimited number of
shares of beneficial interest. The issuance of any additional shares of
beneficial interest may result in the dilution of the interests of the
current holders of our shares of beneficial interest.
|
||
|
|
|||
|
IRET
Properties
|
IRET
|
||
|
Liquidity
|
|||
|
With
certain limited exceptions, the limited partners may not transfer their LP
Units, in whole or in part, without the written consent of IRET, Inc.,
which consent may be withheld in the sole discretion of IRET, Inc. IRET,
Inc. may not consent to any transfer that would cause IRET Properties to
be treated as a corporation for federal income tax purposes. Each limited
partner has the right to redeem his, her or its LP Units for Shares,
subject to a minimum one-year holding period.
|
The
common shares covered by this prospectus will be freely transferable as
registered securities under the Securities Act of 1933. Our common shares
are listed on the NASDAQ Global Market under the symbol “IRET.” The
breadth and strength of this secondary market will depend, among other
things, upon the number of common shares outstanding, our financial
results and prospects, general interest in us and other real estate
investments and our dividend yield compared to that of other debt and
equity securities.
|
||
|
Federal
Income Taxation
|
|||
|
IRET
Properties is not subject to federal income taxes. Instead, each limited
partner includes its allocable share of taxable income or loss of IRET
Properties in determining its individual federal income tax liability. The
maximum federal income tax rate for individuals is currently
35%.
A
limited partner’s share of income and loss generated by IRET Properties
generally is subject to the “passive activity” limitations. Under the
“passive activity” rules, income and loss from IRET Properties that are
considered “passive income” generally can be offset against income and
loss from other investments that constitute “passive activities.” Cash
distributions from IRET Properties are not taxable to a limited partner
except to the extent such distributions exceed such limited partner’s
basis in his, her or its LP Units (which will include such limited
partner’s allocable share of IRET Properties’ taxable income and
nonrecourse debt.) Limited partners are required, in some cases, to file
state income tax returns and/or pay state income taxes in the states in
with IRET Properties owns property, even if they are not residents of
those states.
|
Since
our organization, we have operated in a manner intended to qualify as a
REIT. So long as we qualify as a REIT, we will not be taxed on that
portion of our taxable income that is distributed to our shareholders,
provided that at least 90% of our taxable income is distributed. To the
extent that there is undistributed taxable income or undistributed capital
gain income, we will be taxed as a domestic corporation at corporate
income tax rates. However, we may retain some or all of our net capital
gain without incurring double taxation. If we elect to do this, we are
taxed on the amount we designate as retained capital gain at the capital
gains rate generally applicable to corporations. Distributions made to our
shareholders out of current or accumulated earnings and profits will be
taxed to such shareholders as ordinary income. Distributions that are
designated as capital gain dividends will generally be taxed as long-term
capital gains to the extent they do not exceed our actual net capital gain
income for the taxable year. Distributions to a shareholder in excess of
current or accumulated earnings and profits will be treated as a
nontaxable return of capital to the extent that they do not exceed the
adjusted basis of a shareholder’s shares of beneficial interest. If
distributions in excess of current or accumulated earnings and profits
exceed the adjusted basis of a shareholder’s shares of beneficial
interest, the distributions will be included in the shareholder’s income
as long-term or short-term capital gain (assuming the shares of beneficial
interest are held as a capital asset in the hands of the
shareholder).
Shareholders
who are individuals generally will not be required to file state income
tax returns and/or pay state income taxes outside of their state of
residence with respect to our operations and distributions. We may be
required to pay state income taxes in certain
states.
|
||
MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS
This
section summarizes the current material federal income tax consequences to the
Company and to our shareholders generally resulting from the treatment of the
Company as a REIT. Because this section is a general summary, it does
not address all of the potential tax issues that may be relevant to you in light
of your particular circumstances. The discussion does not address all
aspects of taxation that may be relevant to particular investors in light of
their personal investment or tax circumstances, or to certain types of investors
that are subject to special treatment under the federal income tax laws, such as
insurance companies, tax-exempt organizations (except to the limited extent
discussed in “Treatment of Tax-Exempt Shareholders” below), financial
institutions or broker-dealers, non-U.S. individuals and foreign corporations
(except to the limited extent discussed in “Special Tax Considerations for
Non-U.S. Shareholders” below) and other persons subject to special tax rules. As
you review this discussion, you should also keep in mind that:
|
·
|
this
summary generally does not address alternative minimum tax, state, local or
non-U.S. tax considerations;
|
|
·
|
this
summary deals only with shareholders that hold our common shares as
“capital assets” within the meaning of Section 1221 of the Internal
Revenue Code; and
|
|
·
|
we
do not intend this discussion to be, and you should not construe it as,
tax advice.
|
You should review the following discussion and consult with your own tax advisor to
determine the tax consequences to you of the acquisition, ownership and
disposition of our common shares and of our election to be taxed as a REIT,
including the federal, state, local, foreign and other tax
consequences.
We base
the information in this discussion on the current Internal Revenue Code,
current, final, temporary and proposed
Treasury regulations, the legislative history of the Internal Revenue Code,
current administrative interpretations and practices of the Internal Revenue
Service (the “IRS”), including its practices and policies as endorsed in private
letter rulings, which are not binding on the IRS, and existing court decisions.
Future legislation, regulations, administrative interpretations and court
decisions could change current law or adversely affect existing interpretations
of current law. Any change could apply retroactively. It is possible that the
IRS could challenge the statements in this discussion, which do not bind the IRS
or the courts, and that a court could agree with the IRS.
Taxation of Investors Real Estate
Trust as a REIT
We
elected to be taxed as a REIT under the federal income tax laws commencing with
our taxable year ended April 30, 1971. We believe that, commencing with such
taxable year, we have been organized and have operated in such a manner as to
qualify for taxation as a REIT under the Internal Revenue Code, and we intend to
continue to be organized and to operate in such a manner. However, we cannot
assure you that we have operated or will operate in a manner so as to qualify or
remain qualified as a REIT. Qualification as a REIT depends on our continuing to
satisfy numerous asset, income, stock ownership and distribution tests described
below, the satisfaction of which depends, in part, on our operating results. The
sections of the Internal Revenue Code relating to qualification and operation as
a REIT, and the federal income taxation of a REIT and its shareholders, are
highly technical and complex. The following discussion sets forth only the
material aspects of those sections. This summary is qualified in its entirety by
the applicable Internal Revenue Code provisions and the related rules and
regulations.
Federal Income Taxation of Investors
Real Estate Trust
In the
opinion of Pringle & Herigstad, P.C., we qualified to be taxed as a REIT for
our taxable years ended April 30, 2001 through April 30, 2008, and our
organization and current and proposed method of operation will enable us to
continue to qualify as a REIT for our taxable year ending April 30, 2009 and in
the future. Investors should be aware that Pringle & Herigstad’s opinion is
based upon customary assumptions, is conditioned upon certain representations
made by us as to factual matters, including representations regarding the nature
of our properties and the future conduct of our business, and is not binding
upon the Internal Revenue Service or any court. In addition, Pringle &
Herigstad’s opinion is based on existing federal income tax law governing
qualification as a REIT, which is subject to change, possibly on a retroactive
basis. Moreover, our continued qualification and taxation
as a REIT
depend upon our ability to meet on a continuing basis, through actual annual
operating results, certain qualification tests set forth in the federal tax
laws. Those qualification tests involve the percentage of income that we earn
from specified sources, the percentage of our assets that falls within specified
categories, the diversity of our share ownership, and the percentage of our
earnings that we distribute. While Pringle & Herigstad has reviewed those
matters in connection with the foregoing opinion, Pringle & Herigstad will
not review our compliance with those tests on a continuing basis. Accordingly,
with respect to our current and future taxable
years, no assurance can be given that the actual results of our
operations for any particular taxable year will satisfy such requirements. For a
discussion of the tax consequences of our failure to qualify as a REIT, see
“-Failure to Qualify.”
If we
qualify as a REIT, we generally will not be subject to federal corporate income
tax on that portion of our ordinary income or capital gain that is timely
distributed to shareholders. The REIT provisions of the Internal Revenue Code
generally allow a REIT to deduct distributions paid to its shareholders,
substantially eliminating the federal “double taxation” on earnings (that is,
taxation at the corporate level when earned, and again at the shareholder level
when distributed) that usually results from investments in a corporation.
Nevertheless, we will be subject to federal income tax as follows:
First, we
will be taxed at regular corporate rates on our undistributed “REIT taxable
income,” including undistributed net capital gains.
Second,
under some circumstances, we may be subject to the “alternative minimum tax” as
a consequence of our items of tax preference,
including any deductions of net operating losses.
Third, if
we have net income from the sale or other disposition of “foreclosure property”
that we hold primarily for sale to customers in the ordinary course of business
or other non-qualifying income from foreclosure property, we will be subject to
tax at the highest corporate rate on such income.
Fourth,
if we have net income from “prohibited transactions” (which are, in general,
certain sales or other dispositions of property, other than foreclosure
property, held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax.
Fifth, if
we should fail to satisfy one or both of
the 75% gross income test or the 95% gross income test as described below under “—Requirements for
Qualification—Income Tests,” but have nonetheless maintained our
qualification as a REIT because we have met other requirements, we will be
subject to a 100% tax on the greater of (1)(a) the amount by which we fail the 75% gross income test or (b) the amount by which 90% (or 95%
commencing with taxable years beginning on or after January 1, 2005) of our
gross income exceeds the amount of our
income qualifying for the 95% gross
income test, multiplied in either case by
(2) a fraction intended to reflect our profitability.
Sixth, if
we fail any of the asset tests (other than a de minimis failure of the 5% asset
test or the 10% vote or value test) commencing
with taxable years beginning on or after January 1, 2005, as described below
under “— Requirements for Qualification — Asset Tests,” as long as (1) the
failure was due to reasonable cause and not to willful neglect, (2) we file a
description of each asset that caused such failure with the IRS, and (3) we
dispose of the assets or otherwise comply with the asset tests within six months
after the last day of the quarter in which we identify such failure, we will pay
a tax equal to the greater of $50,000 or 35% of the net income from the
nonqualifying assets during the period in which we failed to satisfy the asset
tests.
Seventh, if we fail to satisfy one or more requirements
for REIT qualification commencing with taxable years beginning on or after
January 1, 2005, other than the gross income tests and the asset tests, and such failure is due to reasonable cause and
not to willful neglect, we will be required to pay a penalty of $50,000
for each such failure.
Eighth, if we fail to distribute during each year
at least the sum of:
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85%
of our REIT ordinary income for such
year,
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95%
of our capital gain net income for such year,
and
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any
undistributed taxable income required to be
distributed from prior
periods,
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then we
will be subject to a 4% excise tax on the excess of this required distribution
amount over the amounts actually distributed.
Ninth, if we should acquire any asset from a “C”
corporation (i.e., a corporation generally subject to full corporate-level tax)
in a carryover-basis transaction and no election is made for the transaction to
be currently taxable, and we subsequently recognize gain on the disposition of
such asset during the 10-year period beginning on the date on which we acquired
the asset, we generally will be subject to tax at the highest regular corporate
rate applicable on the lesser of the amount
of gain that we recognize at the time of the sale or disposition and the amount
of gain that we would have recognized if we had sold the asset at the time we
acquired the asset, the “Built-in Gains Tax.”
Tenth, if we own taxable REIT subsidiaries, we
will be subject to a 100% excise tax on transactions with them that are not
conducted on an arm’s-length basis. Currently we do not own any direct or
indirect interests in taxable REIT subsidiaries.
Eleventh, we may elect to retain and pay income
tax on our net long-term capital gain. In that case, a U.S. shareholder would be
taxed on its proportionate share of our undistributed long-term capital gain (to
the extent that we make a timely designation of such gain to the shareholder)
and would receive a credit or refund for its proportionate share of the tax we
paid.
