e424b5
Filed
Pursuant to Rule 424(b)(5)
Registration
No. 333-147856
Prospectus Supplement
(To Prospectus dated
December 19, 2007)
$25,000,000
Common
Stock
On November 4, 2009, we entered into an Open Market Sale
Agreement with Jefferies & Company, Inc. relating to
the shares of our common stock, par value, $0.001 per share,
offered by this prospectus supplement and the accompanying
prospectus.
In accordance with the terms of the Open Market Sale Agreement,
we may offer and sell shares of our common stock from time to
time through Jefferies & Company, Inc. as our sales
agent. Sales of such shares, if any, will be made by means of
ordinary brokers transactions on the Nasdaq Global Market
at market prices, in privately negotiated transactions, crosses
or block transactions and such other transactions as may be
agreed between us and Jefferies & Company, Inc.,
including a combination of any of these transactions. Under the
terms of the Open Market Sale Agreement, we also may sell shares
to Jefferies & Company, Inc. as a principal for its
own account at a price agreed upon at the time of sale.
Our common stock is listed on the Nasdaq Global Market under the
symbol GOOD. On November 3, 2009, the last
reported sale price of our common stock on the Nasdaq Global
Market was $12.79 per share.
Please carefully read and consider the information described
under Risk Factors on
page S-3
of this prospectus supplement, under Risk Factors in
the accompanying prospectus on page 3 and under
Item 1A. Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2008 before making an
investment decision.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Jefferies & Company, Inc. will receive from us a
commission of 2% of the gross proceeds of any shares sold
through it pursuant to this prospectus supplement.
Jefferies & Company, Inc. will use its commercially
reasonable efforts to place on our behalf any shares to be
offered by us under the Open Market Sale Agreement.
Jefferies &
Company
The date of this prospectus supplement is November 4, 2009
Table of
Contents
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Page
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Prospectus Supplement
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ii
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ii
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S-1
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S-3
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S-4
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S-5
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S-5
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S-6
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S-7
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S-8
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S-9
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S-10
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S-10
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S-10
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S-11
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Prospectus
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Prospectus Summary
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1
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Recent Developments
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2
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About This Prospectus
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2
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Risk Factors
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3
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Forward-Looking Statements
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13
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Incorporation by Reference
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14
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Where You Can Find More Information
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15
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Use of Proceeds
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Ration of Earnings to Fixed Charges and Preferred Dividends
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15
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Description of Our Capital Stock
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16
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Certain Provisions of Maryland Law and of Our Articles of
Incorporation and Bylaws
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20
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Certain United States Federal Tax Considerations
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23
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Plan of Distribution
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39
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Experts
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40
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Legal Matters
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40
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You should rely only on the information contained in or
incorporated by reference into this prospectus supplement and
accompanying prospectus or in any free writing prospectus that
we may provide you. If the description of the offering varies
between this prospectus supplement and the accompanying
prospectus, you should rely on the information in this
prospectus supplement. Neither we nor Jefferies &
Company, Inc. have authorized anyone to provide you with
information different from that contained in this prospectus. If
anyone provides you with different or inconsistent information,
you should not rely on it. We are offering to sell, and seeking
offers to buy, shares of our common stock only in jurisdictions
where offers and sales are permitted. You should assume that the
information contained in or incorporated by reference into this
prospectus supplement and the accompanying prospectus is
accurate only as of the date on the front cover of this
prospectus supplement, the accompanying prospectus or the date
of the document incorporated by reference, as applicable. Our
business, financial condition, results of operations and
prospects may have changed since those dates.
i
About This
Prospectus Supplement
This document is presented in two parts. The first part is this
prospectus supplement, which describes the specific terms of
this offering and other information concerning Gladstone
Commercial Corporation. The second part is the accompanying
prospectus, which provides more general information concerning
our company and the securities we may offer from time to time.
We may also authorize one or more free writing
prospectuses (i.e., written communications concerning the
offering that are not part of this prospectus supplement) that
may contain material information relating to the offering.
Some of the information in the accompanying prospectus does not
apply to this offering. To the extent that any statement made in
this prospectus supplement conflicts with statements made in the
accompanying prospectus, the statements made in this prospectus
supplement will be deemed to modify or supersede those made in
the accompanying prospectus.
You should rely only on the information contained or
incorporated by reference in this prospectus supplement, the
accompanying prospectus and any free writing prospectus prepared
by or on behalf of us. We have not, and Jefferies &
Company, Inc. has not, authorized any other person to provide
you with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are not, and Jefferies & Company, Inc. is not,
making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted.
The rules of the Securities and Exchange Commission, or SEC,
allow us to incorporate by reference certain information into
this prospectus supplement and into the accompanying prospectus.
You should read this prospectus supplement, any related free
writing prospectus that we may authorize and the accompanying
prospectus, including the documents incorporated by reference
that are described under Incorporation by Reference
in this prospectus supplement. You should carefully consider the
information described under Risk Factors on
page S-3
of this prospectus supplement, under Risk Factors on
page 3 of the accompanying prospectus and under
Item 1A Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2008 before making an
investment decision.
Important
Information Regarding Forward-Looking Statements
This prospectus supplement, the accompanying prospectus and the
documents incorporated by reference herein and therein contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, that involve substantial risks and uncertainties. All
statements, other than statements of historical fact, including
statements regarding our strategy, future operations, prospects,
future financial position, future revenues, cash flow from
operations, available cash, operating costs, capital and other
expenditures, financing plans, capital structure, contractual
obligations, legal proceedings and claims, future economic
performance, managements plans, goals and objectives for
future operations and growth and markets for our planned
products and stock, are forward-looking statements. The words
anticipate, believe,
estimate, expect, intend,
may, plan, predict,
project, will and would and
similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain
these identifying words.
We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements, and
you should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the
forward-looking statements we make. We have described important
factors in the information included and incorporated by
reference in this prospectus supplement and the accompanying
prospectus that we believe could cause actual results or events
to differ materially from the forward-looking statements that we
make. Please see Risk Factors in this prospectus
supplement, in the accompanying prospectus and under
Item 1A Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2008 for more information.
You should consider the risk factors and other cautionary
statements made in this prospectus supplement, the accompanying
prospectus and in the documents we incorporate by reference as
being applicable to all related forward-looking statements
wherever they appear. We do not assume any obligation to update
any forward-looking statements except as required by law.
ii
Prospectus
Supplement Summary
Our
Company
We are a real estate investment trust, or REIT, that was
incorporated under the General Corporation Laws of the State of
Maryland on February 14, 2003 primarily for the purpose of
investing in and owning net leased industrial and commercial
real property and selectively making long-term industrial and
commercial mortgage loans. Most of our portfolio of real estate
we currently own is leased to a wide cross section of tenants
ranging from small businesses to large public companies, many of
which are corporations that do not have publicly rated debt. We
have in the past entered into, and intend in the future to enter
into, purchase agreements for real estate having triple net
leases with terms of approximately 10 to 15 years and built
in rental increases. Under a triple net lease, the tenant is
required to pay all operating, maintenance and insurance costs
and real estate taxes with respect to the leased property. We
currently own a total of 64 properties with 50 tenants in these
properties and hold one mortgage loan.
We conduct substantially all of our activities, including the
ownership of all of our properties, through Gladstone Commercial
Limited Partnership, a Delaware limited partnership that we
refer to as our Operating Partnership. We control our Operating
Partnership through our ownership of GCLP Business
Trust II, a Massachusetts business trust, which is the
general partner of our Operating Partnership, and of GCLP
Business Trust I, a Massachusetts business trust, which
currently holds all of the limited partnership units of our
Operating Partnership. We expect that our Operating Partnership
may issue limited partnership units from time to time in
exchange for industrial and commercial real property. Limited
partners who hold limited partnership units in our Operating
Partnership will be entitled to redeem these units for cash or,
at our election, shares of our common stock on a
one-for-one
basis at any time.
Our Operating Partnership is also the sole member of Gladstone
Lending, LLC, which we refer to as Gladstone Lending. Gladstone
Lending is a Delaware limited liability company that was formed
to hold all of our real estate mortgage loans
Our executive offices are located at 1521 Westbranch Drive,
Suite 200, McLean, Virginia 22102, and our telephone number
is
(703) 287-5800.
Our website is located at www.GladstoneCommercial.com.
Information on or accessible through our website is not part of,
or incorporated by reference into, this prospectus.
S-1
The
Offering
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Common stock offered |
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Shares with an aggregate offering price of up to $25 million |
Use of
proceeds
We currently intend to use the net proceeds from the sale of
common stock offered hereby:
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to pay down borrowings under our line of credit;
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to invest in additional net leased industrial and commercial
real properties in accordance with our investment objectives and
to pay real estate related acquisition expenses;
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to make or invest in mortgage loans in accordance with our
investment objectives; or
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to purchase shares of our Preferred Stock on the open market if
we deem such purchases to be an appropriate use of our capital
in light of market conditions.
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See Use of Proceeds below.
Nasdaq Global
Market symbol
GOOD
Current
distribution rate
We currently make distributions to stockholders on a monthly
basis at the rate of $0.125 per common share. See Dividend
Policy below.
Risk
factors
See Risk Factors and other information included or
incorporated by reference in this prospectus supplement and in
the accompanying prospectus for a discussion of factors you
should carefully consider before deciding to invest in our
common stock.
S-2
Risk
Factors
You should carefully consider the risks described under
Risk Factors in the accompanying prospectus on
page 3 and under Item 1A. Risk Factors in
our Annual Report on
Form 10-K
for the year ended December 31, 2008, together with the
other information contained in this prospectus supplement and in
any other documents incorporated by reference into this
prospectus supplement before making an investment in our common
stock. If any of the circumstances or events described in these
sections and in the documents we incorporate by reference
actually arises or occurs, our business, results of operations,
cash flows, financial condition, and ability to pay dividends
could be materially adversely affected. In any such case, the
market price of our common stock could decline, and you may lose
all or part of your investment. This prospectus supplement, the
accompanying prospectus and the documents we incorporate by
reference also contain forward-looking statements that involve
risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks
mentioned above.
S-3
Use of
Proceeds
We estimate the net proceeds of this offering to be
approximately $24.0 million after deducting sales
commissions and paying offering expenses of approximately
$1.0 million. We intend to use the net proceeds of the
offering:
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to pay down borrowings under our line of credit;
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to invest in additional net leased industrial and commercial
real properties in accordance with our investment objectives and
to pay real estate related acquisition expenses;
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to make or invest in mortgage loans in accordance with our
investment objectives; or
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to purchase shares of our Preferred Stock on the open market if
we deem such purchases to be an appropriate use of our capital
in light of market conditions.
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Our line of credit matures on December 29, 2009. As long as
we are in compliance with covenants under our line of credit, we
have the option to extend the line of credit for an additional
year, and we currently intend to exercise this option. We must
notify KeyBank of our intention to exercise the renewal option
45 days prior to the maturity date and pay an extension fee
of 0.20% of the total commitment outstanding at the date of
notification. The interest rate charged on the advances under
the facility is based on the LIBOR, the prime rate or the
federal funds rate, depending on market conditions, and adjusts
periodically. The current rate under the line of credit is
approximately 2.2% (based on LIBOR).
Until we use our net proceeds for one of the purposes above,
substantially all of the net proceeds of the offering may be
invested in short-term, highly liquid investments, including
government obligations, bank certificates of deposit, short-term
debt obligations and interest-bearing accounts or other
authorized investments as determined by us.
S-4
Price Range of
Common Stock
Our common stock is traded on the Nasdaq Global Market under the
symbol GOOD. The following table sets forth the high
and low sales prices of the common stock for the periods
indicated, as reported by the Nasdaq Global Market and the
dividends declared by us for the last two completed fiscal years
and the current fiscal year through November 3, 2009.
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Dividends Paid Per
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2007
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High
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Low
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Common Share
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First Quarter
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$
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20.73
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$
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18.97
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$
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0.360
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Second Quarter
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$
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20.49
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$
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18.76
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$
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0.360
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Third Quarter
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$
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20.25
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$
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16.90
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$
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0.360
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Fourth Quarter
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$
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19.99
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$
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14.75
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$
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0.360
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2008
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First Quarter
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$
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18.50
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$
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14.81
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$
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0.375
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Second Quarter
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$
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18.50
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$
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15.36
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$
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0.375
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Third Quarter
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$
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17.38
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$
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13.96
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$
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0.375
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Fourth Quarter
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$
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15.89
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$
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6.37
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$
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0.375
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2009
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First Quarter
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$
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10.20
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$
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5.36
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$
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0.375
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Second Quarter
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$
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16.21
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$
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8.20
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$
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0.375
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Third Quarter
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$
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14.50
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$
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11.26
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$
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0.375
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Fourth Quarter (through November 3, 2009)
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$
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14.19
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$
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11.85
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$
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0.125
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On November 3, 2009, the closing price of our common stock,
as reported by the Nasdaq Global Market, was $12.79 per share.
Dividend
Policy
In order to maintain our qualification as a REIT, we are
required to distribute dividends, other than capital gain
dividends, to our stockholders in an amount at least equal to
(1) the sum of (a) 90% of our real estate
investment trust taxable income, computed without regard
to the dividends paid deduction, and our net capital gain, and
(b) 90% of the net after-tax income, if any, from
foreclosure property minus (2) the sum of certain items of
non-cash income.
S-5
Capitalization
The following table sets forth our cash and cash equivalents and
our capitalization as of September 30, 2009 (1) on an
actual basis and (2) on an as adjusted basis to reflect to
the assumed sale of our common stock in the aggregate amount of
$25 million offered at an assumed price of $12.79 per
share, which was the closing price of our common stock on
November 3, 2009, less estimated sales commissions and
offering expenses payable by us.
You should read this table in conjunction with our financial
statements incorporated by reference into this prospectus
supplement and the accompanying prospectus.
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As of September 30, 2009
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Actual
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As Adjusted
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(Unaudited)
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Cash and cash equivalents
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$
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2,787,398
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$
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26,802,397
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Notes payable
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253,372,911
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253,372,911
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Borrowings under line of credit
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31,800,000
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31,800,000
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Stockholders equity:
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Redeemable preferred stock, $0.001 par value, $25
liquidation preference: 2,300,000 shares authorized,
2,150,000 shares issued and outstanding
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2,150
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2,150
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Common stock, $0.001 par value per share:
47,700,000 shares authorized, 8,563,264 shares issued
and outstanding, actual; 47,700,000 shares authorized,
10,517,916 shares issued and outstanding, as adjusted
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8,563
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10,518
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Additional paid-in capital
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170,622,581
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194,635,625
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Notes receivable employees
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(2,551,601
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(2,551,601
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Accumulated distributions in excess of net income
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(46,760,633
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(46,760,633
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Total stockholders equity
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121,321,060
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145,336,059
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Total capitalization(1)
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$
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406,493,971
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$
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430,508,970
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(1) |
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Total capitalization does not include the balance of cash and
cash equivalents. |
The foregoing table assumes solely for purposes of illustration
that we sell our common stock in an aggregate amount of
$25 million at a price of $12.79 per share, the last
reported sale price of our common stock on November 3,
2009, less estimated sales commissions and offering expenses.