Twelfth, we may be required to pay monetary penalties to
the Internal Revenue Service in certain circumstances, including if we fail to
meet record-keeping requirements intended to monitor our compliance with rules
relating to the composition of a REIT’s shareholders, as described below in
“—Recordkeeping Requirements.”
Thirteenth, the earnings of our lower-tier entities, if
any, that are subchapter C corporations, including taxable REIT subsidiaries,
are subject to federal corporate income tax.
In addition, we may be subject to a variety of taxes,
including payroll taxes and state, local and foreign income, property and other
taxes on our assets and operations. We could also be subject to tax
in situations and on transactions not presently
contemplated.
Requirements for
Qualification
To
qualify as a REIT, we must elect to be treated as a REIT and must meet the
requirements, discussed below, relating to our organization, sources of income,
nature of assets and distributions.
The
Internal Revenue Code defines a REIT as a corporation, trust or
association:
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that
is managed by one or more trustees or
directors;
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the
beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial
interest;
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that
would be taxable as a domestic corporation but for application of the REIT
rules;
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that
is neither a financial institution nor an insurance company subject to
certain provisions of the Internal Revenue
Code;
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that
has at least 100 persons as beneficial owners (determined without reference to any rules of
attribution);
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during
the last half of each taxable year, not more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, through the
application of certain attribution rules, by five or fewer individuals (as
defined in the Internal Revenue Code to include certain
entities);
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which elects to be a REIT, or has made such
election for a previous taxable year, and
satisfies all relevant filing and other administrative requirements
established by the IRS that must be met to elect and maintain REIT
status;
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that
(unless the entity qualified as a REIT for any taxable year beginning on
or before October 4, 1976, which is the case with us) uses the calendar
year as its taxable year and complies with the recordkeeping requirements
of the federal income tax laws; and
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that
satisfies the income tests, the asset tests, and the distribution tests,
described below.
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The
Internal Revenue Code provides that REITs must satisfy all of the first
four, the eighth (if applicable) and the
ninth preceding requirements during the entire taxable year. REITs must
satisfy the fifth requirement 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.
For purposes of determining stock ownership under
the sixth requirement, an “individual” generally includes a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of a
trust permanently set aside or used for charitable purposes. An
“individual,” however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under the federal income tax laws, and
beneficiaries of such a trust will be treated as holding our stock in proportion
to their actuarial interests in the trust for purposes of the sixth requirement
above. We will be
treated as having met the sixth requirement if we comply with certain Treasury
Regulations for ascertaining the ownership of our securities for such year and if we did not know
(or after the exercise of reasonable diligence would not have known) that the
sixth condition was not satisfied for such year. Our Third Restated Declaration of Trust currently
includes restrictions regarding transfer of our securities that, among other
things, assist us in continuing to satisfy the fifth and sixth of these
requirements.
If a REIT
owns a corporate subsidiary that is a “qualified REIT subsidiary,” the separate
existence of that subsidiary from its parent REIT
will be disregarded for federal income tax purposes. Generally, a
qualified REIT subsidiary is a corporation, other than a taxable REIT
subsidiary, all of the capital stock of which is owned by the REIT. All assets,
liabilities and items of income, deduction and credit of the qualified REIT
subsidiary will be treated as assets, liabilities and items of income, deduction
and credit of the REIT itself for purposes of applying the requirements herein.
Our qualified REIT subsidiaries will not be subject to federal corporate income
taxation, although they may be subject to state and local taxation in some
states.
An unincorporated domestic entity, such as a partnership
or limited liability company that has a single owner, generally is not treated
as an entity separate from its parent for federal income tax
purposes. An unincorporated domestic entity with two or more owners
is generally treated as a partnership for federal income tax
purposes. In the case of a REIT that is a partner in a
partnership, the REIT is deemed to own its
proportionate share of the assets of the partnership and to earn its
proportionate share of the partnership’s gross
income for purposes of the applicable REIT qualification tests. The character of the
assets and gross income of the partnership retain the same character in the
hands of the REIT for purposes of the gross income and asset tests. Thus, our
proportionate share of the assets, liabilities and items of income of IRET
Properties, our operating partnership (including our operating partnership’s
share of the assets, liabilities and items of income with respect to any
partnership in which it holds an interest) is treated as our assets, liabilities
and items of income for purposes of applying the requirements described
herein. For purposes of the 10% value test (see
“—Asset Tests”), our proportionate share is based on our proportionate interest
in the equity interests and certain debt securities issued by the
partnership. For all of the other asset and income tests, our
proportionate share is based on our proportionate interest in the capital of the
partnership.
A REIT is
permitted to own up to 100% of the stock of one or more “taxable REIT
subsidiaries.” A taxable REIT subsidiary is a fully taxable corporation that may
earn income that would not be qualifying income if earned directly by the parent
REIT. However, a taxable REIT subsidiary may not
directly or indirectly operate or manage any hotels or health care facilities or
provide rights to any brand name under which any hotel or health care facility
is operated, unless such rights are provided to an “eligible independent
contractor” to operate or manage a hotel (or, with respect to taxable years
beginning after July 30, 2008, a health care facility) if such rights are held
by the taxable REIT subsidiary as a franchisee, licensee, or in a similar
capacity and such hotel (or, with respect to taxable years beginning after July
30, 2008, such health care facility) is either owned by the taxable REIT
subsidiary or leased to the taxable REIT subsidiary by its parent
REIT. A taxable REIT subsidiary will not be considered to operate or
manage a “qualified health care property” or a “qualified lodging facility”
solely because the taxable REIT subsidiary directly or indirectly possesses a
license, permit, or similar instrument enabling it to do so. Further,
a taxable REIT subsidiary will not be considered to operate or manage a
qualified health care property or qualified lodging facility located outside of
the United States, as long as an “eligible independent contractor” is
responsible for the daily supervision and direction of such individuals on
behalf of the taxable REIT subsidiary pursuant to a management agreement or
similar service contract. The subsidiary and the REIT must jointly elect
to treat the
subsidiary
as a taxable REIT subsidiary. A taxable REIT subsidiary will pay income tax at
regular corporate rates on any income that it earns. In addition, the taxable
REIT subsidiary rules limit the deductibility of interest paid or accrued by a
taxable REIT subsidiary to its parent REIT to assure that the taxable REIT
subsidiary is subject to an appropriate level of corporate taxation. Further,
the rules impose a 100% excise tax on transactions between a taxable REIT
subsidiary and its parent REIT or the REIT’s tenants that are not conducted on
an arm’s-length basis. Although we previously owned an interest in a taxable
REIT subsidiary, currently we do not own any direct or indirect interests in
taxable REIT subsidiaries. However, it is possible that
in the future we may engage in activities indirectly through one or more taxable
REIT subsidiaries to obtain the benefit of income or services that would
jeopardize our REIT status if we engaged in the activities
directly.
Income Tests. In
order to maintain qualification as a REIT, we must satisfy two gross income
requirements. First, we must derive, directly or indirectly, at least 75% of our
gross income (excluding gross income from prohibited transactions) for each
taxable year from investments relating to real property or mortgages on real
property, including “rents from real property,” gains on disposition of real
estate, dividends paid by another REIT and interest on obligations secured by
real property or on interests in real property, or from certain types of
temporary investments. Second, we must derive at least 95% of our gross income
(excluding gross income from prohibited transactions) for each taxable year from
any combination of income qualifying under the 75% test and dividends, interest,
and gain from the sale or disposition of stock or securities. For taxable years
beginning on or after January 1, 2005, income and
gain from “hedging transactions,” as defined below, that are clearly and timely identified as such will be excluded from both the numerator and the
denominator for purposes of the 95%
gross income test (but not the 75% gross income
test). Income and gain from “hedging transactions” entered into after July 30,
2008 that are clearly and timely identified as such will also be excluded from
both the numerator and the denominator for purposes of the 75% gross income
test. In addition, as discussed below, certain foreign currency gains
recognized after July 30, 2008 will be excluded from gross income for purposes
of one or both of the gross income tests. The following paragraphs
discuss the specific application of the gross income tests to
us.
Rents
that we receive from our real property 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 but can be based on a fixed percentage of gross receipts
or gross sales, provided that such percentage (a)
is fixed at the time the lease is entered into, (b) is not renegotiated during
the term of the lease in a manner that has the effect of basing percentage rent
on income or profits, and (c) conforms with normal business
practice.
Second,
“rents from real property” generally excludes any amount received directly or
indirectly from any tenant if we, or an owner of 10% of more of our outstanding
shares, directly or constructively, own 10% or more of such tenant taking into
consideration the applicable attribution rules, which we refer to as a “related
party tenant.” Under a pair of exceptions from the
related-party tenant rule for taxable REIT subsidiaries, rent that we receive
from a taxable REIT subsidiary will qualify as “rents from real property,” (i)
so long as (a) at least 90% of the leased space in the property in question is
leased to persons other than taxable REIT subsidiaries and related-party
tenants, (b) the amount paid by the taxable REIT subsidiary to rent space at the
property is substantially comparable to rents paid by other tenants of the
property for comparable space, and (c) the amount paid is not attributable to
increased rent as a result of a modification of a lease with a taxable REIT
subsidiary in which we own, directly or indirectly, more than 50% of the voting
power or value of the stock, or (ii) if we lease a “qualified lodging facility”
to a taxable REIT subsidiary and such facility is operated by an “eligible
independent contractor.” For taxable years beginning after July 30, 2008, rental
payments from a taxable REIT subsidiary will also qualify as “rents from real
property” if we lease a “qualified health care property” to a taxable REIT
subsidiary and such property is operated by an “eligible independent
contractor.” If in the future we receive rent from a taxable REIT
subsidiary, we will seek to comply with these exceptions.
Third,
“rents from real property” excludes rent attributable to personal property
except where such personal property is leased in connection with a lease of real
property and the rent attributable to such personal property is less than or
equal to 15% of the total rent received under the lease. The rent attributable
to personal property under a lease is the amount that bears the same ratio to
total rent under the lease for the taxable year as the average of the fair
market values of the leased personal property at the beginning and at the end of
the taxable year bears to the average of the aggregate fair market values of
both the real and personal property covered by the lease at the beginning and at
the end of such taxable year.
Finally,
amounts that are attributable to services furnished or rendered in connection
with the rental of real property, whether or not separately stated, will not
constitute “rents from real property” unless such services are customarily
provided in the geographic area. Customary services that are not considered to
be provided to a particular tenant (e.g., furnishing heat and light, the
cleaning of public entrances, and the collection of trash) can be provided
directly by us. Where, on the other hand, such services are provided primarily
for the convenience of the tenants or are provided to such tenants, such
services must be provided by an independent contractor from whom we do not
receive any income or a taxable REIT subsidiary. Non-customary services that are
not performed by an independent contractor or taxable REIT subsidiary in
accordance with the applicable requirements will result in impermissible tenant
service income to us to the extent of the income earned (or deemed earned) with
respect to such services. If the impermissible tenant service income exceeds 1%
of our total income from a property, all of the income from that property will
fail to qualify as rents from real property. If the total amount of
impermissible tenant services does not exceed 1% of our total income from the
property, the services will not cause the rent paid by tenants of the property
to fail to qualify as rents from real property, but the impermissible tenant
services income will not qualify as “rents from real property.”
We do not
currently charge and do not anticipate charging rent that is based in whole or
in part on the income or profits of any person (unless based on a fixed
percentage or percentages of receipts or sales, as is permitted). We also do not
anticipate either deriving rent attributable to personal property leased in
connection with real property that exceeds 15% of the total rents or receiving
rent from related party tenants.
Our operating partnership does provide some
services with respect to our properties. We believe that the services with
respect to our properties that are and will be provided directly are usually or
customarily rendered in connection with the rental of space for occupancy only
and are not otherwise considered rendered to particular tenants and, therefore,
that the provision of such services will not cause rents received with respect
to the properties to fail to qualify as rents from real property. Services with
respect to the properties that we believe may not be provided by us or the
operating partnership directly without jeopardizing the qualification of rent as
“rents from real property” are and will be performed by independent contractors
or taxable REIT subsidiaries.
We may,
directly or indirectly, receive fees for property management and brokerage and
leasing services provided with respect to some properties not owned entirely by
the operating partnership. These fees, to the extent paid with respect to the
portion of these properties not owned, directly or indirectly, by us, will not
qualify under the 75% gross income test or the 95% gross income test. The
operating partnership also may receive other types of income with respect to the
properties it owns that will not qualify for either of these tests. We believe,
however, that the aggregate amount of these fees and other non-qualifying income
in any taxable year will not cause us to exceed the limits on non-qualifying
income under either the 75% gross income test or the 95% gross income
test.
Tenants
may be required to pay, besides base rent, reimbursements for certain amounts we
are obligated to pay to third parties (such as a lessee’s proportionate share of
a property’s operational or capital expenses), penalties for nonpayment or late
payment of rent or additions to rent. These and other similar payments should
qualify as “rents from real property.” To the extent they do not, they should be
treated as interest that qualifies for the 95% gross income test.
A REIT will incur a 100% tax on the net income derived
from any sale or other disposition of property, other than foreclosure property,
that the REIT holds primarily for sale to customers in the ordinary course of a
trade or business. Whether a REIT holds an asset “primarily for sale to
customers in the ordinary course of a trade or business” depends, however, on
the facts and circumstances in effect from time to time, including those related
to a particular asset. A safe harbor to the characterization of the sale of
property by a REIT as a prohibited transaction and the 100% prohibited
transaction tax is available if the following requirements are
met:
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the REIT has held the property for not less than
four years (or, for sales made after July 30, 2008, two
years);
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the aggregate expenditures made by the REIT, or
any partner of the REIT, during the four-year period (or, for sales made
after July 30, 2008, two-year period) preceding the date of the sale that
are includable in the basis of the property do not exceed 30% of the
selling price of the
property;
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either
(1) during the year in question, the REIT did not make more than seven
sales of property, other than foreclosure property or sales to which
Section 1033 of the Internal Revenue Code applies, (2) the aggregate
adjusted bases of all such properties sold by the REIT during the year did
not exceed 10% of the aggregate bases of all of the assets of the REIT at
the beginning of the year or (3) for sales made after July 30, 2008, the
aggregate fair market value of all such properties sold by the REIT during
the year did not exceed 10% of the aggregate fair market value of all of
the assets of the REIT at the beginning of the
year;
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in the case of property not acquired through
foreclosure or lease termination, the REIT has held the property for at
least four years (or, for sales made after July 30, 2008, two years) for
the production of rental income;
and
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if the REIT has made more than seven sales of
non-foreclosure property during the taxable year, substantially all of the
marketing and development expenditures with respect to the property were
made through an independent contractor from whom the REIT derives no
income.
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We will attempt to comply with the terms of the
safe-harbor provisions in the federal income tax laws prescribing when an asset
sale will not be characterized as a prohibited transaction. We cannot assure
you, however, that we can comply with the safe-harbor provisions or that we will
avoid owning property that may be characterized as property held “primarily for
sale to customers in the ordinary course of a trade or business.” We may,
however, form or acquire a taxable REIT subsidiary to hold and dispose of those
properties we conclude may not fall within the safe-harbor
provisions.
We will
be subject to tax at the maximum corporate rate on any income from foreclosure
property, which includes certain foreign currency
gains and related deductions recognized subsequent to July 30, 2008,
other than income that otherwise would be qualifying income for purposes
of the 75% gross income test, less expenses directly connected with the
production of that income. However, gross income from foreclosure property will
qualify under the 75% and 95% gross income tests. “Foreclosure property” is any
real property, including interests in real property, and any personal property
incident to such real property (a) that is
acquired by a REIT as the result of such REIT having bid on the property at
foreclosure, or having otherwise reduced such property to ownership or
possession by agreement or process of law after actual or imminent default on a
lease of the property or on indebtedness secured by the property, (b) for which the related loan or leased property was
acquired by the REIT at a time when the default was not imminent or anticipated,
and (c) for which the REIT makes a proper election to treat the property
as foreclosure property.
A REIT
will not be considered to have foreclosed on a property where the REIT takes
control of the property as a mortgagee-in-possession and cannot receive any
profit or sustain any loss except as a creditor of the mortgagor. Property
generally ceases to be foreclosure property at the end of the third taxable year
following the taxable year in which the REIT acquired the property (or longer if
an extension is granted by the Secretary of the Treasury). This period (as
extended, if applicable) terminates, and foreclosure property ceases to be
foreclosure property on the first day:
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on
which a lease is entered into for the property that, by its terms, will
give rise to income that does not qualify for purposes of the 75% gross
income test, or any amount is received or accrued, directly or indirectly,
pursuant to a lease entered into on or after such day that will give rise
to income that does not qualify for purposes of the 75% gross income
test;
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on
which any construction takes place on the property, other than completion
of a building or, any other improvement, where more than 10% of the
construction was completed before default became imminent;
or
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which
is more than 90 days after the day on which the REIT acquired the property
and the property is used in a trade or business which is conducted by the
REIT, other than through an independent contractor from whom the REIT
itself does not derive or receive any
income.
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From time
to time, we may enter into hedging transactions with respect to our assets or
liabilities. Our hedging activities may include entering into interest rate
swaps, caps, and floors, options to purchase such items, and futures and forward
contracts. For taxable years beginning prior to January 1, 2005, any periodic
income or gain from the disposition of any financial instrument for these or
similar transactions to hedge indebtedness we incurred to acquire
or carry
“real estate assets” was qualifying income for purposes of the 95% gross income
test, but not the 75% gross income test. To the extent we hedged with other
types of financial instruments, or in other situations, it is not entirely clear
how the income from those transactions should have been treated for the gross
income tests. For taxable years beginning on or after January 1, 2005, income
and gain from “hedging transactions” will be excluded from gross income for
purposes of the 95% gross income test, but not the 75% gross income test. For hedging transactions entered into after July 30,
2008, income and gain from “hedging transactions” will be excluded from gross
income for purposes of both the 75% and 95% gross income tests. For those
taxable years, a “hedging transaction” means either (1) any transaction entered
into in the normal course of our trade or business primarily to manage the risk
of interest rate, price changes, or currency fluctuations with respect to
borrowings made or to be made, or ordinary obligations incurred or to be
incurred, to acquire or carry real estate assets or (2) for transactions entered into after July 30,
2008, any transaction entered into primarily to manage the risk of currency
fluctuations with respect to any item of income or gain that would be qualifying
income under the 75% or 95% gross income test (or any property which generates
such income or gain). We will be required to clearly identify any such
hedging transaction before the close of the day on which it was acquired,
originated, or entered into and to satisfy other identification requirements. We
intend to structure any hedging or similar transactions so as not to jeopardize
our status as a REIT.
The term
“interest” generally does not include any amount received or accrued, directly
or indirectly, if the determination of the amount depends in whole or in part on
the income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term “interest” solely because it is
based on a fixed percentage or percentages of receipts or sales. Furthermore, to
the extent that interest from a loan that is based on the profit or net cash
proceeds from the sale of the property securing the loan constitutes a “shared
appreciation provision,” income attributable to such participation feature will
be treated as gain from the sale of the secured property.
Certain foreign currency gains recognized after June 30,
2008 will be excluded from gross income for purposes of one or both of the gross
income tests. “Real estate foreign exchange gain” will be excluded
from gross income for purposes of the 75% gross income test. Real
estate foreign exchange gain generally includes foreign currency gain
attributable to any item of income or gain that is qualifying income for
purposes of the 75% gross income test, foreign currency gain attributable to the
acquisition or ownership of (or becoming or being the obligor under) obligations
secured by mortgages on real property or on interest in real property and
certain foreign currency gain attributable to certain “qualified business units”
of a REIT. “Passive foreign exchange gain” will be excluded from
gross income for purposes of the 95% gross income test. Passive
foreign exchange gain generally includes real estate foreign exchange gain as
described above, and also includes foreign currency gain attributable to any
item of income or gain that is qualifying income for purposes of the 95% gross
income test and foreign currency gain attributable to the acquisition or
ownership of (or becoming or being the obligor under) obligations secured by
mortgages on real property or on interest in real property. Because
passive foreign exchange gain includes real estate foreign exchange gain, real
estate foreign exchange gain is excluded from gross income for purposes of both
the 75% and 95% gross income test. These exclusions for real estate
foreign exchange gain and passive foreign exchange gain do not apply to any
certain foreign currency gain derived from dealing, or engaging in substantial
and regular trading, in securities. Such gain is treated as
nonqualifying income for purposes of both the 75% and 95% gross income
tests.
If we
fail to satisfy one or both of the 75% gross income
test or the 95% gross income test for any taxable year, we may nevertheless
qualify as a REIT for that year if we are eligible for relief under the Internal
Revenue Code. For taxable years beginning prior to January 1, 2005, the relief
provisions generally will be available if:
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our
failure to meet these tests was due to reasonable cause and not due to
willful neglect;
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we
file a disclosure schedule with the IRS after we determine that we have
not satisfied one of the gross income tests;
and
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any
incorrect information on the schedule is not due to fraud with intent to
evade tax.
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Commencing
with taxable years beginning on or after January 1, 2005, those relief
provisions will be available if:
· our
failure to meet these tests is due to reasonable cause and not to willful
neglect; and
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we
file a disclosure schedule with the IRS after we determine that we have
not satisfied one of the gross income tests in accordance with regulations
prescribed by the Secretary of the
Treasury.
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We cannot
predict whether in all
circumstances we would be entitled to the benefit of the relief provisions. For example, if we fail to satisfy
the gross income tests because non-qualifying income that we intentionally earn
exceeds the limits on such income, the IRS could conclude that our failure to
satisfy the tests was not due to reasonable cause. Even if this relief provision
applies, the Internal Revenue Code imposes a 100% tax with respect to a portion
of the non-qualifying income, as described above.
Asset Tests. At
the close of each quarter of our taxable year, we also must satisfy the following asset tests to maintain our qualification as a
REIT:
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At
least 75% of the value of our total assets must be represented by real
estate assets (including interests in real property (including leaseholds and options to acquire real
property and leaseholds), interests in
mortgages on real property, and stock in other REITs), cash and cash items
(including receivables), government securities and investments in stock or
debt instruments during the one year period following our receipt of new
capital that we raise through equity offerings or public offerings of debt
with at least a five-year-term.
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No
more than 25% of the value of our total assets may be represented by
securities of taxable REIT subsidiaries or
other assets that are not qualifying for purposes of the 75% asset
test.
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Except
for equity investments in REITs, partnerships, qualified REIT subsidiaries or
taxable REIT subsidiaries or other investments that qualify as “real estate
assets” for purposes of the 75% asset
test:
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the
value of any one issuer’s securities that we own may not exceed 5% of the
value of our total assets (the “5% asset
test”);
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we
may not own more than 10% of the voting
power or value of any one issuer’s
outstanding voting securities (the “10% vote
or value test”).
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No
more than 20% of our total assets (or, with
respect to taxable years beginning after July 30, 2008, 25% of the value
of our total assets) may be represented by securities of one of
more taxable REIT subsidiaries.