The amounts and prices at which will sell shares of our common
stock in this offering will vary depending largely on the market
price of our common stock at the time of each sale.
S-6
Description of
Common Stock
Subject to the provisions of our articles of incorporation
regarding restrictions on the transfer and ownership of our
capital stock, each holder of common stock is entitled to one
vote for each share held and, except as provided with respect to
any other class or series of capital stock (currently consisting
of Series A Preferred Stock and Series B Preferred
Stock), the holders of the common stock possess the exclusive
voting power. Stockholders do not have the right to cumulate
their votes in elections of directors. Accordingly, holders of a
majority of the issued and outstanding common stock will have
the right to elect all of our directors and otherwise control
the affairs of Gladstone Commercial.
Holders of common stock are entitled to receive dividends on a
pro rata basis upon declaration of dividends by our board of
directors, provided that required dividends, if any, on any
outstanding preferred stock (currently consisting of
Series A Preferred Stock and Series B Preferred Stock)
have been provided for or paid. Dividends are payable only out
of funds legally available for the payment of dividends.
Holders of our common stock have no preference, conversion,
exchange, sinking fund, redemption or appraisal rights and have
no preemptive rights to subscribe for any of our securities.
Subject to the restrictions on transfer of shares contained in
our articles of incorporation, all shares of common stock have
equal dividend, liquidation and other rights.
S-7
Additional United
States Federal Tax Considerations
The following discussion supplements, and if inconsistent with,
replaces, the discussion under the caption Certain United
States Federal Tax Considerations beginning on
page 23 of the accompanying prospectus.
Taxation of the
Company as a REIT
The Housing and Economic Recovery Act of 2008, or the Recovery
Act, amended certain rules relating to taxation of REITs. The
changes that may relate to us include the following:
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Under the Recovery Act, any income of a REIT from a hedging
transaction entered into after July 30, 2008, including
gain from the sale or disposition of such a transaction, is
excluded from gross income for purposes of both the 75% gross
income test and the 95% gross income test, provided that such
transaction is clearly identified as a hedging transaction
before the close of the day on which it was acquired, originated
or entered into (or such other times as may be prescribed by
regulations). Such hedging income for transactions entered into
on or after January 1, 2005, but on or before July 30,
2008, was excluded from the 95% gross income test but not the
75% gross income test. The term hedging transaction,
as used above, generally means any transaction we enter into in
the normal course of our business primarily to manage risk of
(1) interest rate changes or fluctuations with respect to
borrowings made or to be made by us to acquire or carry real
estate assets, or (2) for hedging transactions entered into
after July 30, 2008, currency fluctuations with respect to
an item of qualifying income under the 75% or 95% gross income
test. For a discussion of the 75% and 95% gross income tests,
see Certain United States Federal Tax
Considerations Income Tests beginning on
page 26 of the accompanying prospectus.
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The Recovery Act increased the percentage of the value of a
REITs assets that may be represented by securities of one
or more taxable REIT subsidiaries from 20% to 25%, for taxable
years beginning after July 30, 2008. For a discussion of
the quarterly asset tests imposed on REITs, see Certain
United States Federal Tax Considerations Asset
Tests beginning on page 28 of the accompanying
prospectus.
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S-8
Plan of
Distribution
We have entered into an Open Market Sale Agreement with
Jefferies & Company, Inc. under which we may issue and
sell shares of our common stock from time to time through
Jefferies & Company, Inc. as our sales agent. Sales of
the shares, if any, will be made by means of ordinary
brokers transactions on the Nasdaq Global Market at market
prices, in privately negotiated transactions, crosses or block
transactions and such other transactions as may be agreed
between us and Jefferies & Company, Inc., including a
combination of any of these transactions. Under the terms of the
Open Market Sale Agreement, we also may sell shares to
Jefferies & Company, Inc. as a principal for its own
account at a price agreed upon at the time of sale.
When requested by us, Jefferies & Company, Inc. will
offer the shares of common stock subject to the terms and
conditions of the Open Market Sale Agreement, which may be on a
daily basis for periods of time, or otherwise, or as we may
otherwise agree with Jefferies & Company, Inc. We will
designate the maximum amount of shares of common stock to be
sold through Jefferies & Company, Inc. when we request
Jefferies & Company, Inc. to do so.
Jefferies & Company, Inc. has agreed, subject to the
terms and conditions of the Open Market Sale Agreement, to use
its commercially reasonable efforts to place on our behalf all
of the designated shares of common stock. We may instruct
Jefferies & Company, Inc. not to place shares of
common stock at or below a price designated by us. We or
Jefferies & Company, Inc. may suspend the offering of
shares of common stock under the Open Market Sale Agreement upon
proper notice to the other party.
If we and Jefferies & Company, Inc. so agree,
Jefferies & Company, Inc. may act as principal in
connection with the placement of the securities offered hereby.
We will pay Jefferies & Company, Inc. a commission
equal to 2% of the gross proceeds of any shares sold through it
pursuant to this prospectus supplement, and reimburse
Jefferies & Company, Inc. for up to $150,000 of its
legal expenses. The estimated offering expenses payable by us,
in addition to such commission and legal expenses, are
approximately $335,000, which includes legal, accounting and
printing costs and various other fees associated with
registering the shares of common stock.
Jefferies & Company, Inc. will provide written
confirmation to us following the close of trading on the Nasdaq
Global Market each day on which shares of common stock are sold
under the Open Market Sale Agreement. Each confirmation will
include the number of shares sold on that day, the aggregate
gross proceeds of such sales and the commission payable by us to
Jefferies & Company, Inc. Settlement for sales of
common stock will occur, unless otherwise agreed, on the third
business day following the date on which such sales were made.
In connection with the sale of our common stock on our behalf,
Jefferies & Company, Inc. may be deemed to be an
underwriter within the meaning of the Securities Act
of 1933, and the compensation paid to Jefferies &
Company, Inc. may be deemed to be underwriting commissions or
discounts.
We have agreed to indemnify Jefferies & Company, Inc.
against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, and liabilities arising from
breaches of representations and warranties contained in the Open
Market Sale Agreement. We have also agreed to contribute to
payments Jefferies & Company, Inc. may be required to
make in respect of such liabilities.
If Jefferies & Company, Inc. or we have reason to
believe that the exemptive provisions set forth in
Rule 101(c)(1) of Regulation M under the Securities
Exchange Act of 1934 are not satisfied, that party will promptly
notify the other and sales of common stock under the Open Market
Sale Agreement will be suspended until that or other exemptive
provisions have been satisfied in the judgment of
Jefferies & Company, Inc. and us.
The offering of shares of common stock pursuant to the Open
Market Sale Agreement will terminate upon the earlier of
(i) the sale of all shares of common stock subject to the
Open Market Sale Agreement, (ii) the termination of the
Open Market Sale Agreement according to its terms by either
Jefferies & Company, Inc. or us, or
(iii) November 4, 2012.
Jefferies & Company, Inc. has provided, and may in the
future provide, various investment banking, commercial banking,
financial advisory and other services to us and our affiliates
for which services it has received, and may in the future
receive, customary fees. In the course of its business,
Jefferies & Company, Inc. may actively trade our
securities for its own account or for the accounts of customers,
and, accordingly, Jefferies & Company, Inc. may at any
time hold long or short positions in such securities.
S-9
Legal
Matters
The validity of the shares offered hereby will be passed upon
for us by Cooley Godward Kronish LLP, Reston, Virginia. Jones
Day is counsel for Jefferies & Company, Inc. in
connection with this offering.
Experts
The financial statements and managements assessment of the
effectiveness of internal control over financial reporting
(which is included in Managements Report on Internal
Control over Financial Reporting) incorporated in this
prospectus supplement by reference to the Annual Report on
Form 10-K
for the year ended December 31, 2008, have been so
incorporated in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
Incorporation by
Reference
The SEC allows us to incorporate by reference the
information we file with it, which means that we can disclose
important business, financial and other information to you in
this prospectus supplement by referring you to documents
containing this information. The information incorporated by
reference is deemed to be a part of this prospectus supplement.
We incorporate by reference into this prospectus supplement the
documents listed below and any documents we file with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, after the date of this
prospectus supplement (which filed documents do not include any
portion thereof not deemed to be filed for purposes
of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liabilities of that
Section):
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Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008 filed with the
SEC on February 25, 2009;
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Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2009 filed with the SEC on
May 4, 2009;
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Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2009 filed with the SEC on
July 30, 2009;
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Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2009 filed with the SEC
on November 4, 2009;
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Definitive Proxy Statement on Schedule 14A filed with the
SEC on March 25, 2009; and
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Current Reports on
Form 8-K
filed with the SEC on March 31, 2009, July 1, 2009 and
November 4, 2009.
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All documents that we file after the date of this prospectus
supplement pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, shall be deemed
incorporated by reference into this prospectus supplement. The
reports and other documents that we file after the date of this
prospectus supplement will update, supplement and supersede the
information in this prospectus supplement. We do not, however,
incorporate by reference in this prospectus supplement any
documents or portions thereof that are not deemed
filed with the SEC, including any information
furnished pursuant to Item 2.02 or Item 7.01 of our
current reports on
Form 8-K
after the date of this prospectus supplement unless, and except
to the extent, specified in such current reports.
We will provide you with a copy of any or all of the information
that has been incorporated by reference into this prospectus
supplement but not delivered with this prospectus supplement at
no cost to you upon written or oral request to Gladstone
Commercial Corporation, 1521 Westbranch Drive,
Suite 200, McLean, VA 22102, Attention: Investor Relations,
telephone:
(703) 287-5839.
S-10
Where You Can
Find More Information
This prospectus supplement and the accompanying prospectus are
part of a registration statement on
Form S-3
which we have filed with the SEC. You can obtain a copy of the
registration statement from the SEC at the address listed above
or from the SECs website. This prospectus supplement and
the accompanying prospectus do not contain all of the
information set forth in the registration statement or the
exhibits and schedules that are part of the registration
statement. For further information about us and our common
stock, you should refer to the registration statement.
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may inspect and copy
this information at the SECs Public Reference Room at
100 F Street, N.E., Washington, D.C., 20549. You
can call the SEC at
1-800-SEC-0330
for further information on the operation of the Public Reference
Room. You can view our electronically filed reports, proxy
statements and other information at the SECs website,
www.sec.gov, or our website, www.gladstonecommercial.com.
Information included on our website is not part of this
prospectus supplement or the accompanying prospectus.
S-11
PROSPECTUS
$300,000,000
Shares of Common Stock
Shares of Preferred Stock
We may offer and sell from time to time securities in one or
more offerings up to an aggregate dollar amount of $300,000,000
of securities. This prospectus provides you with a general
description of the securities we may offer.
We may offer and sell the following securities:
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shares of common stock; and
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shares of preferred stock, which may be convertible into our
shares of common stock.
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Each time securities are sold using this prospectus, we will
provide a supplement to this prospectus containing specific
information about the offering. The supplement may also add,
update or change information contained in this prospectus. You
should read this prospectus and any supplement before you invest.
The securities will be offered directly to investors or through
underwriters, dealers or agents. The supplements to this
prospectus will provide the specific terms of the plan of
distribution.
To ensure that we maintain our qualification as a real estate
investment trust under the applicable provisions of the Internal
Revenue Code of 1986, as amended, ownership of our equity
securities by any person is subject to certain limitations. See
Certain Provisions of Maryland Law and of our Articles of
Incorporation and Bylaws Restrictions on Ownership
of Shares.
Our common stock is traded on the Nasdaq Global Market under the
symbol GOOD. On December 18, 2007, the last
reported sale price of our common stock on the Nasdaq Global
Market was $15.75. The applicable prospectus supplement will
contain information, where applicable, as to any other listing
on the Nasdaq Global Market or any other securities exchange of
the securities covered by such prospectus.
We maintain our executive offices at 1521 Westbranch Drive,
Suite 200, McLean, Virginia 22102. Our telephone number is
(703) 287-5800.
Please see page 3 for risk factors relating to an
investment in Gladstone Commercial Corporation which you should
consider.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is December 19, 2007.
You should rely only on the information contained in or
incorporated by reference in this prospectus. We have not
authorized anyone to provide you with information different from
that contained in or incorporated by reference in this
prospectus. We are offering to sell, and seeking offers to buy,
the securities described in this prospectus only in
jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery
of this prospectus or of any sale of shares. You should not
assume that the information appearing in this prospectus or any
applicable prospectus supplement or the documents incorporated
by reference herein or therein is accurate as of any date other
than their respective dates. Our business, financial condition,
results of operation and prospects may have changed since those
dates.
TABLE OF
CONTENTS
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PROSPECTUS
SUMMARY
As used in this prospectus, references to we,
our, us, the Company and the
REIT are to Gladstone Commercial Corporation and,
except as the context otherwise requires, its wholly owned
subsidiaries Gladstone Commercial Limited Partnership, Gladstone
Commercial Partners, LLC, Gladstone Lending LLC and Gladstone
Commercial Advisers, Inc. References to the Operating
Partnership are to Gladstone Commercial Limited
Partnership, a Delaware limited partnership, which we control
through our ownership of GCLP Business Trust II, a
Massachusetts business trust, which is the general partner of
our Operating Partnership, and of GCLP Business Trust I, a
Massachusetts business trust, which currently holds all of the
limited partnership units of our Operating Partnership. When we
use the term Adviser we are referring to our
Adviser, Gladstone Management Corporation. The Operating
Partnership is also the sole member of Gladstone Lending, LLC,
which we refer to herein as Gladstone Lending.
Gladstone Lending is a Delaware limited liability company
created to hold all real estate mortgage loans issued by the
Operating Partnership.
We were incorporated under the General Corporation Law of the
State of Maryland on February 14, 2003 primarily for the
purpose of investing in and owning net leased industrial and
commercial real estate property and selectively making long-term
industrial and commercial mortgage loans to creditworthy
entities. Subject to certain restrictions and limitations, the
business of the Company is managed by the Adviser. Most of the
portfolio of real estate we currently own is leased to a wide
cross section of tenants ranging from small businesses to large
public companies, many of which do not have publicly rated debt.