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Certain
types of securities are disregarded as securities for purposes of the 10% value
limitation discussed above, including (i) straight debt securities (including
straight debt that provides for certain contingent payments); (ii) any loan to
an individual or an estate; (iii) any rental agreement described in Section 467
of the Internal Revenue Code, other than with a “related person”; (iv) any
obligation to pay rents from real property; (v) certain securities issued by a
State or any political subdivision thereof, the District of Columbia, a foreign
government, or any political subdivision thereof, or the Commonwealth of Puerto
Rico; (vi) any security issued by a REIT; and (vii) any other arrangement that,
as determined by the Secretary of the Treasury, is excepted from the definition
of a security. In addition, (a) a REIT’s interest as a partner in a partnership
is not considered a “security” for purposes of applying the 10% value test to
securities issued by the partnership; (b) any debt instrument issued by a
partnership (other than straight debt or another excluded security) will not be
considered a security issued by the partnership if at least 75% of the
partnership’s gross income (excluding income from prohibited transactions) is
derived from sources that would qualify for the 75% REIT gross income test, and
(c) any debt instrument issued by a partnership (other than straight debt or
another excluded security) will not be considered a security issued by the
partnership to the extent of the REIT’s interest as a partner in the
partnership. For taxable years beginning after October 22, 2004, a special look-through rule applies for determining
a REIT’s share of securities held by a partnership in which the REIT holds an
interest for purposes of the 10% value test. Under that
look-through rule, our proportionate share of the assets of a partnership is our
proportionate interest in any securities issued by the partnership, without
regard to securities described in items (b) and (c) above.
We
believe that substantially all of our assets consist of (1) real properties, (2)
stock or debt investments that earn qualified temporary investment income, (3)
other qualified real estate assets, and (4) cash, cash items and
government
securities. We monitor the status of our assets for purposes of the various
asset tests, and manage our portfolio in order to comply with such
tests.
After
initially meeting the asset tests at the close of any quarter, we will not lose
our qualification 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 the failure to
satisfy the asset tests results from an acquisition of securities or other
property during a quarter, we can cure the failure by disposing of a sufficient
amount of non-qualifying assets within 30 days after the close of that quarter.
We intend to maintain adequate records of the value of our assets to ensure
compliance with the asset tests and to take such other actions within 30 days
after the close of any quarter as necessary to cure any
noncompliance.
Commencing
with taxable years beginning on or after January 1, 2005, after the 30-day cure
period, if a REIT violates the 5% asset test or
the 10% vote or value test described above, a REIT may avoid
disqualification as a REIT by disposing of sufficient assets to cure a violation
that does not exceed the lesser of 1% of the REIT’s assets at the end of the
relevant quarter or $10,000,000, provided that the disposition occurs within six
months following the last day of the quarter in which the REIT first identified
the assets causing the violation. In the
event of any other failure of the
asset tests for taxable years beginning on or
after January 1, 2005, a REIT may avoid disqualification as a REIT after
the 30-day cure period, if such failure was due to reasonable cause and not due
to willful neglect, by taking certain steps, including the disposition of
sufficient assets within the six month period described above to meet the
applicable asset test, paying a tax equal to the greater of $50,000 or the
highest corporate tax rate multiplied by the net income generated by the
non-qualifying assets during the period of time that the assets were held as
non-qualifying assets, and filing a schedule with the IRS that describes the
non-qualifying assets.
Annual Distribution
Requirements
To
qualify for taxation as a REIT, the Internal Revenue Code requires that we make
distributions (other than capital gain distributions and deemed distributions of retained capital
gain) to our shareholders in an amount at least equal to (a) the sum of:
(1) 90% of our “REIT taxable income” (computed without regard to the dividends
paid deduction and our net capital gain or loss), and (2) 90% of the net income,
if any, from foreclosure property in excess of the special tax on income from
foreclosure property, minus (b) the sum of certain items of non-cash
income.
Generally, we must pay distributions in the
taxable year to which they relate. Dividends paid in the subsequent calendar
year, however, will be treated as if paid in the prior calendar year for
purposes of the prior year’s distribution requirement if the dividends satisfy
one of the following two sets of criteria:
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We
declare the dividends in October, November or December, the dividends are
payable to shareholders of record on a specified date in such a month, and
we actually pay the dividends during January of the subsequent year;
or
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We
declare the dividends before we timely file our federal income tax return
for such year, we pay the dividends in the 12-month period following the
close of the prior year and not later than the first regular dividend
payment after the declaration, and we elect on our federal income tax
return for the prior year to have a specified amount of the subsequent
dividend treated as if paid in the prior
year.
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The distributions under the first bullet point above are
treated as received by shareholders on December 31 of the prior taxable year,
while the distributions under the second bullet point are taxable to
shareholders in the year paid.
Even if
we satisfy the foregoing distribution requirements, we will be subject to tax
thereon to the extent that we do not distribute all of our net capital gain or
“REIT taxable income” as adjusted. Furthermore, if we fail to distribute at
least the sum of 85% of our REIT ordinary
income for that year; 95% of our REIT
capital gain net income for that year; and any undistributed taxable
income from prior periods, we would be subject to a 4% non-deductible excise tax
on the excess of the required distribution over the amounts actually
distributed.
We may
elect to retain rather than distribute all or a portion of our net capital gains
and pay the tax on the gains. In that case, we may elect to have our
shareholders include their proportionate share of the undistributed net
capital
gains in
income as long-term capital gains and receive a credit for their share of the
tax we paid. For purposes of the 4% excise tax described, any such retained
amounts would be treated as having been distributed.
We intend
to make timely distributions sufficient to satisfy the annual distribution
requirements. We expect that our REIT taxable income will be less than our cash
flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, we anticipate that we generally will
have sufficient cash or liquid assets to enable us to satisfy the 90%
distribution requirement. It is possible, however, that we, from time to time,
may not have sufficient cash or other liquid assets to meet the 90% distribution
requirement or to distribute such greater amount as may be necessary to avoid
income and excise taxation. In this event, we may find it necessary to arrange
for borrowings or, if possible, pay taxable dividends in order to meet the
distribution requirement or avoid such income or excise taxation.
In the
event that we are subject to an adjustment to our REIT taxable income (as
defined in Section 860(d)(2) of the Internal Revenue Code) resulting from an
adverse determination by either a final court decision, a closing agreement
between us and the IRS under Section 7121 of the Internal Revenue Code, or an
agreement as to tax liability between us and an IRS district director, or, an
amendment or supplement to our federal income tax return for the applicable tax
year, we may be able to rectify any resulting failure to meet the 90% annual
distribution requirement by paying “deficiency dividends” to shareholders that
relate to the adjusted year but that are paid in a subsequent year. To qualify
as a deficiency dividend, we must make the distribution within 90 days of the
adverse determination and we also must satisfy other procedural requirements. If
we satisfy the statutory requirements of Section 860 of the Internal Revenue
Code, a deduction is allowed for any deficiency dividend we subsequently paid to
offset an increase in our REIT taxable income resulting from the adverse
determination. We, however, must pay statutory interest on the amount of any
deduction taken for deficiency dividends to compensate for the deferral of the
tax liability.
Recordkeeping
Requirements
We must
maintain certain records in order to qualify as a REIT. In addition, to avoid
paying a penalty, we must request on an annual basis information from our
shareholders designed to disclose the actual ownership of our outstanding
shares. We have complied and intend to continue to comply with these
requirements.
Failure To
Qualify
Commencing
with taxable years beginning on or after January 1, 2005, a violation of a REIT
qualification requirement other than the gross income tests or the asset tests
will not disqualify us if the violation is due to reasonable cause and not due
to willful neglect and we pay a penalty of $50,000 for each such violation. If
we fail to qualify for taxation as a REIT in any taxable year and the relief
provisions do not apply, we will be subject to tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates.
Distributions to shareholders in any year in which we fail to qualify as a REIT
will not be deductible by us nor will they be required to be made. In that
event, to the extent of our positive current and accumulated earnings and
profits, distributions to shareholders will be dividends, generally taxable to
non-corporate shareholders at long-term capital gains tax rates (through 2010, as described below) and, subject to
certain limitations of the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction. Unless we are entitled to relief
under specific statutory provisions, we also will be disqualified from taxation
as a REIT for the four taxable years following the year during which we lost our
REIT qualification. We cannot state whether in all circumstances we would be
entitled to such statutory relief. For example, if we fail to satisfy the gross
income tests because non-qualifying income that we intentionally earn exceeds
the limit on such income, the IRS could conclude that our failure to satisfy the
tests was not due to reasonable cause.
Taxation of U.S.
Shareholders
As used
in this prospectus, the term “U.S. Shareholder” means a holder of our securities
that, for federal income tax purposes:
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is
a citizen or resident of the United
States;
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is
a corporation (including an entity treated as a corporation for federal
income tax purposes) created or organized in or under the laws of the
United States or of any political subdivision
thereof;
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is
an estate, the income of which is subject to federal income taxation
regardless of its source;
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is
a trust and a court within the United States is able to exercise primary
supervision over the administration of the trust, and one or more United
States persons have the authority to control all substantial decisions of
the trust; or
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is
an eligible trust that elects to be taxed as a U.S. person under
applicable Treasury Regulations.
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If a partnership, entity, or arrangement treated as a
partnership for federal income tax purposes holds our securities, the federal
income tax treatment of a partner in the partnership will generally depend on
the status of the partner and the activities of the partnership. If
you are a partner in a partnership holding our securities, you should consult
your tax advisor regarding the consequences of the purchase, ownership, and
disposition of our securities by the partnership.
For any
taxable year for which we qualify for taxation as a REIT, amounts distributed to
taxable U.S. Shareholders will be taxed as discussed below.
Distributions
Generally. Distributions to taxable U.S. Shareholders, other than capital
gain dividends discussed below, will constitute dividends up to the amount of
our positive current and accumulated earnings and profits and, to that extent,
will constitute ordinary income to U.S. Shareholders. For purposes of determining whether a distribution is
made out of our current or accumulated earnings and profits, our earnings and
profits will be allocated first to our preferred share distributions and then to
our common share distributions.
These
distributions are not eligible for the dividends received deduction generally
available to corporations. Certain “qualified dividend income” received by U.S.
Shareholders in taxable years 2003 through 2010 is subject to tax at the same
tax rates as long-term capital gain (generally, a maximum rate of 15% for such
taxable years). Qualified dividend income
generally includes dividends paid to U.S. Shareholders taxed at individual rates
by domestic corporations and certain qualified foreign corporations.
Dividends received from REITs, however, generally do not constitute qualified dividend income, are
not eligible for these reduced rates and, therefore, will continue to be subject
to tax at higher ordinary income rates (generally, a maximum rate of 35% for
taxable years 2003 through 2010), subject
to two narrow exceptions. Under the first exception, dividends received from a
REIT may be treated as “qualified dividend income” eligible for the reduced tax
rates to the extent that the REIT itself has received qualified dividend income
from other corporations (such as taxable REIT subsidiaries). Under the second
exception, dividends paid by a REIT in a taxable year may be treated as
qualified dividend income in an amount equal to the sum of (i) the excess of the
REIT’s “REIT taxable income” for the preceding taxable year over the
corporate-level federal income tax payable by the REIT for such preceding
taxable year and (ii) the excess of the REIT’s income that was subject to the
Built-in Gains Tax in the preceding taxable year over the tax payable by the
REIT on such income for such preceding taxable year. We do not anticipate that a
material portion of our distributions will be treated as qualified dividend
income. In general, to qualify for the reduced tax
rate on qualified dividend income, a U.S. Shareholder must hold our securities
for more than 60 days during the 121-day period beginning on the date that is 60
days before the date on which our securities become
ex-dividend.
To the
extent that we make a distribution in excess of our positive current and
accumulated earnings and profits, the distribution will be treated first as a
tax-free return of capital, reducing the tax basis in the U.S. Shareholder’s
shares, and then the distribution in excess of such basis will be taxable to the
U.S. Shareholder as gain realized from the sale of its shares. Such gain will generally be treated as long-term capital
gain, or short-term capital gain if the securities have been held for less than
one year, assuming the securities are a capital asset in the hands of the U.S.