We have in the past entered into, and intend in the future to
enter into, purchase agreements for real estate that have triple
net leases with terms of 10 to 15 years and built in rental
increases. Under a triple net lease, the tenant is required to
pay all operating, maintenance and insurance costs and real
estate taxes with respect to the leased property. We are
actively communicating with buyout funds, real estate brokers
and other third parties to locate properties for potential
acquisition or mortgage financing in an effort to build our
portfolio. At September 30, 2007, we owned 47 properties
totaling approximately 5.5 million square feet, and had one
mortgage loan outstanding. All of our properties are fully
leased and all tenants and borrowers are current and paying in
accordance with their leases and loan, respectively.
We conduct substantially all of our activities, including the
ownership of all of our properties, through our Operating
Partnership, which was formed on May 28, 2003. We control
our Operating Partnership through our ownership of GCLP Business
Trust II, a Massachusetts business trust, which is the
general partner of our Operating Partnership, and of GCLP
Business Trust I, a Massachusetts business trust, which
currently holds all of the limited partnership units of our
Operating Partnership. We expect the Operating Partnership to
issue limited partnership units from time to time in exchange
for industrial and commercial real property. By structuring our
acquisitions in this manner, the sellers of the real estate will
generally be able to defer the realization of gains until they
redeem the limited partnership units. Limited partners who hold
limited partnership units in the Operating Partnership will be
entitled to redeem these units for cash or, at our election,
shares of our common stock on a
one-for-one
basis at any time. Whenever we issue common stock for cash, we
will be obligated to contribute any net proceeds we receive from
the sale of the stock to the Operating Partnership and the
Operating Partnership will, in turn, be obligated to issue an
equivalent number of limited partnership units to us. The
Operating Partnership will distribute the income it generates
from its operations to Gladstone Commercial Partners, LLC and
its limited partners, including us, on a pro rata basis. We
will, in turn, distribute the amounts we receive from the
Operating Partnership to our stockholders in the form of monthly
cash distributions. We have historically operated, and intend to
continue to operate, so as to qualify as a REIT for federal tax
purposes, thereby generally avoiding federal and state income
taxes on the distributions we make to our stockholders.
The Operating Partnership is also the sole member of Gladstone
Lending. Gladstone Lending is a Delaware limited liability
company that was formed on January 27, 2004 to hold all of
our real estate mortgage loans.
Our Adviser is a registered investment adviser and an affiliate
of ours. Our Adviser is responsible for managing our business on
a day-to-day
basis and for identifying and making acquisitions and
dispositions that it believes meet our investment criteria.
1
RECENT
DEVELOPMENTS
On October 15, 2007, through wholly-owned subsidiaries, we
borrowed $16.0 million pursuant to a long-term note payable
from Countrywide Commercial Real Estate Finance, which is
collateralized by security interests in our Mt. Pocono,
Pennsylvania property, our Raleigh, North Carolina property and
our Mason, Ohio property in the amounts of approximately
$5.4 million, $5.6 million and $5.0 million,
respectively. The note accrues interest at a rate of 6.63% per
year and we may not repay this note prior to the last three
months of the term, or we would be subject to a substantial
prepayment penalty. The note has a maturity date of
November 8, 2017. We used the proceeds from the note to pay
down the outstanding balance on the line of credit.
On November 13, 2007, we, through our Operating
Partnership, exercised an option under our existing credit
agreement with KeyBank National Association to increase the
current maximum availability under the credit agreement from
$75 million to $95 million. The credit agreement was
originally established on December 29, 2006.
ABOUT
THIS PROSPECTUS
This prospectus is part of a registration statement that we
filed with the SEC using a shelf registration
process or continuous offering process. Under this shelf
registration process, we may, from time to time, sell the
securities described in this prospectus in one or more
offerings. This prospectus provides you with a general
description of the securities that may be offered by us. We may
also file, from time to time, a prospectus supplement or an
amendment to the registration statement of which this prospectus
forms a part containing specific information about us and the
terms of the securities being offered. That prospectus
supplement or amendment may include additional risk factors or
other special considerations applicable to those securities. Any
prospectus supplement or amendment may also add, update, or
change information in this prospectus. If there is any
supplement or amendment, you should rely on the information in
that prospectus supplement or amendment.
This prospectus and any accompanying prospectus supplement do
not contain all of the information included in the registration
statement. For further information, we refer you to the
registration statement and any amendments to such registration
statement, including its exhibits. Statements contained in this
prospectus and any accompanying prospectus supplement about the
provisions or contents of any agreement or other document are
not necessarily complete. If the SECs rules and
regulations require that an agreement or document be filed as an
exhibit to the registration statement, please see that agreement
or document for a complete description of these matters.
You should read both this prospectus and any prospectus
supplement together with additional information described below
under the heading Where You Can Find More
Information. Information incorporated by reference with
the SEC after the date of this prospectus, or information
included in any prospectus supplement or an amendment to the
registration statement of which this prospectus forms a part,
may add, update, or change information in this prospectus or any
prospectus supplement. If information in these subsequent
filings, prospectus supplements or amendments is inconsistent
with this prospectus or any prospectus supplement, the
information incorporated by reference or included in the
subsequent prospectus supplement or amendment will supersede the
information in this prospectus or any earlier prospectus
supplement. You should not assume that the information in this
prospectus or any prospectus supplement is accurate as of any
date other than the date on the front of each document.
2
RISK
FACTORS
You should carefully consider the risk factors set forth
below as well as the other information included or incorporated
by reference in this prospectus. An investment in the securities
offered by this prospectus involves a significant degree of
risk, including but not limited to the risks described below.
Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial may also materially and
adversely affect our business operations. Any of the following
risks could materially and adversely affect our business,
financial condition or results of operations. In such case, you
could lose a portion of your original investment.
Real
estate industry risks
We are
subject to certain risks associated with real estate ownership
and lending which could reduce the value of our
investments.
Our investments include net leased industrial and commercial
property and mortgage loans secured by industrial and commercial
real estate. Our performance, and the value of our investments,
is subject to risks incident to the ownership and operation of
these types of properties, including:
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changes in the general economic climate;
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changes in local conditions such as an oversupply of space or
reduction in demand for real estate;
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changes in interest rates and the availability of financing;
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competition from other available space; and
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changes in laws and governmental regulations, including those
governing real estate usage, zoning and taxes.
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Competition
for the acquisition of real estate may impede our ability to
make acquisitions or increase the cost of these
acquisitions.
We compete for the acquisition of properties with many other
entities engaged in real estate investment activities, including
financial institutions, institutional pension funds, other
REITs, other public and private real estate companies and
private real estate investors. These competitors may prevent us
from acquiring desirable properties or may cause an increase in
the price we must pay for real estate. Our competitors may have
greater resources than we do, and may be willing to pay more for
certain assets or may have a more compatible operating
philosophy with our acquisition targets. In particular, larger
REITs may enjoy significant competitive advantages that result
from, among other things, a lower cost of capital and enhanced
operating efficiencies. Our competitors may also adopt
transaction structures similar to ours, which would decrease our
competitive advantage in offering flexible transaction terms. In
addition, the number of entities and the amount of funds
competing for suitable investment properties may increase,
resulting in increased demand and increased prices paid for
these properties.
Risks
related to our tenants, borrowers and properties
Highly
leveraged tenants or borrowers may be unable to pay rent or make
mortgage payments, which could adversely affect our cash
available to make distributions to our
stockholders.
Some of our tenants or borrowers may have been recently
restructured using leverage or been acquired in a leveraged
transaction. Tenants or borrowers that are subject to
significant debt obligations may be unable to make their rent or
mortgage payments if there are adverse changes to their
businesses or economic conditions. Tenants that have experienced
leveraged restructurings or acquisitions will generally have
substantially greater debt and substantially lower net worth
than they had prior to the leveraged transaction. In addition,
the payment of rent and debt service may reduce the working
capital available to leveraged entities and prevent them from
devoting the resources necessary to remain competitive in their
industries.
In situations where management of the tenant or borrower will
change after a transaction, it may be difficult for our Adviser
to determine with certainty the likelihood of the tenants
or borrowers business success and of its
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ability to pay rent or make mortgage payments throughout the
lease or loan term. These companies generally are more
vulnerable to adverse economic and business conditions, and
increases in interest rates.
Leveraged tenants and borrowers are more susceptible to
bankruptcy than unleveraged tenants. Bankruptcy of a tenant or
borrower could cause:
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the loss of lease or mortgage payments to us;
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an increase in the costs we incur to carry the property occupied
by such tenant;
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a reduction in the value of our securities; or
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a decrease in distributions to our stockholders.
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Under bankruptcy law, a tenant who is the subject of bankruptcy
proceedings has the option of continuing or terminating any
unexpired lease. If a bankrupt tenant terminates a lease with
us, any claim we might have for breach of the lease (excluding a
claim against collateral securing the claim) will be treated as
a general unsecured claim. Our claim would likely be capped at
the amount the tenant owed us for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one
years lease payments or 15% of the remaining lease
payments payable under the lease (but no more than three
years lease payments). In addition, due to the long-term
nature of our leases and terms providing for the repurchase of a
property by the tenant, a bankruptcy court could re-characterize
a net lease transaction as a secured lending transaction. If
that were to occur, we would not be treated as the owner of the
property, but might have additional rights as a secured creditor.
Net
leases may not result in fair market lease rates over
time.
We expect a large portion of our rental income to come from net
leases and, net leases frequently provide the tenant greater
discretion in using the leased property than ordinary property
leases, such as the right to freely sublease the property, to
make alterations in the leased premises and to terminate the
lease prior to its expiration under specified circumstances.
Further, net leases are typically for longer lease terms and,
thus, there is an increased risk that contractual rental
increases in future years will fail to result in fair market
rental rates during those years. As a result, our income and
distributions to our stockholders could be lower than it would
otherwise be if we did not engage in net leases.
Many
of our tenants are small and medium size businesses, which
exposes us to additional risks unique to these
entities.
Leasing real property or making mortgage loans to small and
medium-sized businesses exposes us to a number of unique risks
related to these entities, including the following:
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Small and medium-sized businesses may have limited financial
resources and may not be able to make their lease or mortgage
payments. A small or medium-sized tenant or
borrower is more likely to have difficulty making its lease or
mortgage payments when it experiences adverse events, such as
the failure to meet its business plan, a downturn in its
industry or negative economic conditions.
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Small and medium-sized businesses typically have narrower
product lines and smaller market shares than large
businesses. Because our target tenants and
borrowers are smaller businesses, they will tend to be more
vulnerable to competitors actions and market conditions,
as well as general economic downturns. In addition, our target
tenants and borrowers may face intense competition, including
competition from companies with greater financial resources,
more extensive development, manufacturing, marketing and other
capabilities and a larger number of qualified managerial and
technical personnel.
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There is generally little or no publicly available
information about our target tenants and
borrowers. Many of our tenants and borrowers are
likely to be privately owned businesses, about which there is
generally little or no publicly available operating and
financial information. As a result, we will rely on our Adviser
to perform due diligence investigations of these tenants and
borrowers, their operations and their prospects. We may not
learn all of the material information we need to know regarding
these businesses through our investigations.
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Small and medium-sized businesses generally have less
predictable operating results. We expect that
many of our tenants and borrowers may experience significant
fluctuations in their operating results, may from time to time
be parties to litigation, may be engaged in rapidly changing
businesses with products subject to a substantial risk of
obsolescence, may require substantial additional capital to
support their operations, to finance expansion or to maintain
their competitive positions, may otherwise have a weak financial
position or may be adversely affected by changes in the business
cycle. Our tenants and borrowers may not meet net income, cash
flow and other coverage tests typically imposed by their senior
lenders. The failure of a tenant or borrower to satisfy
financial or operating covenants imposed by senior lenders could
lead to defaults and, potentially, foreclosure on credit
facilities, which could additionally trigger cross-defaults in
other agreements. If this were to occur, it is possible that the
ability of the tenant or borrower to make required payments to
us would be jeopardized.
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Small and medium-sized businesses are more likely to be
dependent on one or two persons. Typically, the
success of a small or medium-sized business also depends on the
management talents and efforts of one or two persons or a small
group of persons. The death, disability or resignation of one or
more of these persons could have a material adverse impact on
our tenant or borrower and, in turn, on us.
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Small and medium-sized businesses may have limited operating
histories. While we intend to target as tenants
and borrowers stable companies with proven track records, we may
lease properties or lend money to new companies that meet our
other investment criteria. Tenants or borrowers with limited
operating histories will be exposed to all of the operating
risks that new businesses face and may be particularly
susceptible to, among other risks, market downturns, competitive
pressures and the departure of key executive officers.
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We may
not have funding for future tenant improvements.
When a tenant at one of our properties does not renew its lease
or otherwise vacates its space in one of our buildings, it is
likely that, in order to attract one or more new tenants, we
will be required to expend substantial funds for tenant
improvements and tenant refurbishments to the vacated space. We
cannot assure you that we will have sufficient sources of
funding available to us for such purposes in the future.
Our
real estate investments may include special use and single or
multi-tenant properties that may be difficult to sell or
re-lease upon tenant defaults or early lease
terminations.
We focus our investments on commercial, industrial and retail
properties, a number of which include manufacturing facilities,
special use storage or warehouse facilities and special use
single or multi-tenant properties. These types of properties are
relatively illiquid compared to other types of real estate and
financial assets. This illiquidity will limit our ability to
quickly change our portfolio in response to changes in economic
or other conditions. With these properties, if the current lease
is terminated or not renewed or, in the case of a mortgage loan,
if we take such property in foreclosure, we may be required to
renovate the property or to make rent concessions in order to
lease the property to another tenant or sell the property. In
addition, in the event we are forced to sell the property, we
may have difficulty selling it to a party other than the tenant
or borrower due to the special purpose for which the property
may have been designed.
These and other limitations may affect our ability to sell or
re-lease properties without adversely affecting returns to our
stockholders.
The
inability of a tenant in a single tenant property to pay rent
will reduce our revenues.
Since most of our properties are occupied by a single tenant,
the success of our investments will be materially dependent on
the financial stability of these tenants. Lease payment defaults
by these tenants could adversely affect our cash flows and cause
us to reduce the amount of distributions to stockholders. In the
event of a default by a tenant, we may experience delays in
enforcing our rights as landlord and may incur substantial costs
in protecting our investment and re-leasing our property. If a
lease is terminated, there is no assurance that we will be able
to lease the property for the rent previously received or sell
the property without incurring a loss.
5
Liability
for uninsured losses could adversely affect our financial
condition.
Losses from disaster-type occurrences (such as wars or
earthquakes) may be either uninsurable or not insurable on
economically viable terms. Should an uninsured loss occur, we
could lose our capital investment or anticipated profits and
cash flow from one or more properties.
Potential
liability for environmental matters could adversely affect our
financial condition.