Shareholder. Dividends we declared in October, November or December of
any year payable to a U.S. Shareholder of record on a specified date in any such
month will be treated as both paid by us and received by the shareholders on
December 31 of that year, provided that we actually pay the dividends during
January of the following calendar year.
Capital Gain
Distributions. Distributions to U.S. Shareholders that we
properly designate as capital gain dividends will be treated as long-term
capital gains (to the extent they do not exceed our actual net capital gain)
for
the
taxable year without regard to the period for which the U.S. Shareholder has
held his or her shares. However, corporate U.S. shareholders may be required to
treat up to 20% of certain capital gain dividends as ordinary income. Capital
gain dividends are not eligible for the dividends received deduction for
corporations. If, for any taxable year, we elect
to designate as capital gain dividends any portion of the distributions paid for
the year to our shareholders, the portion of the amount so designated (not in
excess of our net capital gain for the year) that will be allocable to holders
of our preferred shares will be the amount so designated, multiplied by a
fraction, the numerator of which will be the total dividends (within the meaning
of the Internal Revenue Code) paid to holders of our preferred shares for the
year and the denominator of which will be the total dividends paid to holders of
all classes of our shares for the year.
We may
elect to retain and pay income tax on net long-term capital gain that we recognized during the tax year. In this instance,
U.S. Shareholders will include in their income their proportionate share of our
undistributed long-term capital gains. U.S. Shareholders will also be deemed to
have paid their proportionate share of the tax we paid, which would be credited
against such shareholders’ U.S. income tax liability (and refunded to the extent
it exceeds such liability). In addition, the basis of the U.S. Shareholders’
shares will be increased by the excess of the amount of capital gain included in
our income over the amount of tax it is deemed to have paid.
Any
capital gain with respect to capital assets held for more than one year that is
recognized or otherwise properly taken into account before January 1, 2011,
generally will be taxed to U.S. Shareholders taxed
at individual rates at a maximum rate of 15%. In the case of capital gain
attributable to the sale of real property held for more than one year, such gain
will be taxed at a maximum rate of 25% to the extent of the amount of
depreciation deductions previously claimed with respect to such property. With
respect to distributions we designated as capital gain dividends (including any
deemed distributions of retained capital gains), subject to certain limits, we
may designate, and will notify our shareholders, whether the dividend is taxable
to U.S. Shareholders taxed at individual
rates at regular long-term capital gains rates (currently at a minimum
rate of 15%) or at the 25% rate applicable to unrecaptured depreciation. Thus, the tax rate differential between capital gain and
ordinary income for non-corporate taxpayers may be significant. In
addition, the characterization of income as capital gain or ordinary income may
affect the deductibility of capital losses. A non-corporate taxpayer may deduct
capital losses not offset by capital gains against its ordinary income only up
to a maximum of $3,000 annually. A non-corporate taxpayer may carry unused
capital losses forward indefinitely. A corporate taxpayer must pay tax on its
net capital gain at corporate ordinary-income rates. A corporate taxpayer may
deduct capital losses only to the extent of capital gains, with unused losses
carried back three years and forward five years.
Passive Activity Loss and Investment
Interest Limitations. Distributions from us and gain from the
disposition of our shares will not be treated as passive activity income and,
therefore, U.S. Shareholders will not be able to apply any “passive activity
losses” against such income. Dividends from us (to the extent they do not
constitute a return of capital) generally will be treated as investment income
for purposes of the investment interest limitations. Net capital gain from the
disposition of our shares or capital gain dividends generally will be excluded
from investment income unless the U.S. Shareholder elects to have the gain taxed
at ordinary income rates. Shareholders are not allowed to include on their own
federal income tax returns any net
operating losses that we incur. Instead, these losses are generally
carried over by us for potential affect against future income.
Dispositions of Securities. In general, U.S.
Shareholders who are not dealers in securities will realize capital gain or loss
on the disposition of our securities equal
to the difference between the amount of cash and the fair market value of any
property received on the disposition and that shareholder’s adjusted basis in
the securities. The applicable tax rate
will depend on the U.S. Shareholder’s holding period in the asset (generally, if
the U.S. Shareholder has held the asset for more than one year, it will produce
long-term capital gain) and the shareholder’s tax bracket (the maximum long-term capital gain rate for U.S.
Shareholders taxed at individual rates currently being 15%).
The maximum tax rate on long-term capital gain from the sale
or exchange of “section 1250 property” (i.e., generally, depreciable real
property) is 25% to the extent the gain would have been treated as ordinary
income if the property were “section 1245 property” (i.e., generally,
depreciable personal property). In general, any loss recognized by a U.S.
Shareholder upon the sale or other disposition of securities that the U.S. shareholder has held for
six months or less, after applying the holding period rules, will be treated as
a long-term capital loss, to the extent of distributions received by the U.S.
Shareholder from us that were required to be treated as long-term capital
gains.
Redemptions of Preferred
Shares. A redemption of our
preferred shares will be treated under Section 302 of the Internal Revenue Code
as a distribution that is taxable as dividend income (to the extent of our
current or accumulated earnings and profits), unless the redemption satisfies
certain tests set forth in Section 302(b) of the Internal Revenue Code enabling
the redemption to be treated as a sale of our preferred shares (in which case
the redemption will be treated in the same manner as a sale described above in
“—Dispositions of Securities”). The redemption will satisfy such tests if it (i)
is “substantially disproportionate” with respect to the holder's interest in our
shares of beneficial interest, (ii) results in a “complete termination” of the
holder’s interest in all our classes of
beneficial interest, or (iii) is “not essentially equivalent to a dividend” with
respect to the holder, all within the meaning of Section 302(b) of the Internal
Revenue Code. In determining whether any of these tests have been
met, shares considered to be owned by the holder by reason of certain
constructive ownership rules set forth in the Internal Revenue Code, as well as
shares actually owned, generally must be taken into account. Because
the determination as to whether any of the three alternative tests of Section
302(b) of the Internal Revenue Code
described above will be satisfied with respect to any particular holder of our
preferred shares depends upon the facts and circumstances at the time that the
determination must be made, prospective investors are urged to consult their tax
advisors to determine such tax treatment.
If a redemption of our preferred shares does not meet
any of the three tests described above, the redemption proceeds will be treated as a distribution,
as described above. In that case, a shareholder's adjusted tax basis
in the redeemed preferred shares will be transferred to such shareholder's
remaining share holdings in us. If the shareholder does not retain any of our
shares, such basis could be transferred to a related person that holds our
shares or it may be lost.
Treatment of Tax-Exempt
Shareholders. Tax-exempt entities,
including qualified employee pension and profit sharing trusts and individual
retirement accounts and annuities, generally are exempt from federal income
taxation. However, they are subject to taxation on their “unrelated business
taxable income” (“UBTI”). While many investments in real estate
generate unrelated business taxable income, the Internal Revenue Service has
issued a ruling that dividend distributions from a REIT to an exempt employee
pension trust do not constitute unrelated business taxable income so long as the
exempt employee pension trust does not otherwise use the shares of the REIT in
an unrelated trade or business of the pension trust. Based on that ruling,
distributions from us to tax-exempt shareholders generally will not
constitute UBTI, unless the shareholder has
borrowed to acquire or carry its shares or has used the securities in an unrelated trade or
business.
However,
for tax-exempt shareholders that are 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 us will constitute UBTI unless the organization properly
sets aside or reserves such amounts for purposes specified in the Internal
Revenue Code. These tax-exempt shareholders should consult their own tax
advisors concerning these “set aside” and reserve requirements.
Qualified
trusts that hold more than 10% (by value) of the shares of “pension-held REITs”
may be required to treat a certain percentage of such a REIT’s distributions as
UBTI. A REIT is a “pension-held REIT” only if the REIT would not qualify as a
REIT for federal income tax purposes but for the application of a “look-through”
exception to the five or fewer requirement applicable to shares held by
qualified trusts and the REIT is “predominantly held” by qualified trusts. A
REIT is predominantly held if either (1) at least one qualified trust holds more
than 25% by value of the REIT’s shares or
(2) a group of qualified trusts, each
owning more than 10% by value of the REIT’s
shares, holds in the aggregate more than 50% of the REIT’s shares. The percentage of any REIT dividend
treated as UBTI is equal to the ratio of (a) the UBTI earned by the REIT
(treating the REIT as if it were a qualified trust and therefore subject to tax
on UBTI) to (b) the total gross income (less certain associated expenses) of the
REIT. In the event that this ratio is less than 5% for any year, then the
qualified trust will not be treated as having received UBTI as a result of the
REIT dividend. For these purposes, a qualified trust is any trust described in
Section 401(a) of the Internal Revenue Code and exempt from tax under Section
501(a) of the Internal Revenue Code.
Special Tax Considerations For
Non-U.S. Shareholders
A
“non-U.S. Shareholder” is a shareholder that is not a U.S. Shareholder or a partnership (or entity treated as a partnership
for federal income tax purposes). The rules governing the federal income
taxation of nonresident alien
individuals, foreign corporations, foreign partnerships,
and other foreign shareholders are complex. This section is only a summary of
such rules. We urge non-U.S. Shareholders to consult their own tax advisors to
determine the impact of federal, foreign, state, and local income tax laws on
the purchase, ownership, and disposition of our securities, including any
reporting requirements.
In
general, non-U.S. Shareholders will be subject to federal income tax at
graduated rates with respect to their investment in us if the income from the
investment is “effectively connected” with the non-U.S. Shareholder’s conduct of
a trade or business in the United States in the same manner that U.S.
shareholders are taxed. A corporate non-U.S. Shareholder that receives income
that is (or is treated as) effectively connected with a U.S. trade or business
also may be subject to the branch profits tax under Section 884 of the Internal
Revenue Code, which is imposed in addition to regular federal income tax at the
rate of 30%, subject to reduction under a tax treaty, if applicable. Effectively
connected income that meets various certification requirements will generally be
exempt from withholding. The following discussion will apply to non-U.S.
Shareholders whose income from their investments in us is not so effectively
connected (except to the extent that the “FIRPTA” rules discussed below treat
such income as effectively connected income).
Distributions
by us that are not attributable to gain from the sale or exchange by us of a
“United States real property interest” (a
“USRPI”), as defined below, and that we do not
designate as a capital gain distribution will be treated as an ordinary income
dividend to the extent that we pay the distribution out of our current or
accumulated earnings and profits. Generally, any ordinary income dividend will
be subject to a federal income tax, required to be withheld by us, equal to 30%
of the gross amount of the dividend, unless an applicable tax treaty reduces
this tax. Such a distribution in excess of our earnings and profits will be
treated first as a return of capital that will reduce a non-U.S. Shareholder’s
basis in its shares (but not below zero) and then as gain from the disposition
of such securities, the tax treatment of
which is described under the rules discussed below with respect to dispositions
of securities. Because we generally cannot
determine at the time we make a distribution whether the distribution will
exceed our current and accumulated earnings and profits, we normally will
withhold tax on the entire amount of any distribution at the same rate as we
would withhold on a dividend. However, a non-U.S. Shareholder may obtain a
refund of amounts we withhold if we later determine that a distribution in fact
exceeded our current and accumulated earnings and profits.
For any year in which we qualify as a REIT, a non-U.S.
Shareholder may incur tax on distributions that are attributable to gain from
our sale or exchange of a USRPI under the Foreign Investment in Real Property
Tax Act of 1980 (“FIRPTA”). The term USRPI includes certain interests
in real property and stock in corporations at least 50% of whose assets consist
of interests in real property. Under the FIRPTA rules, a non-U.S.
Shareholder is taxed on distributions attributable to gain from sales of USRPIs
as if such gain were effectively connected with a U.S. business of the non-U.S.