Our purchase of industrial, commercial and retail properties
subjects us to the risk of liabilities under federal, state and
local environmental laws. Some of these laws could subject us to:
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responsibility and liability for the cost of removal or
remediation of hazardous substances released on our properties,
generally without regard to our knowledge of or responsibility
for the presence of the contaminants;
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liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for
the disposal or treatment of these substances; and
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potential liability for common law claims by third parties for
damages resulting from environmental contaminants.
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We generally include provisions in our leases making tenants
responsible for all environmental liabilities and for compliance
with environmental regulations, and requiring tenants to
reimburse us for damages or costs for which we have been found
liable. However, these provisions will not eliminate our
statutory liability or preclude third party claims against us.
Even if we were to have a legal claim against a tenant to enable
us to recover any amounts we are required to pay, there are no
assurances that we would be able to collect any money from the
tenant. Our costs of investigation, remediation or removal of
hazardous substances may be substantial. In addition, the
presence of hazardous substances on one of our properties, or
the failure to properly remediate a contaminated property, could
adversely affect our ability to sell or lease the property or to
borrow using the property as collateral.
We obtain environmental site assessments, or ESAs, on all of our
properties at the time of acquisition. The ESAs are intended to
identify potential environmental contamination. The ESAs include
a historical review of the property, a review of certain public
records, a preliminary investigation of the site and surrounding
properties, screening for the presence of hazardous substances
and underground storage tanks, and the preparation and issuance
of a written report.
The ESAs that we have obtained have not revealed any
environmental liability or compliance concerns that we believe
would have a material adverse effect on our business, assets,
results of operations or liquidity, nor are we aware of any such
liability. Nevertheless, it is possible that these ESAs do not
reveal all environmental liabilities or that there are material
environmental liabilities or compliance concerns that we are not
aware of. Moreover, we cannot assure you that (i) future
laws, ordinances or regulations will not impose material
environmental liability, or (ii) the current environmental
condition of a property will not be affected by the condition of
properties in the vicinity of the property (such as the presence
of leaking underground storage tanks) or by third parties
unrelated to us.
Risks
related to our Adviser
We are
dependent upon our key management personnel, who are employed by
our Adviser, for our future success, particularly David
Gladstone, Terry Lee Brubaker and George Stelljes
III.
We are dependent on our senior management and other key
management members to carry out our business and investment
strategies. Our future success depends to a significant extent
on the continued service and coordination of our senior
management team, particularly David Gladstone, our chairman and
chief executive officer, Terry Lee Brubaker, our vice chairman
and chief operating officer, and George Stelljes III, our
president and chief investment officer, all of whom are subject
to an employment agreement with our Advisor. The departure of
any of our executive officers or key employees could have a
material adverse effect on our ability to implement our business
strategy and to achieve our investment objectives.
6
Our
success depends on the performance of our Adviser and if our
Adviser makes inadvisable investment or management decisions,
our operations could be materially adversely
impacted.
Our ability to achieve our investment objectives and to pay
distributions to our stockholders is dependent upon the
performance of our Adviser in evaluating potential investments,
selecting and negotiating property purchases and dispositions
and mortgage loans, selecting tenants and borrowers, setting
lease or mortgage loan terms and determining financing
arrangements. Accomplishing these objectives on a cost-effective
basis is largely a function of our Advisers marketing
capabilities, management of the investment process, ability to
provide competent, attentive and efficient services and our
access to financing sources on acceptable terms. Our
stockholders have no opportunity to evaluate the terms of
transactions or other economic or financial data concerning our
investments and must rely entirely on the analytical and
management abilities of our Adviser and the oversight of our
board of directors. If our Adviser or our board of directors
makes inadvisable investment or management decisions, our
operations could be materially adversely impacted. As we grow,
our Adviser may be required to hire, train, supervise and manage
new employees. Our Advisers failure to effectively manage
our future growth could have a material adverse effect on our
business, financial condition and results of operations.
We may
have conflicts of interest with our Adviser and other
affiliates.
Our Adviser manages our business and locates, evaluates,
recommends and negotiates the acquisition of our real estate
investments. At the same time, our advisory agreement permits
our Adviser to conduct other commercial activities and provide
management and advisory services to other entities, including
Gladstone Capital Corporation, Gladstone Investment Corporation
and Gladstone Land Corporation, an entity affiliated with our
chairman David Gladstone. Moreover, all of our officers and
directors are also officers and directors of Gladstone Capital
Corporation and Gladstone Investment Corporation, which actively
make loans to and invest in small and medium-sized companies. As
a result, we may from time to time have conflicts of interest
with our Adviser in its management of our business and with
Gladstone Capital and Gladstone Investment, which may arise
primarily from the involvement of our Adviser, Gladstone
Capital, Gladstone Investment, Gladstone Land and their
affiliates in other activities that may conflict with our
business.
Examples of these potential conflicts include:
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our Adviser may realize substantial compensation on account of
its activities on our behalf;
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we may experience competition with our affiliates for financing
transactions;
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our Adviser may earn fee income from our borrowers or
tenants; and
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our Adviser and other affiliates such as Gladstone Capital,
Gladstone Investment and Gladstone Land could compete for the
time and services of our officers and directors.
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These and other conflicts of interest between us and our Adviser
and other affiliates could have a material adverse effect on the
operation of our business and the selection or management of our
real estate investments.
Our
Adviser is not obligated to provide a waiver of the incentive
fee, which could negatively impact our earnings and our ability
to maintain our current level of, or increase, distributions to
our stockholders.
On January 1, 2007, the Amended Advisory Agreement became
effective. In addition to providing for a base management fee
based on our stockholders equity, this agreement contemplates a
quarterly incentive fee based on our funds from operations. Our
Adviser has the ability to issue a full or partial waiver of the
incentive fee for current and future periods, however our
Adviser is not required to issue this waiver. If our Adviser
does not issue this waiver in future quarters, it could
negatively impact our earnings and may compromise our ability to
maintain our current level of, or increase, distributions to our
stockholders, which could have a material adverse impact on our
stock price.
We may
be obligated to pay our Adviser incentive compensation even if
we incur a loss.
On January 1, 2007, the Amended Advisory Agreement became
effective and entitled our Adviser to incentive compensation
based on our FFO, which rewards the Adviser if our quarterly FFO
(before giving effect to any
7
incentive fee) exceeds 1.75% (7% annualized) of our total
stockholders equity (less the recorded value of any
preferred stock). Our pre-incentive fee FFO for incentive
compensation purposes excludes the effect of any unrealized
gains, losses or other items that do not affect realized net
income that we may incur in the fiscal quarter, even if such
losses result in a net loss on our statement of operations for
that quarter. Thus, we may be required to pay our Adviser
incentive compensation for a fiscal quarter even if we incur a
net loss for that quarter.
Financing
Risks
Our
business strategy relies heavily on external financing, which
may expose us to risks associated with leverage such as
restrictions on additional borrowing and payment of
distributions, risks associated with balloon payments, and risk
of loss of our equity upon foreclosure.
Our current business strategy involves the use of leverage so
that we may make more investments than would otherwise be
possible in order to maximize potential returns to stockholders.
If the income generated by our properties and other assets fails
to cover our debt service, we could be forced to reduce or
eliminate distributions to our stockholders and may experience
losses. We may borrow on a secured or unsecured basis.
Our ability to achieve our investment objectives will be
affected by our ability to borrow money in sufficient amounts
and on favorable terms. We expect that we will borrow money that
will be secured by our properties and that these financing
arrangements will contain customary covenants such as those that
limit our ability, without the prior consent of the lender, to
further mortgage the applicable property or to discontinue
insurance coverage. In addition, our short-term line of credit
contains, and any other credit facility we might enter into is
likely to contain certain customary restrictions, requirements
and other limitations on our ability to incur indebtedness, and
will specify debt ratios that we will be required to maintain.
Accordingly, we may be unable to obtain the degree of leverage
we believe to be optimal, which may cause us to have less cash
for distribution to stockholders than we would have with an
optimal amount of leverage. Our use of leverage could also make
us more vulnerable to a downturn in our business or the economy
generally. There is also a risk that a significant increase in
the ratio of our indebtedness to the measures of asset value
used by financial analysts may have an adverse effect on the
market price of our common stock.
Some of our debt financing arrangements may require us to make
lump-sum or balloon payments at maturity. Our
ability to make a balloon payment at maturity is uncertain and
may depend upon our ability to obtain additional financing or to
sell the financed property. At the time the balloon payment is
due, we may not be able to refinance the balloon payment on
terms as favorable as the original loan or sell the property at
a price sufficient to make the balloon payment, which could
adversely affect the amount of distributions to our stockholders.
We intend to acquire additional properties by using our
$95 million short-term line of credit and by continuing to
seek long-term financing, where we will borrow all or a portion
of the purchase price of a potential acquisition and securing
the loan with a mortgage on some or all of our existing real
property. To date we have obtained approximately
$202 million in long-term financing, which we have used to
acquire additional properties. If we are unable to make our debt
payments as required, a lender could foreclose on the property
securing its loan. This could cause us to lose part or all of
our investment in such property which in turn could cause the
value of our securities or the amount of distributions to our
stockholders to be reduced.
Failure
to hedge effectively against interest rate changes may adversely
affect our results of operations.
We may experience interest rate volatility in connection with
mortgage loans on our properties or other variable-rate debt
that we may obtain from time to time. We currently have one
variable rate loan, certain of our leases contain escalations
based on market interest rates, and the interest rate on our
existing line of credit is variable. We mitigate this risk by
structuring such provisions to contain a minimum interest rate
or escalation rate, as applicable. We are also exposed to the
effects of interest rate changes as a result of the holding of
our cash and cash equivalents in short-term, interest-bearing
investments. A significant change in interest rates could have
an adverse impact on the results of our operations. To date we
have not entered into any derivative contracts, however certain
of our mortgage loans and properties have embedded derivatives
in the form of interest rate floors and ceilings. These embedded
derivatives do not require separate accounting under Statement
of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities.
8
Risks of
being a REIT
We may
not qualify as a REIT for federal income tax purposes, which
would subject us to federal income tax on our taxable income at
regular corporate rates, thereby reducing the amount of funds
available for paying distributions to our
stockholders.
We have historically operated and intend to continue to operate
in a manner that will allow us to qualify as a REIT for federal
income tax purposes. Our qualification as a REIT depends on our
ability to meet various requirements set forth in the Internal
Revenue Code concerning, among other things, the ownership of
our outstanding common stock, the nature of our assets, the
sources of our income and the amount of our distributions to our
stockholders. The REIT qualification requirements are extremely
complex, and interpretations of the federal income tax laws
governing qualification as a REIT are limited. Accordingly, we
cannot be certain that we will be successful in operating so as
to qualify as a REIT. At any time new laws, interpretations or
court decisions may change the federal tax laws relating to, or
the federal income tax consequences of, qualification as a REIT.
It is also possible that future economic, market, legal, tax or
other considerations may cause our board of directors to revoke
our REIT election, which it may do without stockholder approval.
If we lose or revoke our REIT status, we will face serious tax
consequences that will substantially reduce the funds available
for distribution to you because:
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we would not be allowed a deduction for distributions to
stockholders in computing our taxable income, we would be
subject to federal income tax at regular corporate rates and we
might need to borrow money or sell assets in order to pay any
such tax;
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we also could be subject to the federal alternative minimum tax
and possibly increased state and local taxes; and
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unless we are entitled to relief under statutory provisions, we
would be prevented from re-qualifying to be taxed as a REIT for
the four taxable years following the year during which we ceased
to qualify.
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In addition, if we fail to qualify as a REIT, distributions to
stockholders would be taxable to the extent of our current and
accumulated earnings and profits, and, then, to the extent that
the amount by which the balance of such distribution exceeds the
stockholders adjusted basis in such stockholders
stock of the REIT. If we were taxed as a regular corporation,
corporate distributees might be eligible for the dividends
received deduction, but we would not be required to make
distributions to stockholders.
We
have not sought a ruling from the Internal Revenue Service that
we qualify as a REIT, nor do we intend to do so in the
future.
An IRS determination that we do not qualify as a REIT would
deprive our stockholders of the tax benefits of our REIT status
only if the IRS determination is upheld in court or otherwise
becomes final. To the extent that we challenge an IRS
determination that we do not qualify as a REIT, we may incur
legal expenses that would reduce our funds available for
distribution to our stockholders. As a result of all these
factors, our failure to qualify as a REIT could impair our
ability to expand our business and raise capital, and would
adversely affect the value of our common stock.
Failure
to make required distributions or to satisfy certain income
requirements would subject us to tax.
In order to qualify as a REIT, each year we must distribute to
our stockholders at least 90% of our taxable income, other than
any net capital gains. To the extent that we satisfy the
distribution requirement but distribute less than 100% of our
taxable income, we will be subject to federal corporate income
tax on our undistributed income. In addition, we will incur a 4%
nondeductible excise tax on the amount, if any, by which our
distributions in any year are less than the sum of:
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85% of our ordinary income for that year;
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95% of our capital gain net income for that year; and
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100% of our undistributed taxable income from prior years.
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9
In addition, each year at least 95% of our gross income must be
derived from passive sources in real estate and securities, and
at least 75% of our gross income must be derived from real
estate sources. If we fail to satisfy either of these gross
income tests, but nonetheless continue to qualify as a REIT
because we meet certain other requirements, we will incur a tax
of up to 100% on the greater of the excess of 95% of our gross
income over the amount of our qualifying income, or the excess
of 75% of our gross income over the amount of our qualifying
income.
We intend to pay out our income to our stockholders in a manner
intended to satisfy the distribution requirement applicable to
REITs and to satisfy the foregoing gross income tests and, thus,
avoid corporate income taxes and the 4% excise tax. Differences
in timing between the recognition of income and the related cash
receipts or the effect of required debt amortization payments
could require us to borrow money or sell assets to pay out
enough of our taxable income to satisfy the distribution
requirement and to avoid corporate income tax and the 4% excise
tax in a particular year. In the future, we may borrow funds to
pay distributions to our stockholders and the limited partners
of our Operating Partnership. Any funds that we borrow would
subject us to interest rate and other market risks.
Because
we must distribute a substantial portion of our net income to
qualify as a REIT, we will be largely dependent on third-party
sources of capital to fund our future capital
needs.
To qualify as a REIT, we generally must distribute to our
stockholders at least 90% of our taxable income each year,
excluding capital gains. Because of this distribution
requirement, it is not likely that we will be able to fund a
significant portion of our future capital needs, including
property acquisitions, from retained earnings. Therefore, we
will likely rely on public and private debt and equity capital
to fund our business. This capital may not be available on
favorable terms or at all. Our access to additional capital
depends on a number of things, including the markets
perception of our growth potential and our current and potential
future earnings. Moreover, additional debt financings may
substantially increase our leverage.
Other
Risks
We are
subject to restrictions that may discourage a change of control.
Certain provisions contained in our articles of incorporation
and Maryland law may prohibit or restrict a change of
control.
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Our articles of incorporation prohibit ownership of more than
9.8% of the outstanding shares of our capital stock by one
person. This restriction may discourage a change of control and
may deter individuals or entities from making tender offers for
our capital stock, which offers might otherwise be financially
attractive to our stockholders or which might cause a change in
our management.
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Our board of directors are divided into three classes, with the
term of the directors in each class expiring every third year.
At each annual meeting of stockholders, the successors to the
class of directors whose term expires at such meeting will be
elected to hold office for a term expiring at the annual meeting
of stockholders held in the third year following the year of
their election. After election, a director may only be removed
by our stockholders for cause. Election of directors for
staggered terms with limited rights to remove directors makes it
more difficult for a hostile bidder to acquire control of us.
The existence of this provision may negatively impact the price
of our securities and may discourage third-party bids to acquire
our securities. This provision may reduce any premiums paid to
stockholders in a change in control transaction.
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Certain provisions of Maryland law applicable to us prohibit
business combinations with:
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any person who beneficially owns 10% or more of the voting power
of our common stock, referred to as an interested
stockholder;
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an affiliate of ours who, at any time within the two-year period
prior to the date in question, was an interested
stockholder; or
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an affiliate of an interested stockholder.
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These prohibitions last for five years after the most recent
date on which the interested stockholder became an interested
stockholder. Thereafter, any business combination with the
interested stockholder must be recommended by our board of
directors and approved by the affirmative vote of at least 80%
of the votes entitled to be cast by holders of our outstanding
shares of common stock and two-thirds of the votes entitled to
be cast by holders of our common stock other than shares held by
the interested stockholder. These requirements could have the
effect of inhibiting a change in control even if a change in
control were in our stockholders interest. These
provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by our board of
directors prior to the time that someone becomes an interested
stockholder.
Market
conditions could adversely affect the market price and trading
volume of our securities.
The market price of our common and preferred stock may be highly
volatile and subject to wide fluctuations and the trading volume
in our common and preferred stock may fluctuate and cause
significant price variations to occur. We cannot assure you that
the market price of our common stock will not fluctuate or
decline significantly in the future. Some market conditions that
could negatively affect our share price or result in
fluctuations in the price or trading volume of our securities
include:
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price and volume fluctuations in the stock market from time to
time, which are often unrelated to the operating performance of
particular companies;
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significant volatility in the market price and trading volume of
shares of REITs, real estate companies or other companies in our
sector, which is not necessarily related to the performance of
those companies;
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price and volume fluctuations in the stock market as a result of
terrorist attacks, or speculation regarding future terrorist
attacks, in the United States or abroad;
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actual or anticipated variations in our quarterly operating
results or distributions;
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changes in our funds from operations or earnings estimates or
the publication of research reports about us or the real estate
industry generally;
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actions by institutional stockholders;
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speculation in the press or investment community;
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changes in regulatory policies or tax guidelines, particularly
with respect to REITs; and
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Investor confidence in the stock market.
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Shares
of common stock eligible for future sale may have adverse
effects on our share price.
We cannot predict the effect, if any, of future sales of common
stock, or the availability of shares for future sales, on the
market price of our common stock. Sales of substantial amounts
of common stock (including shares of common stock issuable upon
the conversion of units of our operating partnership that we may
issue from time to time), or the perception that these sales
could occur, may adversely affect prevailing market prices for
our common stock.
An
increase in market interest rates may have an adverse effect on
the market price of our securities.
One of the factors that investors may consider in deciding
whether to buy or sell our common stock or preferred stock is
our distribution rate as a percentage of our share price,
relative to market interest rates. If market interest rates
increase, prospective investors may desire a higher distribution
yield on our securities or seek securities paying higher
dividends or interest. The market price of our securities likely
will be based primarily on the earnings that we derive from
rental income with respect to our properties, interest earned on
our mortgage loans and our related distributions to
stockholders, and not from the underlying appraised value of the
properties themselves. As a result, interest rate fluctuations
and capital market conditions are likely to affect the market
price of our securities, and such effects could be significant.
For instance, if interest rates rise without a corresponding
increase in our distribution rate, the market price of our
common stock could decrease because potential investors may
require a higher distribution yield on our common stock as
market rates on interest-bearing securities, such as bonds,
rise.
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Additionally, because both our Series A and Series B
Preferred Stock is entitled to receive dividends at a fixed rate
(and any series of preferred stock we may authorize and issue in
the future will also likely receive dividends at a fixed rate),
any increase in interest rates is likely to result in a decrease
in the market price of our Series A and Series B
Preferred Stock or any future series of preferred stock.
Legislative
or regulatory action could adversely affect
investors.
In recent years, numerous legislative, judicial and
administrative changes have been made in the provisions of the
federal and state income tax laws applicable to investments in
REIT shares. Additional changes to tax laws are likely to
continue to occur in the future, and we cannot assure you that
any such changes will not adversely affect the taxation of our
stockholders. Any such changes could have an adverse effect on
an investment in our shares or on the market value or the resale
potential of our properties.
If our
Operating Partnership fails to maintain its status as a
partnership or other form of pass-through entity for federal
income tax purposes, its income may be subject to
taxation.
As we hold all of the ownership interests in our Operating
Partnership, it is currently disregarded for income tax
purposes. We intend that it will qualify as a partnership for
income tax purposes upon the admission of additional partners;
however, if the IRS were to successfully challenge the status of
our Operating Partnership as a partnership, it would be taxable
as a corporation. In such event, this would reduce the amount of
distributions that our Operating Partnership could make to us.
This could also result in our losing REIT status and becoming
subject to a corporate level tax on our own income. This would
substantially reduce our cash available to pay distributions and
the return on your investment. In addition, if any of the
entities through which our Operating Partnership owns its
properties, in whole or in part, loses its characterization as a
partnership for federal income tax purposes, it would be subject
to taxation as a corporation, thereby reducing distributions to
our Operating Partnership. Such a recharacterization of an
underlying property owner could also threaten our ability to
maintain REIT status.
Our
potential participation in joint ventures creates additional
risk.
We may participate in joint ventures or purchase properties
jointly with other unaffiliated entities. There are additional
risks involved in these types of transactions. These risks
include the potential of our joint venture partner becoming
bankrupt or our economic or business interests diverging. These
diverging interests could, among other things, expose us to
liabilities of the joint venture in excess of our proportionate
share of these liabilities. The partition rights of each owner
in a jointly owned property could reduce the value of each
portion of the divided property.
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FORWARD-LOOKING
STATEMENTS
Some of the statements contained in or incorporated by reference
in this prospectus constitute forward-looking statements under
Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange
Act), including statements made with respect to possible
or assumed future results of our business, financial condition,
liquidity, results of operations, plans and objectives. When we
use the words believe, expect,
anticipate, estimate or similar
expressions, we intend to identify forward-looking statements.
You should not place undue reliance on these forward-looking
statements. Statements regarding the following subjects are
forward-looking by their nature:
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our business strategy;
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pending transactions;
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our projected operating results;
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our ability to obtain future financing arrangements;
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estimates relating to our future distributions;
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our understanding of our competition;
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market trends;
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estimates of our future operating expenses, including payments
to our Adviser under the terms of our advisory agreement;
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projected capital expenditures; and
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use of the proceeds of our credit facilities, mortgage notes
payable, and other future capital resources, if any.
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These statements involve known and unknown risks, uncertainties
and other factors that may cause results, levels of activity,
growth, performance, tax consequences or achievements to be
materially different from any future results, levels of
activity, growth, performance, tax consequences or achievements
expressed or implied by such forward-looking statements.
The forward-looking statements are based on our beliefs,
assumptions and expectations of our future performance, taking
into account all information currently available to us. Although
we believe that these beliefs, assumptions and expectations are
reasonable, we cannot guarantee future results, levels of
activity, performance, growth or achievements. These beliefs,
assumptions and expectations can change as a result of many
possible events or factors, not all of which are known to us. If
a change occurs, our business, financial condition, liquidity
and results of operations may vary materially from those
expressed in or implied by our forward-looking statements. You
should carefully consider these risks before you make an
investment decision with respect to our common stock, along with
the following factors that could cause actual results to vary
from our forward-looking statements:
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the loss of any of our key employees, such as Mr. David
Gladstone, our chairman and chief executive officer,
Mr. Terry Lee Brubaker, our vice chairman and chief
operating officer, or Mr. George Stelljes III, our
president and chief investment officer;
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general volatility of the capital markets and the market price
of our common stock;
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risks associated with negotiation and consummation of pending
and future transactions;
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changes in our business strategy;
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availability, terms and deployment of capital, including the
ability to maintain and borrow under our existing credit
facility, arrange for long-term mortgages on our properties;
secure one or more additional long-term credit facilities, and
to raise equity capital;
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availability of qualified personnel;
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changes in our industry, interest rates or the general economy;
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the degree and nature of our competition; and
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those factors discussed in the Risk Factors section
of this prospectus and those factors listed under the caption
Risk Factors in our Securities and Exchange
Commission filings incorporated herein by reference.
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We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform such
statements to actual results.
INCORPORATION
BY REFERENCE
There are incorporated by reference in this prospectus the
following documents previously filed by Gladstone Commercial
Corporation with the Securities and Exchange Commission (the
SEC).
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Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006, filed
February 27, 2007;
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Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 31, 2007, filed
May 1, 2007;
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Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 30, 2007, filed
July 31, 2007;
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Quarterly Report on
Form 10-Q
for the fiscal quarter ended September 30, 2007, filed
October 30, 2007;
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Current Reports on
Form 8-K
filed January 3, 2007, July 10, 2007 and
November 16, 2007;
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The description of our common stock contained in our
Registration Statement on
Form 8-A
filed August 12, 2003 as updated through subsequently filed
reports;
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The description of our 7.75% Series A Cumulative Redeemable
Preferred Stock contained in our Registration Statement on
Form 8-A
filed January 19, 2006, as updated through subsequently
filed reports; and
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The description of our 7.50% Series B Cumulative Redeemable
Preferred Stock contained in our Registration Statement on
Form 8-A
filed October 19, 2006, as amended October 23, 2006,
as updated through subsequently filed reports.
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The SEC has assigned file number 0-50363 to reports and other
information that Gladstone Commercial Corporation files with the
Securities and Exchange Commission.
All documents subsequently filed by Gladstone Commercial
Corporation pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act prior to the termination of the offering of
the offered securities, shall be deemed to be incorporated by
reference in this prospectus and to be a part of this prospectus
from the date of filing of such documents. Any statement
contained in this prospectus or in a document incorporated or
deemed to be incorporated by reference in this prospectus shall
be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained in this
prospectus, or in any subsequently filed document which is
incorporated or deemed to be incorporated by reference in this
prospectus, modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this
prospectus.
Gladstone Commercial Corporation will provide without charge to
each person, including any beneficial owner, to whom a copy of
this prospectus is delivered, upon the written or oral request
of such person, a copy of any or all of the documents
incorporated by reference in this prospectus, other than
exhibits to such documents unless such exhibits are specifically
incorporated by reference into such documents. Requests should
be addressed to:
Investor Relations
Gladstone Commercial Corporation
1521 Westbranch Drive, Suite 200
McLean, Virginia 22102
(703) 287-5835
14
WHERE YOU
CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange
Act and, in accordance therewith, file reports, proxy statements
and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information
can be inspected, without charge, at the public reference
facilities maintained by the SEC at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. Copies of
such material can be obtained at prescribed rates from the
Public Reference Room of the SEC at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. You may
obtain information on the operation of the Securities and
Exchange Commissions public reference room in
Washington, D.C. by calling the SEC at
1-800-SEC-0330.
Such materials may also be inspected on the Securities and
Exchange Commissions website at www.sec.gov. Our
outstanding shares of common stock are listed on the Nasdaq
Global Market under the symbol GOOD. You can also
obtain information about Gladstone Commercial Corporation at our
website, www.GladstoneCommercial.com. Information included on,
or accessible through our website is not a part of this
prospectus.
This prospectus constitutes part of a registration statement on
Form S-3
filed by Gladstone Commercial Corporation with the SEC under the
Securities Act of 1933. This prospectus does not contain all of
the information set forth in the registration statement, parts
of which are omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. For
further information, reference is made to the registration
statement.
USE OF
PROCEEDS
Unless otherwise described in the applicable prospectus
supplement, we intend to use the net proceeds from the sale of
the offered securities to:
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pay down our revolving line of credit, which currently accrues
interest at the rate of approximately 6.47% and matures on
December 29, 2009, with an option to extend for an
additional year;
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acquire and develop commercial and industrial real estate for
lease to tenants as suitable opportunities arise;
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make industrial and commercial mortgage loans as suitable
opportunities arise;
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reimburse our Adviser for the expenses and fees it incurs in
connection with our business;
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repay any outstanding indebtedness at the time it is
due; and
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fund general business purposes.
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Pending their use, we may invest the net proceeds from the sale
of the offered securities in REIT-qualified money market
instruments, short-term repurchase agreements or other cash
equivalents that are expected to provide a lower net return than
we hope to achieve from our intended real estate investments. We
may also temporarily invest in securities that qualify as
real estate assets under the REIT provisions of the
Internal Revenue Code, such as mortgage-backed securities. We
may not be able to achieve our targeted investment pace.
RATIO OF
EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
The following table sets forth the ratio of earnings to fixed
charges and preferred dividends for the periods indicated below.
Earnings consist of income (loss) from continuing
operations before income taxes and fixed charges. Fixed
charges consist of interest expense and the portion of
operating lease expense that represents interest.
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Nine Months
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Period February 14,
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Ended
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Year Ended
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Year Ended
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Year Ended
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2003 (Inception)
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September 30,
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December 31,
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December 31,
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December 31,
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through December 31,
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2007
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2006
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2005
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2004
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2003
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Ratio of earnings to combined fixed charges and preferred
dividends
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1.4x
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1.3x
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2.4x
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60.8x
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(1
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For the period from our inception to December 31, 2003, our
earnings were insufficient to cover fixed charges by $240,871. |
15
DESCRIPTION
OF OUR CAPITAL STOCK
General
Our authorized capital stock consists of 20,000,000 shares
of capital stock, $0.001 par value per share, 17,700,000 of
which are designated as common stock, 1,150,000 of which are
designated as Series A Preferred Stock and 1,150,000 of
which are designated Series B Preferred Stock. Under our
articles of incorporation, our board of directors is authorized
to classify and reclassify any unissued shares of capital stock
by setting or changing in any one or more respects, from time to
time before issuance of such stock, the preferences, conversion
or other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption
of such stock. As of September 30, 2007, there were
8,565,264 shares of common stock issued and outstanding and
2,150,000 shares of preferred stock issued and outstanding.