Shareholder. A non-U.S. Shareholder thus would be taxed on such a
distribution at the normal capital gains rates applicable to U.S. Shareholders,
subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of a nonresident alien individual. A corporate non-U.S.
Shareholder not entitled to treaty relief or exemption also may be subject to
the 30% branch profits tax on such a distribution. Unless the exception
described in the next paragraph applies, we must withhold 35% of any
distribution that we could designate as a capital gain dividend. A
non-U.S. Shareholder may receive a credit against its tax liability for the
amount we withhold.
Distributions
by us with respect to our securities that
are attributable to gain from the sale or exchange of a USRPI will be treated as ordinary dividends
(taxed as described above) to a non-U.S. Shareholder rather than as gain from the sale of a USRPI as
long as (1) the applicable class of shares
are “regularly traded” on an established securities market in the United States
and (2) the non-U.S. Shareholder did not
own more than 5% of such class of shares at
any time during the one-year period preceding the date of the distribution. Capital gain dividends
distributed to a non-U.S. Shareholder that held more than 5% of the applicable class of shares in the year
preceding the distribution, or to all non-U.S. Shareholders in the event that
the applicable class of shares ceases to be regularly traded
on an established securities market in the United
States, will be taxed under FIRPTA as
described in the preceding paragraph. Moreover, if a non-U.S. Shareholder
disposes of our shares during the 30-day period preceding a dividend payment,
and such non-U.S. Shareholder (or a person related to such non-U.S. Shareholder)
acquires or enters into a contract or option to acquire our shares within 61
days of the 1st day of the 30-day period described above, and any portion of
such dividend payment would, but for the disposition, be treated as a USRPI capital
gain
to such
non-U.S. Shareholder, then such non-U.S. Shareholder shall be treated as having
USRPI capital gain in an amount that, but
for the disposition, would have been treated as USRPI capital gain.
Although
the law is not clear on this matter, it appears that amounts designated by us as
undistributed capital gains in respect of our shares generally should be treated
with respect to non-U.S. Shareholders in the same manner as actual distributions
by us of capital gain dividends.
Although
tax treaties may reduce our withholding obligations, we generally will be
required to withhold from distributions to non-U.S. Shareholders, and remit to
the IRS, 30% of ordinary dividends paid out of earnings and profits. Special
withholding rules apply to capital gain dividends that are not recharacterized
as ordinary dividends. In addition, we may be required to withhold 10% of
distributions in excess of our current and accumulated earnings and profits.
Consequently, although we intend to withhold at a
rate of 30% on the entire amount of any distribution, to the extent we do not do
so, we may withhold at a rate of 10% on any portion of a distribution not
subject to a withholding rate of 30%. If the amount of tax withheld by us
with respect to a distribution to a non-U.S. Shareholder exceeds the
shareholder’s U.S. tax liability, the non-U.S. Shareholder may file for a refund
of such excess from the IRS.
We expect
to withhold federal income tax at the rate of 30% on all distributions
(including distributions that later may be determined to have been in excess of
current and accumulated earnings and profits) made to a non-U.S. Shareholder
unless:
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a
lower treaty rate applies and the non-U.S. Shareholder files with us an
IRS Form W-8BEN evidencing eligibility for that reduced treaty
rate;
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the
non-U.S. Shareholder files with us an IRS Form W-8ECI claiming that the
distribution is income effectively connected with the non-U.S.
Shareholder’s trade or business so that no withholding tax is required;
or
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the
distributions are treated for FIRPTA withholding tax purposes as
attributable to a sale of a USRPI, in
which case tax will be withheld at a 35%
rate.
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Unless
our securities constitute a USRPI within the meaning of FIRPTA, a sale of our
shares by a non-U.S. Shareholder generally will not be subject to federal income
taxation. Our securities will not constitute a
USRPI if we are a
“domestically controlled qualified investment entity.” A REIT is a domestically
controlled qualified investment entity if at all times during a specified
testing period less than 50% in value of its shares is held directly or
indirectly by non-U.S. Shareholders. We believe that we are a domestically
controlled qualified investment entity and, therefore, that the sale of our
securities will not be subject to taxation
under FIRPTA. However, because our common
shares and Series A preferred shares are publicly
traded, we cannot assure you that we are or will be a domestically controlled
qualified investment entity at all times in the
future. If we were not a domestically controlled qualified investment
entity, a non-U.S. Shareholder’s sale of our securities would be a taxable sale of a USRPI unless the shares were “regularly traded”
on an established securities market (such as NASDAQ) and the selling shareholder
owned, actually or constructively, no more
than 5% of the shares of the applicable class throughout the
applicable testing period. If the gain on the sale of securities were subject to taxation under FIRPTA,
the non-U.S. Shareholder would be subject to the same treatment as a U.S.
Shareholder with respect to the gain (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). However, even if our securities are not a USRPI, a nonresident alien individual’s gains
from the sale of securities will be taxable
if the nonresident alien individual is present in the United States for 183 days
or more during the taxable year and certain other conditions apply, in which
case the nonresident alien individual will be subject to a 30% tax on his or her
U.S. source capital gains.
A
purchaser of our securities from a non-U.S.
Shareholder will not be required to withhold under FIRPTA on the purchase price
if the purchased securities are “regularly
traded” on an established securities market or if we are a domestically
controlled qualified investment entity. Otherwise, the purchaser of our shares
from a non-U.S. Shareholder may be required to withhold 10% of the purchase
price and remit this amount to the IRS. Our shares currently are traded on the
NASDAQ. We believe that our common shares and
Series A preferred shares qualify as “regularly traded” and that we are
a domestically controlled qualified investment entity but we cannot
provide any assurance to that effect.
Upon the
death of a nonresident alien individual, that individual’s ownership of our
shares will be treated as part of his or her U.S. estate for purposes of the
U.S. estate tax, except as may be otherwise provided in an applicable estate tax
treaty.
Information
Reporting Requirements and Backup Withholding Tax
U.S.
Shareholders. In general, information reporting requirements
will apply to payments of distributions on our securities and payments of the proceeds of the
sale of our securities, unless an exception
applies. Further, a payee may be subject to backup withholding at a rate of up
to 28% if:
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the
payee fails to furnish a taxpayer identification number to the payer or to
establish an exemption from backup
withholding;
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the
IRS notifies the payer that the taxpayer identification number furnished
by the payee is incorrect;
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a
notified payee has been under-reporting with respect to interest,
dividends or original issue discount described in Section 3406(c) of the
Internal Revenue Code; or
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the
payee has failed to certify under the penalty of perjury that the payee is
not subject to backup withholding under the Internal Revenue
Code.
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Some
shareholders, including corporations, will be exempt from backup withholding.
Any amounts withheld under the backup withholding rules from a payment to a
shareholder will be allowed as a credit against the shareholder’s federal income
tax and may entitle the shareholder to a refund, provided that the shareholder
furnishes the required information to the IRS. A
U.S. Shareholder who does not provide us with its correct tax identification
number may be subject to penalties imposed by the IRS.
Non-U.S.
Shareholders. Generally, information reporting will apply to
payments of distributions on our securities, and backup withholding may apply,
unless the payee certifies that it is not a U.S. person or otherwise establishes
an exemption.
The
payment of the proceeds from the disposition of our securities to or through the U.S. office of a
U.S. or foreign broker will be subject to information reporting and, possibly,
backup withholding unless the non-U.S. Shareholder certifies as to its non-U.S.
status or otherwise establishes an exemption, provided that the broker does not
have actual knowledge that the shareholder is a U.S. person or that the
conditions of any other exemption are not, in fact, satisfied. The proceeds of
the disposition by a non-U.S. Shareholder of our securities to or through a foreign office of a
broker generally will not be subject to information reporting or backup
withholding. However, if the broker is a U.S. person, a controlled foreign
corporation for U.S. tax purposes or a foreign person 50% or more whose gross
income from all sources for specified periods is from activities that are
effectively connected with a U.S. trade or business, information reporting
generally will apply unless the broker has documentary evidence as to the
non-U.S. Shareholder’s foreign status and has no actual knowledge to the
contrary.
Applicable
Treasury regulations provide presumptions regarding the status of shareholders
when payments to the shareholders cannot be reliably associated with appropriate
documentation provided to the payer. Because the application of
these Treasury
regulations varies depending on the shareholder’s particular
circumstances, you
should consult your tax advisor regarding the information reporting
requirements applicable
to you.
Other Tax
Consequences
Tax Aspects of Our Investments in
the Operating Partnership. The following discussion summarizes
certain material federal income tax
considerations applicable to our direct or indirect investment in our operating
partnership and any subsidiary partnerships or limited liability companies we
form or acquire that are treated as partnerships for federal income tax
purposes, each individually referred to as a “Partnership” and, collectively, as
“Partnerships.” The following discussion does not cover state or local tax laws
or any federal tax laws other than income tax laws.
Classification as
Partnerships. We are entitled to include in our income our
distributive share of each Partnership’s income and to deduct our distributive
share of each Partnership’s losses only if such Partnership is
classified
for federal income tax purposes as a partnership (or an entity that is
disregarded for federal income tax purposes if the entity has only one owner or
member), rather than as a corporation or an association taxable as a
corporation. An organization with at least two owners or members will be
classified as a partnership, rather than as a corporation, for federal income
tax purposes if it:
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is
treated as a partnership under the Treasury regulations relating to entity
classification (the “check-the-box regulations”);
and
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is
not a “publicly traded”
partnership.
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Under the
check-the-box regulations, an unincorporated entity with at least two owners or
members may elect to be classified either as an association taxable as a
corporation or as a partnership. If such an entity does not make an election, it
generally will be treated as a partnership for federal income tax purposes. We
intend that each Partnership will be classified as a partnership for federal
income tax purposes (or else a disregarded entity where there are not at least
two separate beneficial owners).
A
publicly traded partnership is a partnership whose interests are traded on an
established securities market or are readily tradable on a secondary market (or
a substantial equivalent). A publicly traded partnership is generally treated as
a corporation for federal income tax purposes, but will not be so treated if,
for each taxable year beginning after December 31, 1987 in which it was
classified as a publicly traded partnership, at least 90% of the partnership’s
gross income consisted of specified passive income, including real property
rents (which includes rents that would be qualifying income for purposes of the
75% gross income test, with certain modifications that make it easier for the
rents to qualify for the 90% passive income exception), gains from the sale or
other disposition of real property, interest, and dividends (the “90% passive
income exception”).
Treasury
regulations, referred to as PTP regulations, provide limited safe harbors from
treatment as a publicly traded partnership. Pursuant to one of those safe
harbors (the “private placement exclusion”), interests in a partnership will not
be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (1) all interests in the partnership were issued in a
transaction or transactions that were not required to be registered under the
Securities Act of 1933, as amended, and (2) the partnership does not have more
than 100 partners at any time during the partnership’s taxable year. For the
determination of the number of partners in a partnership, a person owning an
interest in a partnership, grantor trust, or S corporation that owns an interest
in the partnership is treated as a partner in the partnership only if (1)
substantially all of the value of the owner’s interest in the entity is
attributable to the entity’s direct or indirect interest in the partnership and
(2) a principal purpose of the use of the entity is to permit the partnership to
satisfy the 100-partner limitation. Each Partnership (excluding the operating
partnership, which has more than 100 partners) should qualify for the private
placement exclusion.
The
operating partnership does not qualify for the private placement exclusion.
While units of the operating partnership are not and will not be traded on an
established securities market, and while the exchange rights of limited partners
of the operating partnership are restricted by the agreement of limited
partnership in ways that we believe, taking into account all of the facts and
circumstances, prevent the limited partners from being able to buy, sell or
exchange their limited partnership interests in a manner such that the limited
partnership interests would be considered “readily tradable on a secondary
market or the substantial equivalent thereof” under the PTP regulations, no
complete assurance can be provided that the IRS will not successfully assert
that the operating partnership is a publicly traded partnership.