The following summary description of our capital stock is not
necessarily complete and is qualified in its entirety by
reference to our articles of incorporation and bylaws, each of
which has been filed with the Securities and Exchange
Commission, as well as applicable provisions of Maryland law.
Description
of Common Stock
Voting
Rights of Common Stock
Subject to the provisions of our articles of incorporation
regarding restrictions on the transfer and ownership of our
capital stock, each outstanding share of common stock entitles
the holder to one vote on all matters submitted to a vote of
stockholders, including the election of directors, and, except
as provided with respect to any other class or series of capital
stock (currently consisting of Series A Preferred Stock and
Series B Preferred Stock), the holders of the common stock
possess the exclusive voting power. There is no cumulative
voting in the election of directors, which means that the
holders of a majority of the outstanding common stock, voting as
a single class, can elect all of the directors then standing for
election and the holders of the remaining shares are not able to
elect any directors.
Dividends,
Liquidations and Other Rights
All shares of common stock offered by this prospectus will be
duly authorized, fully paid and nonassessable. Holders of our
common stock are entitled to receive dividends when declared by
our board of directors out of assets legally available for the
payment of dividends. They also are entitled to share ratably in
our assets legally available for distribution to our
stockholders in the event of our liquidation, dissolution or
winding up, after payment of or adequate provision for all of
our known debts and liabilities. These rights are subject to the
preferential rights of any other class or series of our shares
(currently consisting of Series A Preferred Stock and
Series B Preferred Stock) and to the provisions of our
articles of incorporation regarding restrictions on transfer of
our shares.
Holders of our common stock have no preference, conversion,
exchange, sinking fund, redemption or appraisal rights and have
no preemptive rights to subscribe for any of our securities.
Subject to the restrictions on transfer of shares contained in
our articles of incorporation, all shares of common stock have
equal dividend, liquidation and other rights.
Certificates
We will not issue certificates. Shares will be held in
uncertificated form which will eliminate the
physical handling and safekeeping responsibilities inherent in
owning transferable stock certificates and eliminate the need to
return a duly executed stock certificate to the transfer agent
to effect a transfer. Transfers can be effected simply by
mailing to us a duly executed transfer form. Upon the issuance
of our shares, we will send to each stockholder a written
statement which will include all information that is required to
be written upon stock certificates under Maryland law.
Meetings
and Special Voting Requirements
An annual meeting of the stockholders will be held each year for
the purpose of electing the class of directors whose term is up
for election and to conduct other business that may be before
the stockholders. Special meetings of
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stockholders may be called only upon the request of a majority
of our directors, a majority of our independent directors, our
chairman, our president or upon the written request of
stockholders entitled to cast at least 20% of all the votes
entitled to be cast at a meeting. In general, the presence in
person or by proxy of a majority of the outstanding shares,
exclusive of excess shares (described in Certain
Provisions of Maryland Law and of Our Articles of Incorporation
and Bylaws Restrictions on Ownership of Shares
below), shall constitute a quorum. Generally, the affirmative
vote of a majority of the votes entitled to be voted at a
meeting at which a quorum is present is necessary to take
stockholder action, except that a plurality of all votes cast at
such a meeting is sufficient to elect a director.
A proposal by our board of directors to amend our articles of
incorporation or to dissolve us requires the approval at a duly
held meeting of our stockholders holding at least a majority of
the shares entitled to vote. Stockholders may, by the
affirmative vote of two-thirds of the shares entitled to vote on
such matter, elect to remove a director for cause. Stockholders
do not have the ability to vote to replace our Adviser or to
select a new adviser.
The affirmative vote of a majority of all shares entitled to
vote is required to approve any merger or sale of substantially
all of our assets other than in the ordinary course of business.
The term substantially all as used in this context
is a term used in the Maryland General Corporate Law. The
Maryland General Corporation Law does not include a definition
of substantially all and Maryland case law suggests
that the term be interpreted on a
case-by-case
basis. The effect for investors of the Maryland laws lack
of definition is that we cannot provide investors with a
definition for substantially all and therefore
stockholders will not know whether a sale of assets will
constitute a sale of substantially all of the assets and,
therefore, whether they will have the right to approve any
particular sale.
Information
Rights
Any stockholder may, during normal business hours and for any
lawful and proper purpose, inspect and copy our bylaws, minutes
of the proceedings of our stockholders, our annual financial
statements and any voting trust agreement that is on file at our
principal office. In addition, one or more stockholders who
together are, and for at least six months have been, record or
beneficial holders of 5% of our common stock are entitled to
inspect a copy of our stockholder list upon written request. The
list will include the name and address of, and the number of
shares owned by, each stockholder and will be available at our
principal office within 20 days of the stockholders
request.
The rights of stockholders described above are in addition to,
and do not adversely affect rights provided to investors under,
Rule 14a-7
promulgated under the Exchange Act, which provides that, upon
request of investors and the payment of the expenses of the
distribution, we are required to distribute specific materials
to stockholders in the context of the solicitation of proxies
for voting on matters presented to stockholders, or, at our
option, provide requesting stockholders with a copy of the list
of stockholders so that the requesting stockholders may make the
distribution themselves.
Distributions
Distributions will be paid to investors who are stockholders as
of the record date selected by our board of directors.
Distributions will be paid on a quarterly basis regardless of
the frequency with which such distributions are declared. We are
required to make distributions sufficient to satisfy the REIT
requirements. Generally, income distributed as distributions
will not be taxable to us under federal income tax laws unless
we fail to comply with the REIT requirements.
Distributions will be paid at the discretion of our board of
directors based on our earnings, cash flow and general financial
condition. The directors discretion will be governed, in
substantial part, by their obligation to cause us to comply with
the REIT requirements. Because we may receive income from
interest or rents at various times during our fiscal year,
distributions may not reflect our income earned in that
particular distribution period but may be made in anticipation
of cash flow which we expect to receive during a later period of
the year and may be made in advance of actual receipt in an
attempt to make distributions relatively uniform. We may borrow
to make distributions if the borrowing is necessary to maintain
our REIT status, or if the borrowing is part of a liquidation
strategy whereby the borrowing is done in anticipation of the
sale of properties and the proceeds will be used to repay the
loan.
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Repurchases
of Excess Shares
We have the authority to redeem excess shares (as
defined in our articles of incorporation) immediately upon
becoming aware of the existence of excess shares or after giving
the holder of the excess shares 30 days to transfer the
excess shares to a person whose ownership of such shares would
not exceed the ownership limit and, therefore such shares would
no longer be considered excess shares. The price paid upon
redemption by us shall be the lesser of the price paid for such
excess shares by the stockholder holding the excess shares or
the fair market value of the excess shares. We may purchase
excess shares or otherwise repurchase shares if the repurchase
does not impair our capital or operations. For additional
information regarding excess shares, see Certain
Provisions of Maryland Law and of our Articles of Incorporation
and Bylaws Restrictions on Ownership of Shares.
Other
Matters
The transfer and dividend paying agent and registrar for our
common stock is The Bank of New York. The principal business
address of The Bank of New York is 101 Barclay Street,
Suite 11E, New York, New York 10286, telephone number
(800) 274-2944.
The Bank of New York also maintains an internet web site at
http://stock.bankofny.com.
Description
of Preferred Stock
General
Subject to limitations prescribed by Maryland law and our
articles of incorporation, our board of directors is authorized
to issue, from the authorized but unissued shares of stock,
shares of preferred stock in series and to establish from time
to time the number of shares of preferred stock to be included
in the series and to fix the designation and any preferences,
conversion and other rights, voting powers, restrictions,
limitations as to dividends and other distributions,
qualifications and terms and conditions of redemption of the
shares of each series, and any other subjects or matters as may
be fixed by resolution of our board of directors or one of its
duly authorized committees.
Existing
Series of Preferred Stock
As of the date of this prospectus, our board of directors has
designated:
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1,150,000 shares of 7.75% Series A Cumulative
Preferred Stock, 1,000,000 of which are outstanding; and
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1,150,000 shares of 7.75% Series B Cumulative
Preferred Stock, all of which are outstanding.
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The description of our Series A Preferred Stock is
contained in our prospectus supplement dated January 18,
2006, which was filed January 19, 2006 with the Securities
and Exchange Commission.
The description of our Series B Preferred Stock is
contained in our prospectus supplement dated October 18,
2006, which was filed October 19, 2006 with the Securities
and Exchange Commission.
Future
Series of Preferred Stock
The following description of the terms of our preferred stock
sets forth general terms and provisions of our preferred stock
to which a prospectus supplement may relate. Specific terms of
any series of preferred stock offered by a prospectus supplement
will be described in that prospectus supplement. The description
set forth below is subject to and qualified in its entirety by
reference to the articles supplementary to our charter fixing
the preferences, limitations and relative rights of a particular
series of preferred stock.
If we offer preferred stock pursuant to this prospectus, the
applicable prospectus supplement will describe the specific
terms of the series of shares of preferred stock being offered,
including:
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the title and stated value of the series of shares of preferred
stock and the number of shares constituting that series;
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the number of shares of the series of shares of preferred stock
offered, the liquidation preference per share and the offering
price of the shares of preferred stock;
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the dividend rate(s), period(s)and/or payment date(s)or the
method(s)of calculation for those values relating to the shares
of preferred stock of the series;
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the date from which dividends on shares of preferred stock of
the series shall cumulate, if applicable;
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the procedures for any auction and remarketing, if any, for
shares of preferred stock of the series;
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the provision for a sinking fund, if any, for shares of
preferred stock of the series;
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the provision for redemption or repurchase, if applicable, of
shares of preferred stock of the series, and any restriction on
our ability to exercise those redemption and repurchase rights;
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any listing of the series of shares of preferred stock on any
securities exchange or market;
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the terms and conditions, if applicable, upon which shares of
preferred stock of the series will be convertible into shares of
preferred stock of another series or common stock, including the
conversion price, or manner of calculating the conversion price,
and the conversion period;
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whether the preferred stock will be exchangeable into debt
securities, and, if applicable, the exchange price, or how it
will be calculated, and the exchange period;
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voting rights, if any, of the shares of preferred stock of the
series;
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preemption rights, if any;
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whether interests in shares of preferred stock of the series
will be represented by global securities;
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a discussion of U.S. Federal income tax considerations
applicable to shares of preferred stock of the series;
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the relative ranking and preferences of shares of preferred
stock of the series as to dividend rights and rights upon
liquidation, dissolution or winding up of our affairs;
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any limitations on issuance of any series of shares of preferred
stock ranking senior to or on a parity with the series of shares
of preferred stock as to dividend rights and rights upon
liquidation, dissolution or winding up of our affairs; and
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any limitations on direct or beneficial ownership and
restrictions on transfer of shares of preferred stock of the
series, in each case as may be appropriate to preserve our
status as a REIT under the Code;
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the registrar and transfer agent for the shares of preferred
stock; and
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any other specific terms, preferences, rights, limitations or
restrictions of the series of shares of preferred stock.
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If we issue shares of preferred stock under this prospectus, the
shares will be fully paid and non-assessable and will not have,
or be subject to, any preemptive or similar rights.
The issuance of preferred stock could adversely affect the
voting power, conversion or other rights of holders of common
stock. Preferred stock could be issued quickly with terms
designed to delay or prevent a change in control of our company
or make removal of management more difficult. Additionally, the
issuance of preferred stock may have the effect of decreasing
the market price of our common stock.
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CERTAIN
PROVISIONS OF MARYLAND LAW AND
OF OUR ARTICLES OF INCORPORATION AND BYLAWS
The following description of certain provisions of Maryland
law and of our articles of incorporation and bylaws is only a
summary. For a complete description, we refer you to the
Maryland General Corporation Law, our articles of incorporation
and our bylaws. We have filed our articles of incorporation and
bylaws as exhibits to the registration statement of which this
prospectus is a part.
Classification
of our Board of Directors
Pursuant to our bylaws our board of directors is comprised of
ten members and is divided into three classes of directors.
Directors of each class are elected for a three-year term, and
each year one class of directors will be elected by the
stockholders. The current terms of the Class II,
Class III and Class I directors will expire in 2008,
2009 and 2010, respectively, and when their respective
successors are duly elected and qualify. Any director elected to
fill a vacancy shall serve for the remainder of the full term of
the class in which the vacancy occurred and until a successor is
elected and qualifies. We believe that classification of our
board of directors helps to assure the continuity and stability
of our business strategies and policies as determined by our
directors. Holders of shares of our capital stock have no right
to cumulative voting in the election of directors. Consequently,
at each annual meeting of stockholders, the holders of a
majority of the capital stock are able to elect all of the
successors of the class of directors whose terms expire at that
meeting.
Our classified board could have the effect of making the
replacement of incumbent directors more time consuming and
difficult. At least two annual meetings of stockholders, instead
of one, will generally be required to effect a change in a
majority of our board of directors. Thus, our classified board
could increase the likelihood that incumbent directors will
retain their positions. The staggered terms of directors may
delay, defer or prevent a tender offer or an attempt to change
control of us or another transaction that might involve a
premium price for our common stock that might be in the best
interest of our stockholders.
Removal
of Directors
Any director may be removed only for cause by the stockholders
upon the affirmative vote of at least two-thirds of all the
votes entitled to be cast at a meeting called for the purpose of
the proposed removal. The notice of the meeting shall indicate
that the purpose, or one of the purposes, of the meeting is to
determine if the director shall be removed.
Restrictions
on Ownership of Shares
In order for us to qualify as a REIT, not more than 50% of our
outstanding shares may be owned by any five or fewer individuals
(including some tax-exempt entities) during the last half of
each taxable year, and the outstanding shares must be owned by
100 or more persons independent of us and each other during at
least 335 days of a
12-month
taxable year or during a proportionate part of a shorter taxable
year for which an election to be treated as a REIT is made. We
may prohibit certain acquisitions and transfers of shares so as
to facilitate our continued qualification as a REIT under the
Internal Revenue Code. However, this prohibition may not be
effective.
Our articles of incorporation, in order to assist our board of
directors in preserving our status as a REIT, contain an
ownership limit which prohibits any person or group of persons
from acquiring, directly or indirectly, beneficial ownership of
more than 9.8% of our outstanding shares of capital stock.
Shares owned by a person or a group of persons in excess of the
ownership limit are deemed excess shares. Shares
owned by a person who individually owns of record less than 9.8%
of outstanding shares may nevertheless be excess shares if the
person is deemed part of a group for purposes of this
restriction.
Our articles of incorporation stipulate that any purported
issuance or transfer of shares shall be valid only with respect
to those shares that do not result in the transferee-stockholder
owning shares in excess of the ownership limit. If the
transferee-stockholder acquires excess shares, the person is
considered to have acted as our agent and holds the excess
shares on behalf of the ultimate stockholder.
The ownership limit does not apply to offerors which, in
accordance with applicable federal and state securities laws,
make a cash tender offer, where at least 90% of the outstanding
shares of our common stock (not including shares or subsequently
issued securities convertible into common stock which are held
by the tender offeror and any
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affiliates or associates thereof within
the meaning of the Exchange Act) are duly tendered and accepted
pursuant to the cash tender offer. The ownership limit also does
not apply to the underwriter in a public offering of our shares.
The ownership limit also does not apply to a person or persons
which our directors so exempt from the ownership limit upon
appropriate assurances that our qualification as a REIT is not
jeopardized.
Business
Combinations
Maryland law prohibits business combinations between
us and an interested stockholder or an affiliate of an
interested stockholder for five years after the most recent date
on which the interested stockholder becomes an interested
stockholder. These business combinations include a merger,
consolidation, share exchange, or, in circumstances specified in
the statute, an asset transfer or issuance or reclassification
of equity securities. Maryland law defines an interested
stockholder as:
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any person who beneficially owns 10% or more of the voting power
of our shares; or
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an affiliate or associate of ours who, at any time within the
two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of our
then-outstanding voting shares.
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A person is not an interested stockholder if our board of
directors approved in advance the transaction by which the
person otherwise would have become an interested stockholder.
However, in approving a transaction, our board of directors may
provide that its approval is subject to compliance, at or after
the time of approval, with any terms and conditions determined
by our board of directors.
After the five-year prohibition, any business combination
between us and an interested stockholder generally must be
recommended by our board of directors and approved by the
affirmative vote of at least:
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80% of the votes entitled to be cast by holders of our
then-outstanding shares of capital stock; and
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two-thirds of the votes entitled to be cast by holders of our
voting shares other than shares held by (a) the interested
stockholder with whom or with whose affiliate the business
combination is to be effected and (b) shares held by an
affiliate or associate of the interested stockholder.
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These super-majority vote requirements do not apply if our
common stockholders receive a minimum price, as defined under
Maryland law, for their shares in the form of cash or other
consideration in the same form as previously paid by the
interested stockholder for its shares. The statute permits
various exemptions from its provisions, including business
combinations that are exempted by our board of directors before
the time that the interested stockholder becomes an interested
stockholder. The business combination statute may discourage
others from trying to acquire control of us and increase the
difficulty of consummating any offer.
Merger;
Amendment of Articles of Incorporation
Under Maryland law, we will not be able to amend our articles of
incorporation or merge with another entity unless approved by
the affirmative vote of stockholders holding at least a majority
of the shares entitled to vote on the matter. As permitted by
Maryland law, our articles of incorporation contain a provision
permitting our directors, without any action by our
stockholders, to amend the articles of incorporation to increase
or decrease the aggregate number of shares of stock or the
number of shares of any class of stock that we have authority to
issue.
Operations
We generally are prohibited from engaging in certain activities,
including acquiring or holding property or engaging in any
activity that would cause us to fail to qualify as a REIT.
Term and
Termination
Our articles of incorporation provide for us to have a perpetual
existence. Pursuant to our articles of incorporation, and
subject to the provisions of any of our classes or series of
stock then outstanding and the approval by a majority of the
entire board of directors, our stockholders, at any meeting
thereof, by the affirmative vote of a majority of all of the
votes entitled to be cast on the matter, may approve a plan of
liquidation and dissolution.
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Advance
Notice of Director Nominations and New Business
Our bylaws provide that, with respect to an annual meeting of
stockholders, nominations of persons for election to our board
of directors and the proposal of business to be considered by
stockholders at the annual meeting may be made only:
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pursuant to our notice of the meeting;
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by our board of directors; or
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by a stockholder who was a stockholder of record both at the
time of the provision of notice and at the time of the meeting
who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in our bylaws.
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With respect to special meetings of stockholders, only the
business specified in our notice of meeting may be brought
before the meeting of stockholders and nominations of persons
for election to our board of directors may be made only:
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pursuant to our notice of the meeting;
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by our board of directors; or
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provided that our board of directors has determined that
directors shall be elected at such meeting, by a stockholder who
was a stockholder of record both at the time of the provision of
notice and at the time of the meeting who is entitled to vote at
the meeting and has complied with the advance notice provisions
set forth in our bylaws.
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Power to
Issue Additional Shares
We currently do not intend to issue any securities other than
the shares described in this prospectus, although we may do so
at any time, including upon the redemption of limited
partnership interests that we may issue in connection with
acquisitions of real property. We believe that the power to
issue additional shares of stock and to classify or reclassify
unissued shares of common stock or preferred stock and
thereafter to issue the classified or reclassified shares
provides us with increased flexibility in structuring possible
future financings and acquisitions and in meeting other needs
which might arise. These actions can be taken without
stockholder approval, unless stockholder approval is required by
applicable law or the rules of any stock exchange or automated
quotation system on which our securities may be listed or
traded. Although we have no present intention of doing so, we
could issue a class or series of shares that could delay, defer
or prevent a transaction or a change in control that might
involve a premium price for holders of common stock or otherwise
be in their best interest.
Control
Share Acquisitions
Maryland law provides that control shares of a
corporation acquired in a control share acquisition
have no voting rights unless the corporations stockholders
approve such voting rights by a vote of two-thirds of the votes
entitled to be cast on the matter. Shares owned by the acquiror,
or by officers or directors of the corporation who are also
employees are excluded from shares entitled to vote on the
matter. Control shares are voting shares which, if
aggregated with all other shares previously acquired by the
acquiring person, or in respect of which the acquiring person is
able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the
acquiring person to exercise voting power in electing directors
within one of the following ranges of voting power:
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one-tenth or more but less than one-third of all voting power;
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one-third or more but less than a majority of all voting
power; or
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a majority or more of all voting power.
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Control shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained
stockholder approval. A control share acquisition
means the acquisition of control shares, subject to certain
exceptions.
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A person who has made or proposes to make a control share
acquisition may compel our board of directors to call a special
meeting of stockholders to be held within 50 days to
consider the voting rights of the shares. The right to compel
the calling of a special meeting is subject to the satisfaction
of certain conditions, including providing a statement to us
detailing, among other things, the acquiring persons
identity and stock ownership and an undertaking to pay the
expenses of the meeting. If no request for a meeting is made, we
may present the question at any stockholders meeting.
If voting rights are not approved at the stockholders
meeting or if the acquiring person does not deliver the
statement required by Maryland law, then, subject to certain
conditions and limitations, we may redeem any or all of the
control shares, except those for which voting rights have
previously been approved, at the fair market value of such
shares. The control share acquisition statute does not apply to
shares acquired in a merger, consolidation or share exchange if
we are a party to the transaction, nor does it apply to
acquisitions approved or exempted by our articles of
incorporation or bylaws.
Possible
Anti-Takeover Effect of Certain Provisions of Maryland Law and
of Our Articles of Incorporation and Bylaws
The business combination provisions and the control share
acquisition provisions of Maryland law, the provisions of our
bylaws regarding the classification of our board of directors
and the restrictions on the transfer of stock and the advance
notice provisions of our bylaws could have the effect of
delaying, deferring or preventing a transaction or a change in
the control that might involve a premium price for holders of
common stock or otherwise be in their best interest.
CERTAIN
UNITED STATES FEDERAL TAX CONSIDERATIONS
The following discussion summarizes our taxation and the
material U.S. Federal income tax consequences to
stockholders of their ownership of our stock. The tax treatment
of stockholders will vary depending upon the stockholders
particular situation, and this discussion addresses only
stockholders that hold our stock as a capital asset and does not
deal with all aspects of taxation that may be relevant to
particular stockholders in light of their personal investment or
tax circumstances. This section also does not deal with all
aspects of taxation that may be relevant to certain types of
stockholders to which special provisions of the
U.S. Federal income tax laws apply, including:
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dealers in securities or currencies;
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traders in securities that elect to use a
mark-to-market
method of accounting for their securities holdings;
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banks;
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tax-exempt organizations;
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certain insurance companies;
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persons liable for the alternative minimum tax;
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persons that hold our stock as a hedge against interest rate or
currency risks or as part of a straddle or conversion
transaction; and
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stockholders whose functional currency is not the
U.S. dollar.
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This summary is based on the Code, its legislative history,
existing and proposed regulations under the Code, published
rulings and court decisions. This summary describes the
provisions of these sources of law only as they are currently in
effect. All of these sources of law may change at any time, and
any change in the law may apply retroactively.
We urge you to consult with your own tax advisor regarding
the tax consequences to you of acquiring, owning and selling our
stock including the U.S. Federal, state, local and foreign
tax consequences of acquiring, owning and selling our stock in
your particular circumstances and potential changes in
applicable laws.
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Taxation
of the Company as a REIT
In the opinion of Cooley Godward Kronish LLP, commencing with
our taxable year ending December 31, 2003, we have been
organized in conformity with the requirements for qualification
and taxation as a REIT under the Code, and our proposed method
of operation will enable us to continue to meet the requirements
for qualification and taxation as a REIT under the Code. You
should be aware, however, that opinions of counsel are not
binding upon the IRS or any court.
In providing its opinion, Cooley Godward Kronish LLP is relying
as to certain factual matters upon the statements and
representations contained in certificates provided to Cooley
Godward Kronish LLP by us. Commencing with our taxable year
ending December 31, 2003, we have been organized in
conformity with the requirements for qualification and taxation
as a REIT under the Code, and our proposed method of operation
will enable us to continue to meet the requirements for
qualification and taxation as a REIT under the Code.
Our qualification as a REIT will depend upon our continuing
satisfaction of the requirements of the Code relating to
qualification for REIT status. Some of these requirements depend
upon actual operating results, distribution levels, diversity of
stock ownership, asset composition, source of income and record
keeping. Accordingly, while we intend to continue to qualify to
be taxed as a REIT, the actual results of our operations for any
particular year might not satisfy these requirements.
The sections of the Code applicable to REITs are highly
technical and complex. The following discussion summarizes the
material aspects of relevant sections of the Code.
As a REIT, we generally will not have to pay U.S. Federal
corporate income taxes on net income that we currently
distribute to our stockholders. This treatment substantially
eliminates the double taxation at the corporate and
stockholder levels that generally results from investment in a
regular corporation. Our dividends, however, will generally not
be eligible for (i) the reduced tax rates applicable to
dividends received by individuals or (ii) the corporate
dividends received deduction. In addition, our domestic taxable
REIT subsidiary will be subject to U.S. Federal, state and
local corporate income tax.
Even if we qualify for taxation as a REIT, we may be subject to
U.S. Federal income tax as follows:
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First, we will have to pay tax at regular corporate rates
on any undistributed real estate investment trust taxable
income, including undistributed net capital gains.
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Second, under certain circumstances, we may have to pay
the alternative minimum tax on items of tax preference, if any.
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Third, if we have (a) net income from the sale or
other disposition of foreclosure property, as
defined in the Code, which is held primarily for sale to
customers in the ordinary course of business or (b) other
non-qualifying net income from foreclosure property, we will
have to pay tax at the highest corporate rate on that income.
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Fourth, if we have net income from prohibited
transactions, as defined in the Code, we will have to pay
a 100% tax on that income. Prohibited transactions 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. Under current law, unless a
sale of real property qualifies for a safe harbor, the question
of whether the sale of a property constitutes the sale of
property held primarily for sale to customers is generally a
question of the facts and circumstances regarding a particular
transaction. We and our subsidiaries intend to hold the
interests in our properties for investment with a view to
long-term appreciation and to make occasional sales as are
consistent with our investment objectives. We do not intend to
engage in prohibited transactions. We cannot assure you,
however, that we will only make sales that satisfy the
requirements of the safe harbors or that the IRS will not
successfully assert that one or more of such sales are
prohibited transactions.
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Fifth, if we should fail to satisfy the 75% gross income
test or the 95% gross income test, as discussed below under
Income Tests, but we have nonetheless
maintained our qualification as a REIT because we have satisfied
other requirements necessary to maintain REIT qualification, we
will have to pay a 100% tax on an
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amount equal to (a) the gross income attributable to the
greater of (i) 75% of our gross income over the amount of
gross income that is qualifying income for purposes of the 75%
test, and (ii) 95% of our gross income over the amount of
gross income that is qualifying income for purposes of the 95%
test, multiplied by (b) a fraction intended to reflect our
profitability.
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Sixth, if we should fail to distribute during each
calendar year at least the sum of (1) 85% of our real
estate investment trust ordinary income for that year,
(2) 95% of our real estate investment trust capital gain
net income for that year and (3) any undistributed taxable
income from prior periods, we would have to pay a non-deductible
4% excise tax on the excess of that required distribution over
the amounts actually distributed.
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Seventh, if we acquire any asset from a C corporation in
certain transactions in which we must adopt the basis of the
asset or any other property in the hands of the C corporation as
our basis of the asset in our hands, and we subsequently
recognize gain on the disposition of that asset during the
10-year
period beginning on the date on which we acquired that asset,
then we will have to pay tax on the built-in gain at the highest
regular corporate rate. A C corporation means
generally a corporation that has to pay full corporate-level tax.
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Eighth, if we receive non-arms length income from
one of our taxable REIT subsidiaries (as defined under
Asset Tests), we will be subject to a
100% tax on the amount of our non-arms length income.
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Ninth, if we should fail to satisfy the asset test (as
discussed below) but nonetheless maintain our qualification as a
REIT because certain other requirements have been met, we may be
subject to a tax that would be the greater of (a) $50,000;
or (b) an amount determined by multiplying the highest rate
of tax for corporations by the net income generated by the
assets for the period beginning on the first date of the failure
and ending on the day we dispose of the assets (or otherwise
satisfy the requirements for maintaining REIT qualification).
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Tenth, if we should fail to satisfy one or more
requirements for REIT qualification, other than the 95% and 75%
gross income tests and other than the asset test, but
nonetheless maintain our qualification as a REIT because certain
other requirements have been met, we may be subject to a $50,000
penalty for each failure.
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Eleventh, if we should fail to comply with the
record-keeping requirements in ascertaining the actual ownership
of the outstanding shares of our stock, we may be subject to a
$25,000 or a $50,000 penalty for each failure.
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Requirements
for Qualification as a REIT
The Code defines a REIT as a corporation, trust or association
that is:
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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 otherwise be taxable as a domestic corporation, but
for Sections 856 through 859 of the Code;
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that is neither a financial institution nor an insurance company
to which certain provisions of the Code apply;
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the beneficial ownership of which is held by 100 or more persons;
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that, during the last half of each taxable year, has no more
than 50% in value of its outstanding stock owned, directly or
constructively, by five or fewer individuals, as defined in the
Code to include certain entities; and
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that meets certain other tests, described below, regarding the
nature of its income and assets.