As noted
above, a publicly traded partnership will be treated as a corporation for
federal income tax purposes unless at least 90% of such partnership’s gross
income for each taxable year in which the partnership is a publicly traded
partnership consists of “qualifying income” under Section 7704 of the Code.
“Qualifying income” under Section 7704 of the Code includes interest, dividends,
real property rents, gains from the disposition of real property, and certain
income or gains from the exploitation of natural resources. In addition,
qualifying income under Section 7704 of the Code generally includes any income
that is qualifying income for purposes of the 95% gross income test applicable
to REITs. We believe the operating partnership has satisfied the 90% qualifying
income test under Section 7704 of the Code in each year since its formation and
will continue to satisfy that exception in the future. Thus, the operating
partnership has not and will not be taxed as a corporation.
There is
one significant difference, however, regarding rent received from related party
tenants. For a REIT, rent from a tenant does not qualify as rents from real
property if the REIT and/or one or more actual or constructive owners of 10% or
more of the REIT actually or constructively own 10% or more of the tenant. Under
Section 7704 of the Code, rent from a tenant is not qualifying income if a
partnership and/or one or more actual or constructive owners of 5% or more of
the partnership actually or constructively own 10% or more of the
tenant.
Accordingly,
we will need to monitor compliance with both the REIT rules and the publicly
traded partnership rules. The operating partnership has not requested, nor does
it intend to request, a ruling from the IRS that it will be treated as a
partnership for federal income tax purposes. In the opinion of Pringle &
Herigstad, which is based on the provisions of the limited partnership agreement
of the operating partnership and on certain factual assumptions and
representations made by us, the operating partnership has since its formation
and will continue to be taxed as a partnership rather than a corporation.
Pringle & Herigstad’s opinion is not binding on the IRS or the
courts.
We have
not requested, and do not intend to request, a ruling from the Internal Revenue
Service that the Partnerships will be classified as partnerships (or disregarded
entities, if the entity has only one owner or member) for federal income tax
purposes. If for any reason a Partnership were taxable as a corporation, rather
than as a partnership, for federal income tax purposes, we would not be able to
qualify as a REIT. See “–Requirements for Qualification – Income Tests” and
“–Requirements for Qualification – Asset Tests.” In addition, any change in a
Partnership’s status for tax purposes might be treated as a taxable event, in
which case we might incur tax liability without any related cash distribution.
See “–Annual Distribution Requirements.” Further, items of income and deduction
of such Partnership would not pass through to its partners, and its partners
would be treated as shareholders for tax purposes. Consequently, such
Partnership would be required to pay income tax at corporate rates on its net
income, and distributions to its partners would constitute dividends that would
not be deductible in computing such Partnership’s taxable income.
Income Taxation of the Partnerships
and Their Partners
Partners, Not the Partnerships,
Subject to Tax. A partnership is not a taxable entity for
federal income tax purposes. We will therefore take into account our allocable
share of each Partnership’s income, gains, losses, deductions, and credits for
each taxable year of the Partnership ending with or within our taxable year,
even if we receive no distribution from the Partnership for that year or a
distribution less than our share of taxable income. Similarly, even if we
receive a distribution, it may not be taxable if the distribution does not
exceed our adjusted tax basis in our interest in the Partnership.
Partnership
Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, allocations will
be disregarded for tax purposes if they do not comply with the provisions of the
federal income tax laws governing partnership allocations. 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. Each Partnership’s allocations of taxable income, gain,
and loss are intended to comply with the requirements of the federal income tax
laws governing partnership allocations.
Tax Allocations With Respect to
Contributed Properties. Income, gain, loss, and deduction
attributable to (a) appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership or (b) property
revalued on the books of a 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,
referred to as “built-in gain” or “built-in loss,” is generally equal to the
difference between the fair market value of the contributed or revalued property
at the time of contribution or revaluation and the adjusted tax basis of such
property at that time, referred to as 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 U.S.
Treasury Department has issued regulations requiring partnerships to use a
“reasonable method” for allocating items with respect to which there is a
book-tax difference and outlining several reasonable allocation methods. Unless
we as general partner select a different method, our operating partnership will
use the traditional method for allocating items with respect to which there is a
book-tax difference.
Basis in Partnership
Interest. Our adjusted tax basis in any partnership interest
we own generally will be:
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the
amount of cash and the basis of any other property we contribute to the
partnership;
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increased
by our allocable share of the partnership’s income (including tax-exempt
income) and our allocable share of indebtedness of the partnership;
and
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reduced,
but not below zero, by our allocable share of the partnership’s loss, the
amount of cash and the basis of property distributed to us, and
constructive distributions resulting from a reduction in our share of
indebtedness of the partnership.
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Loss
allocated to us in excess of our basis in a partnership interest will not be
taken into account until we again have basis sufficient to absorb the loss. A
reduction of our share of partnership indebtedness will be treated as a
constructive cash distribution to us, and will reduce our adjusted tax basis.
Distributions, including constructive distributions, in excess of the basis of
our partnership interest will constitute taxable income to us. Such
distributions and constructive distributions normally will be characterized as
long-term capital gain.
Depreciation Deductions Available to
Partnerships. The initial tax basis of property is the amount
of cash and the basis of property given as consideration for the property. A
partnership in which we are a partner generally will depreciate property for
federal income tax purposes under the alternative depreciation system of
depreciation, referred to as ADS. Under ADS, the partnership generally will
depreciate (1) furnishings and equipment over a nine year recovery period using
a straight line method and a mid-month convention, (2) buildings and
improvements over a 40-year recovery period using a straight line method and a
mid-month convention, and (3) land improvements such as landscaping and parking
lots over a 20-year recovery period using a straight line method. The
partnership’s initial basis in properties acquired in exchange for units of the
partnership should be the same as the transferor’s basis in such properties on
the date of acquisition. Although the law is not entirely clear, the partnership
generally will depreciate such property for federal income tax purposes over the
same remaining useful lives and under the same methods used by the transferors.
The partnership’s tax depreciation deductions will be allocated among the
partners in accordance with their respective interests in the partnership,
except to the extent that the partnership is required under the federal income
tax laws governing partnership allocations to use a method for allocating tax
depreciation deductions attributable to contributed or revalued properties that
results in our receiving a disproportionate share of such
deductions.
Sale of a Partnership’s
Property. Generally, any gain realized by a Partnership on the
sale of property held for more than one year will be long-term capital gain,
except for any portion of the gain treated as depreciation or cost recovery
recapture. Any gain or loss recognized by a Partnership on the disposition of
contributed or revalued properties will be allocated first to the partners who
contributed the properties or who were partners at the time of revaluation, to
the extent of their built-in gain or loss on those properties for federal income
tax purposes. The partners’ built-in gain or loss on contributed or revalued
properties is the difference between the partners’ proportionate share of the
book value of those properties and the partners’ tax basis allocable to those
properties at the time of the contribution or revaluation. Any remaining gain or
loss recognized by the Partnership on the disposition of contributed or revalued
properties, and any gain or loss recognized by the Partnership on the
disposition of other properties, will be allocated among the partners in
accordance with their percentage interests in the Partnership.
Our share
of any Partnership gain from the sale of inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership’s
trade or business will be treated as income from a prohibited transaction
subject to a 100% tax. Income from a prohibited transaction may have an adverse
effect on our ability to satisfy the gross income tests for REIT status. See
“–Requirements for Qualification – Income Tests.” We do not presently intend to
acquire or hold, or to allow any Partnership to acquire or hold, any property
that is likely to be treated as inventory or property held primarily for sale to
customers in the ordinary course of our, or the Partnership’s, trade or
business.
State
and Local Tax
We and
our shareholders may be subject to state and local tax in various states and
localities, including those in which we or they transact business, own property
or reside. The tax treatment of us and our shareholders in such
jurisdictions
may differ from the federal income tax treatment described above. Consequently,
prospective shareholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in our securities.
The
validity of the common shares offered by this prospectus, the federal and state
tax aspects of the organization and operation of the Company and IRET Properties
and other legal matters will be passed upon for us by Pringle & Herigstad,
P.C., Minot, North Dakota.
The
consolidated financial statements and the related financial statement schedules
incorporated in this Prospectus by reference from the Company’s Annual Report on
Form 10-K, and the effectiveness of the Company’s internal control over
financial reporting, have been audited by Deloitte & Touche LLP,
an independent registered public accounting firm, as stated in their reports,
which are incorporated herein by reference. Such consolidated
financial statements and financial statement schedules have been so incorporated
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
We file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy any document
we file at the Securities and Exchange Commission’s Public Reference Section at
100 F Street, N.E., Room 1580, Washington, D.C., 20549, and in New York, New
York and Chicago, Illinois. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the Public Reference Section. You
also may obtain copies of the documents at prescribed rates by writing to the
Public Reference Section of the Securities Exchange Commission. Our Securities
and Exchange Commission filings are also available to the public at the
Securities and Exchange Commission’s web site at http://www.sec.gov and our web
site at http://www.iret.com. Information on our website does not constitute part
of this prospectus.
We have
filed with the Securities and Exchange Commission a Registration Statement on
Form S-3, of which this prospectus is a part, under the Securities Act of 1933
with respect to our common shares of beneficial interest. As permitted by the
rules and regulations of the Securities and Exchange Commission, this prospectus
does not contain all the information you can find in the Registration Statement
or the exhibits to the Registration Statement.
Statements
contained in this prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
about us and our securities, you should refer to the Registration Statement and
such exhibits and schedules, which may be obtained from the Securities and
Exchange Commission at its principal office in Washington, D.C., upon payment of
the fees prescribed by the Securities and Exchange Commission, and at the
Securities and Exchange Commission’s website.
The
documents listed below have been filed by us under the Securities Exchange Act
of 1934 with the Securities and Exchange Commission and are incorporated by
reference in this prospectus:
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our
Annual Report on Form 10-K for the fiscal year ended April 30,
2008;
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our
Quarterly Report on Form 10-Q for the quarter ended July 31, 2008
;
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our
Current Report on Form 8-K filed with the SEC on May 20,
2008;
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the
description of our common shares of beneficial interest contained in our
Registration Statement on Form 10 (File No. 0-14851), dated July 29, 1986,
as amended by the Amended Registration Statement on Form 10, dated
December 17, 1986, and the Second Amended Registration Statement on Form
10, dated March 12, 1987; and
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The
description of our Series A Cumulative Redeemable Preferred Shares of
Beneficial Interest contained in our registration statement on Form 8-A,
dated April 21, 2004 and filed with the Securities and Exchange Commission
on April 22, 2004.
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We also
incorporate by reference into this prospectus all documents that we file with
the Securities and Exchange Commission pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 following the date of this
prospectus and prior to the termination of the sale of our securities offered by
this prospectus, except for those deemed to be furnished, not
filed.
This
means that important information about us appears or will appear in these
documents and will be regarded as appearing in this prospectus. To the extent
that information appearing in a document filed later is inconsistent with prior
information, the later statement will control and the prior information, except
as modified or superseded, will no longer be a part of this
prospectus.
We will
provide copies of all documents that are incorporated by reference into this
prospectus and any applicable prospectus supplement (not including the exhibits
other than exhibits that are specifically incorporated by reference) without
charge to each person who so requests in writing or by calling us at the
following address and telephone number:
Investors
Real Estate Trust
12 Main
Street South
Minot, ND
58701
Attn:
Shareholder Relations
Telephone:
(701) 837-4738
Facsimile:
(701) 838-7785
Certain
statements included in this prospectus and the documents incorporated into this
prospectus by reference are “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements include statements about
our intention to invest in properties that we believe will increase in income
and value; our belief that the real estate markets in which we invest will
continue to perform well; our belief that we have the liquidity and capital
resources necessary to meet our known obligations and to make additional real
estate acquisitions and capital improvements when appropriate to enhance long
term growth; and other statements preceded by, followed by or otherwise
including words such as “believe,” “expect,” “intend,” “project,” “anticipate,”
“potential,” “may,” “designed,” “estimate,” “should,” “continue” and other
similar expressions. These statements indicate that we have used assumptions
that are subject to a number of risks and uncertainties that could cause our
actual results or performance to differ materially from those
projected.
Although
we believe that the expectations reflected in forward-looking statements are
based on reasonable assumptions, we can give no assurance that these
expectations will prove to have been correct. Important factors that could cause
our actual results to differ materially from the expectations reflected in our
forward-looking statements include:
|
·
|
the
economic health of the markets in which we own and operate multi-family
and commercial properties, in particular the states of Minnesota and North
Dakota, or other markets in which we may invest in the
future;
|
|
·
|
the
economic health of our commercial
tenants;
|
|
·
|
market
rental conditions, including occupancy levels and rental rates, for
multi-family residential and commercial
properties.
|
|
·
|
our
ability to identify and secure additional multi-family residential and
commercial properties that meet our criteria for
investment;
|
|
·
|
the
level and volatility of prevailing market interest rates and the pricing
of our securities;
|
|
·
|
financing
risks, such as our inability to obtain debt or equity financing on
favorable terms, or at all; and
|
|
·
|
compliance
with applicable laws, including those concerning the environment and
access by persons with
disabilities.
|
In light
of these uncertainties, the events anticipated by our forward-looking statements
might not occur and we caution you not to place undue reliance on any of our
forward-looking statements. We undertake no obligation to update or revise our
forward-looking statements, whether as a result of new information, future
events or otherwise, and those statements speak only as of the date made. The
foregoing review of factors that could cause our actual results to differ
materially from those contemplated in any forward-looking statements should not
be construed as exhaustive.
5,886,949
Common
Shares of Beneficial Interest
________________
PROSPECTUS
________________
PART
II
INFORMATION
NOT REQUIRED TO BE IN PROSPECTUS
Item
14. Other Expenses
of Issuance and Distribution
The
following table sets forth the various expenses incurred by the Company in
connection with the issuance and registration of the common shares being
registered pursuant to this Registration Statement on Form S-3. All
of the amounts shown are estimates, except for the Securities and Exchange
Commission registration fee.
|
Securities
and Exchange Commission
Fee
|
$ | 2,526.42 | ||
|
NASDAQ
Listing
Fee
|
$ | 7,500 | * | |
|
Legal
Fees and
Expenses
|
$ | 2,000 | * | |
|
Accounting
Fees and
Expenses
|
$ | 5,000 | * | |
|
TOTAL
|
$ | 17,026.42 |
*
Estimate
Item
15. Indemnification
of Directors and Officers
Limitation of
Liability and Indemnification. Our Third
Restated Declaration of Trust provides that we will indemnify members of our
board of trustees to the fullest extent permitted by law in connection with any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she
was a member of our board of trustees or is or was serving at our request as a
director, trustee, officer, partner, manager, member, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
limited liability company, other enterprise or employee benefit plan, from all
claims and liabilities to which such person may become subject by reason of
service in such capacity, and further we will pay or reimburse reasonable
expenses (including without limitation attorneys’ fees), as such expenses are
incurred, of each member of our board of trustees in connection with any such
proceedings.
Our Third
Restated Declaration of Trust further provides that we will indemnify each of
our officers and employees, and will have the power to indemnify each of our
agents, to the fullest extent permitted by North Dakota law, as amended from
time to time, in connection with any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she was our officer, employee or agent or is or
was serving at our request as a director, trustee, officer, partner, manager,
member, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, limited liability company, other enterprise
or employee benefit plan, from all claims and liabilities to which such person
may become subject by reason of service in such capacity and will pay or
reimburse reasonable expenses, as such expenses are incurred, of each officer,
employee or agent in connection with any such proceedings.
For
purposes of providing indemnification for members of our board of trustees, and
all of our officers, employees and agents, our Third Restated Declaration of
Trust provides that we will have the authority to enter into insurance or other
arrangements, with persons or entities that are regularly engaged in the
business of providing insurance coverage, to indemnify all of the members of our
board of trustees, and all of our officers, employees and agents against any and
all liabilities and expenses incurred by them by reason of their being members
of our board of trustees, or our officers, employees or agents, whether or not
we would otherwise have the power to indemnify such persons against such
liability. Without limiting our power to procure or maintain any kind
of insurance or other arrangement, our Third Restated Declaration of Trust
provides that we may, for the benefit of persons indemnified by us,
(i) create a trust fund, (ii) establish any form of self-insurance,
(iii) secure our indemnity obligation by grant of any security interest or
other lien on our assets, or (iv) establish a letter of credit, guaranty or
surety arrangement. Any such insurance or other arrangement may be
procured, maintained or established within us or with any insurer or other
person deemed appropriate by our board of trustees regardless of whether all or
part of the shares or other securities thereof are owned in whole or in part by
us. In the absence of fraud, the judgment of the board of trustees as
to the terms and conditions of insurance or other arrangement and the identity
of the insurer or other person participating in any arrangement will be
conclusive, and such insurance or other arrangement will not be subject to
voidability, nor subject the members of our board of trustees approving such
insurance or other arrangement to liability, on any ground, regardless of
whether the members participating in and approving such
II -
2
insurance
or other arrangement will be beneficiaries thereof. We currently
maintain insurance covering members of the board and officers against liability
as a result of their actions or inactions on our behalf.
With the
exception of indemnification and insurance provisions set forth above, there is
currently no other statute, charter provision, bylaw, contract or other
arrangement under which a member of our board of trustees or an employee is
insured or indemnified in any manner against liability that he or she may incur
in his or her capacity as a member of our board of trustees or as an
employee.
Item
16. Exhibits
|
Exhibit
Number
|
Description
|
|
3.1
|
Articles
of Amendment and Third Restated Declaration of Trust of Investors Real
Estate Trust.(1)
|
|
3.2
|
Articles
Supplementary to the Articles of Amendment and Third Restated Declaration
of Trust of IRET classifying and designating IRET’s 8.25% Series A
Cumulative Redeemable Preferred Shares of Beneficial Interest.(2)
|
|
3.3
|
Third
Restated Trustees’ Regulations (Bylaws).(3)
|
|
3.4
|
Agreement
of Limited Partnership of IRET Properties, dated January 31, 1997.(4)
|
|
5
|
Opinion
of Pringle & Herigstad, P.C.*
|
|
8
|
Opinion
of Pringle & Herigstad, P.C.*
|
|
23.1
|
Consent
of Deloitte & Touche LLP, Independent Registered Public Accounting
Firm*
|
|
23.2
|
Consent
of Pringle & Herigstad, P.C.*
|
|
24
|
Power
of Attorney (included on signature
page)
|
__________
|
*
|
Filed
herewith.
|
|
(1)
|
Incorporated
herein by reference to the Company’s Current Report on Form 8-K, filed
with the SEC on September 19, 2007.
|
|
(2)
|
Incorporated
herein by reference to Exhibit 3.2 of the Company’s Form 8-A,
filed with the Securities and Exchange Commission on April 22,
2004.
|
|
(3)
|
Incorporated
herein by reference to the Company’s Current Report on Form 8-K, filed
with the SEC on May 16, 2007.
|
|
(4)
|
Incorporated
herein by reference to the Company’s Registration Statement on Form S-11
(File No. 333-21945), filed with the Securities and Exchange Commission on
February 18, 1997.
|
Item
17. Undertakings
(a) 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
the volume of securities offered (if the total dollar value of the securities
offered would not exceed that which was registered) and any deviation of from
the low or high end of the estimated maximum offering range may be reflected in
the form of the prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective registration
statement.
II -
3
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
provided,
however, that paragraphs (a)(1)(i)(ii)and (iii) do not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement, or is contained in a
form of prospectus filed pursuant to Rule 424(b) that is part of the
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 securities offered therein, 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.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(i) Each
prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be
deemed to be part of the registration statement as of the date the filed
prospectus was deemed part of and included in the registration statement;
and
(ii) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or
(b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or
(x) for the purpose of providing the information required by section 10(a)
of the Securities Act of 1933 shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of prospectus is
first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in
Rule 430B, for liability purposes of the issuer and any person that is at
that date an underwriter, such date shall be deemed to be a new effective date
of the registration statement relating to the securities in the registration
statement to which that prospectus relates, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Provided, however, that
no statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date.
(5) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the securities: The
undersigned registrant undertakes that in a primary offering of securities of
the registrant pursuant to this registration statement, regardless of the
underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
|
(i)
|
Any
preliminary prospectus or prospectus of the registrant relating to the
offering required to be filed pursuant to Rule
424;
|
|
|
(ii)
|
Any
free writing prospectus relating to the offering prepared by or on behalf
of the undersigned registrant or used or referred to by the
registrant;
|
II -
4
|
|
(iii)
|
The
portion of any other free writing prospectus relating to the offering
containing material information about an undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
|
|
|
(iv)
|
Any
other communication that is an offer in the offering made by the
registrant to the purchaser.
|
(b) The
registrant hereby undertakes that, for 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 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan’s annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) 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 foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 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 the Act and will
be governed by the final adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, 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
Minot, State of North Dakota, on this 27th day of August, 2008.
|
INVESTORS
REAL ESTATE TRUST
|
|
|
By:
|
/s/
Thomas A. Wentz, Sr.
|
|
Thomas
A. Wentz, Sr.
|
|
|
Its:
|
President
and Chief Executive Officer
|
II -
5
POWER
OF ATTORNEY
KNOW ALL
BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Thomas A. Wentz, Sr. his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him or her and in
his or her name, place and stead, in any and all capacities, to sign any and all
amendments to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
and Power of Attorney have been signed by the following persons in the
capacities and on the date indicated below.
|
Signature
|
Title
|
Date
|
|
/S/ Jeffrey L.
Miller
Jeffrey
L. Miller
|
Trustee
and Chairman
|
August
27, 2008
|
|
/S/ Charles W.
Morgan
Charles
W. Morgan
|
Trustee
|
August
27, 2008
|
|
/S/ Patrick G.
Jones
Patrick
G. Jones
|
Trustee
|
August
27, 2008
|
|
/S/ Stephen L. Stenehjem
Stephen
L. Stenehjem
|
Trustee
|
August
27, 2008
|
|
/S/ John D.
Stewart
John
D. Stewart
|
Trustee
|
August
27, 2008
|
|
/S/ W. David
Scott
W.
David Scott
|
Trustee
|
August
27, 2008
|
|
/S/ Thomas A. Wentz,
Jr.
Thomas
A. Wentz, Jr.
|
Trustee,
Senior Vice President—
Asset
Management and Finance
|
August
27, 2008
|
|
/S/ Timothy P.
Mihalick
Timothy
P. Mihalick
|
Trustee,
Senior Vice President and
Chief
Operating Officer
|
August
27, 2008
|
|
/S/ Thomas A. Wentz, Sr.
Thomas
A. Wentz, Sr.
|
President
and
Chief
Executive Officer
(Principal
Executive Officer)
|
August
27, 2008
|
|
/S/ Diane K.
Bryantt
Diane
K. Bryantt
|
Senior
Vice President and
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
August
27, 2008
|
II -
6
INVESTORS
REAL ESTATE TRUST
Form
S-3 Registration Statement
INDEX
TO EXHIBITS FILED HEREWITH
|
Exhibit
Number
|
Description
|
|
5
|
Opinion
of Pringle & Herigstad, P.C.
|
|
8
|
Opinion
of Pringle & Herigstad, P.C.
|
|
23.1
|
Consent
of Deloitte & Touche LLP
|
|
23.2
|
Consent
of Pringle & Herigstad,
P.C.
|