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The Code provides that the conditions described in the first
through fourth bullet points above must be met during the entire
taxable year and that the condition described in the fifth
bullet point above must be met 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. Under applicable
Treasury regulations, we must maintain certain records and
request certain information from our
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stockholders designed to disclose the actual ownership of our
stock. The Code waives the requirements in the fifth and sixth
bullet points for the first taxable year for which an election
is made to be taxed as a REIT.
We expect that we will satisfy the conditions described in the
first through sixth bullet points of the second preceding
paragraph. In addition, our articles of incorporation provide
for restrictions regarding the ownership and transfer of our
stock. These restrictions are intended to assist us in
continuing to satisfy the share ownership requirements described
in the fifth and sixth bullet points of the second preceding
paragraph. The ownership and transfer restrictions pertaining to
our stock are described in this prospectus under the heading
Certain Provisions of Maryland Law and of our Articles of
Incorporation and Bylaws Restrictions on Ownership
of Shares. Our board of directors will require an IRS
ruling or an opinion of counsel before granting any request for
an exemption from such ownership limitations in circumstances
where it is unable to satisfy itself that the ownership
limitations would not be violated.
We own interests in two corporate subsidiaries. Code
Section 856(i) provides that unless a REIT makes an
election to treat the corporation as a taxable REIT subsidiary
(as defined below), a wholly owned corporate subsidiary of a
REIT which is a qualified REIT subsidiary, as
defined in the Code, will not be treated as a separate
corporation, and all assets, liabilities and items of income,
deduction and credit of a qualified REIT subsidiary will be
treated as assets, liabilities and items of these kinds of the
REIT. Thus, in applying the requirements described in this
section, our qualified REIT subsidiaries, if any, will be
ignored, and all assets, liabilities and items of income,
deduction and credit of these subsidiaries will be treated as
assets, liabilities and items of these kinds of ours.
Taxable
REIT Subsidiaries
A taxable REIT subsidiary, or TRS, is any corporation in which a
REIT directly or indirectly owns stock, provided that the REIT
and that corporation make a joint election to treat that
corporation as a TRS. The election can be revoked at any time as
long as the REIT and the TRS revoke such election jointly. In
addition, if a TRS holds directly or indirectly, more than 35%
of the securities of any other corporation (by vote or by
value), then that other corporation is also treated as a TRS. A
corporation can be a TRS with respect to more than one REIT.
A TRS is subject to U.S. Federal income tax at regular
corporate rates (currently at the top marginal rate of 35%), and
may also be subject to state and local taxation.
Any dividends paid or deemed paid by any one of our TRSs will
also be subject to tax, either (i) to us if we do not pay
the dividends received to our stockholders as dividends, or
(ii) to our stockholders if we do pay out the dividends
received to our stockholders. We may hold more than 10% of the
stock of a TRS without jeopardizing our qualification as a REIT
notwithstanding the rule described below under
Asset Tests that generally precludes
ownership of more than 10% of any issuers securities.
However, as noted below, in order for us to qualify as a REIT,
the securities of all of the TRSs in which we have invested
either directly or indirectly may not represent more than 20% of
the total value of our assets. Although we expect that the
aggregate value of all of our interests in TRSs will represent
less than 20% of the total value of our assets, we cannot assure
that this will always be true. Other than certain activities
related to operating or managing a lodging or health care
facility as more fully described below in the section entitled
Income Tests, a TRS may generally engage
in any business including the provision of customary or
non-customary services to tenants of the parent REIT.
Income
Tests
In order to maintain our qualification as a REIT, we annually
must satisfy two gross income requirements:
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First, we must derive at least 75% of our gross income,
excluding gross income from prohibited transactions, for each
taxable year directly or indirectly from investments relating to
real property or mortgages on real property, including
rents from real property, as defined in the Code, or
from certain types of temporary investments. Rents from real
property generally include our expenses that are paid or
reimbursed by tenants.
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Second, at least 95% of our gross income, excluding gross
income from prohibited transactions, for each taxable year must
be derived from real property investments as described in the
preceding bullet point, dividends (including dividends from a
TRS), interest and gain from the sale or disposition of stock or
securities that do not constitute dealer property, or from any
combination of these types of sources.
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For taxable years beginning on or after January 1, 2005,
the American Jobs Creation Act of 2004, effective as of
October 22, 2004, or the 2004 Act, clarifies the types of
transactions that are hedging transactions for purposes of the
95% gross income test and states that any income from a hedging
transaction that is clearly and timely identified and hedges
indebtedness incurred or to be incurred to acquire or carry real
estate assets will not constitute gross income, rather than
being treated as qualifying or nonqualifying income, for
purposes of the 95% gross income test.
Rents that we receive or are deemed to have received will
qualify as rents from real property in satisfying the gross
income requirements for a REIT described above only if the rents
satisfy several conditions:
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First, the amount of rent must not be based in whole or
in part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from
rents from real property solely because it is based on a fixed
percentage or percentages of receipts or sales.
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Second, the Code provides that rents received from a
tenant will not qualify as rents from real property in
satisfying the gross income tests if the REIT, or a direct or
indirect owner of 10% or more of the REIT, directly or under the
applicable attribution rules, owns a 10% or greater interest in
that tenant; except that rents received from a TRS under certain
circumstances qualify as rents from real property even if we own
more than a 10% interest in the subsidiary. We refer to a tenant
in which we own a 10% or greater interest as a related
party tenant.
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Third, if rent attributable to personal property leased
in connection with a lease of real property is greater than 15%
of the total rent received under the lease, then the portion of
rent attributable to the personal property will not qualify as
rents from real property.
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Finally, for rents received to qualify as rents from real
property, the REIT generally must not operate or manage the
property or furnish or render services to the tenants of the
property, other than through an independent contractor from whom
the REIT derives no revenue and who is adequately compensated or
through a TRS. However, we may directly perform certain services
that landlords usually or customarily render when renting space
for occupancy only or that are not considered rendered to the
occupant of the property.
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We do not expect to perform any services for our tenants. If we
were to provide services to a tenant that are other than those
landlords usually or customarily provide when renting space for
occupancy only, amounts received or accrued by us for any of
these services will not be treated as rents from real property
for purposes of the REIT gross income tests. However, the
amounts received or accrued for these services will not cause
other amounts received with respect to the property to fail to
be treated as rents from real property unless the amounts
treated as received in respect of the services, together with
amounts received for certain management services, exceed 1% of
all amounts received or accrued by us during the taxable year
with respect to the property. For purposes of the 1% threshold,
the amount treated as received for any service may not be less
than 150% of the direct cost incurred in furnishing or rendering
the service. If the sum of the amounts received in respect of
the services to tenants and management services described in the
preceding sentence exceeds the 1% threshold, then all amounts
received or accrued by us with respect to the property will not
qualify as rents from real property, even if we provide the
impermissible services to some, but not all, of the tenants of
the property.
For purposes of the gross income tests, the term
interest generally does not include any amount
received or accrued, directly or indirectly, if the
determination of that 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.
If we fail to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, we may nevertheless qualify
as a REIT for that year if we satisfy the requirements of other
provisions of the Code that allow relief from disqualification
as a REIT. These relief provisions, as modified by the 2004 Act,
will generally be available if:
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our failure to meet the income tests was due to reasonable cause
and not due to willful neglect; and
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following our identification of the failure, we file with the
IRS a schedule describing each item of our qualifying gross
income for the taxable year of the failure.
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We might not be entitled to the benefit of these relief
provisions, however. As discussed in the fifth bullet point
under the section Taxation of the Company as a
REIT, even if these relief provisions apply, we would have
to pay a tax on the excess income.
Asset
Tests
At the close of each quarter of each taxable year, we must also
satisfy three tests relating to the nature of our assets:
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First, at least 75% of the value of our total assets must
be represented by real estate assets, including (a) real
estate assets held by our qualified REIT subsidiaries, our
allocable share of real estate assets held by partnerships in
which we own an interest and stock issued by another REIT,
(b) for a period of one year from the date of our receipt
of proceeds of an offering of its shares of beneficial interest
or publicly offered debt with a term of at least five years,
stock or debt instruments purchased with these proceeds and
(c) cash, cash items and government securities.
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Second, not more than 25% of our total assets may be
represented by securities other than those in the 75% asset
class.
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Third, not more than 20% of our total assets may
constitute securities issued by one or more TRSs and of the
investments included in the 25% asset class, the value of any
one issuers securities, other than securities issued by
another REIT or by a TRS may not exceed 5% of the value
(5% test) of our total assets, and we may not own
more than 10% of the vote (10% voting test) or value
(10% value test) of any one issuers
outstanding securities, except in the case of a TRS as described
above. If, for example, the IRS would successfully challenge the
partnership status of any of the partnerships in which we
maintain an interest, and the partnership is reclassified as a
corporation or a publicly traded partnership taxable as a
corporation, we could lose our REIT status.
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The following assets are not treated as securities
held by us for purposes of the 10% value test
(i) straight debt meeting certain requirements,
unless we hold (either directly or through our
controlled taxable REIT subsidiaries) certain
other securities of the same corporate or partnership issuer
that have an aggregate value greater than 1% of such
issuers outstanding securities; (ii) loans to
individuals or estates; (iii) certain rental agreements
calling for deferred rents or increasing rents that are subject
to Section 467 of the Code, other than with certain related
persons; (iv) obligations to pay us amounts qualifying as
rents from real property under the 75% and 95% gross
income tests; (v) securities issued by a state or any
political subdivision of a state, the District of Columbia, a
foreign government, any political subdivision of a foreign
government, or the Commonwealth of Puerto Rico, but only if the
determination of any payment received or accrued under the
security does not depend in whole or in part on the profits of
any person not described in this category, or payments on any
obligation issued by such an entity; (vi) securities issued
by another qualifying REIT; and (vii) other arrangements
identified in Treasury regulations (which have not yet been
issued or proposed). In addition, any debt instrument issued by
a partnership will not be treated as a security
under the 10% value test if at least 75% of the
partnerships gross income (excluding gross income from
prohibited transactions) is derived from sources meeting the
requirements of the 75% gross income test. If the partnership
fails to meet the 75% gross income test, then the debt
instrument issued by the partnership nevertheless will not be
treated as a security to the extent of our interest
as a partner in the partnership. Also, in looking through any
partnership to determine our allocable share of any securities
owned by the partnership, our share of the assets of the
partnership, solely for purposes of applying the 10% value test
in taxable years beginning on or after January 1, 2005,
will correspond not only to our interest as a partner in the
partnership but also to our proportionate interest in certain
debt securities issued by the partnership.
If we fail to meet the 5% test, the 10% value test or the 10%
voting test described in the third bullet point of the second
preceding paragraph above at the end of any quarter and such
failure is not cured within 30 days thereafter, we would
fail to qualify as a REIT. Under the 2004 Act, after the
30 day cure period, we could dispose of sufficient assets
to cure such a violation that does not exceed the lesser of 1%
of our assets at the end of the relevant quarter or $10,000,000
if the disposition occurs within six months after the last day
of the calendar quarter in which we identify the violation. For
violations of these tests that are larger than this amount and
for violations of the other asset tests described in the
preceding paragraph, where such violations are due to reasonable
cause and not willful
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neglect, the 2004 Act permits us to avoid disqualification as a
REIT, after the 30 day cure period, by taking steps
including the disposition of sufficient assets to meet the asset
tests (within six months after the last day of the calendar
quarter in which we identify the violation) and paying a tax
equal to the greater of $50,000 or the highest corporate tax
rate multiplied by our net income generated by the
non-qualifying assets during the period beginning on the first
date of the failure and ending on the date we dispose of the
asset (or otherwise cure the asset test failure).
Annual
Distribution Requirement
We are required to distribute dividends, other than capital gain
dividends, to our stockholders in an amount at least equal to
(1) the sum of (a) 90% of our real estate
investment trust taxable income, computed without regard
to the dividends paid deduction, and our net capital gain, and
(b) 90% of the net after-tax income, if any, from
foreclosure property minus (2) the sum of certain items of
non-cash income.
These distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before
we timely file our tax return for the year to which they relate
and if paid on or before the first regular dividend payment
after the declaration.
To the extent that we do not distribute all of our net capital
gain or distribute at least 90%, but less than 100% of our real
estate investment trust taxable income, as adjusted, we will
have to pay tax on those amounts at regular ordinary and capital
gain corporate tax rates, as the case may be. If we so choose,
we may retain, rather than distribute, our net long-term capital
gains and pay the tax on those gains. In this case, our
stockholders would include their proportionate share of the
undistributed long-term capital gains in income. However, our
stockholders would then be deemed to have paid their share of
the tax, which would be credited or refunded to them. In
addition, our stockholders would be able to increase their basis
in our shares they hold by the amount of the undistributed
long-term capital gains, less the amount of capital gains tax we
paid, included in the stockholders long-term capital
gains. Furthermore, if we fail to distribute during each
calendar year at least the sum of (a) 85% of our REIT
ordinary income for that year, (b) 95% of our REIT capital
gain income for that year, and (c) any undistributed
taxable income from prior periods, we would have to pay a 4%
excise tax on the excess of the required distribution over the
amounts actually distributed. We intend to satisfy the annual
distribution requirements.
From time to time, we may not have sufficient cash or other
liquid assets to meet the 90% distribution requirement due to
timing differences between (a) when we actually receive
income and when we actually pay deductible expenses and
(b) when we include the income and deduct the expenses in
arriving at our taxable income. Further, it is possible that,
from time to time, we may be allocated a share of net capital
gain attributable to the sale of depreciated property which
exceeds our allocable share of cash attributable to that sale.
In these cases, we may have less cash available for distribution
than is necessary to meet our annual 90% distribution
requirement. To meet the 90% distribution requirement, we may
find it necessary to arrange for short-term, or possibly
long-term, borrowings or to pay dividends in the form of taxable
stock dividends.
Under certain circumstances, we may be able to rectify a failure
to meet the distribution requirement for a year by paying
deficiency dividends to stockholders in a later
year, which may be included in our deduction for dividends paid
for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, we will
be required to pay penalties and interest based upon the amount
of any deduction taken for deficiency dividends.
Failure
to Qualify as a REIT
If we fail to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, we will have to
pay tax, including any applicable alternative minimum tax, on
our taxable income at regular corporate rates. We will not be
able to deduct distributions to stockholders in any year in
which we fail to qualify, nor will we be required to make
distributions to stockholders. In addition, if we fail to
qualify as a REIT, distributions to stockholders would be
taxable to the extent of our current and accumulated earnings
and profits, and, then, with respect to each stockholder, to the
extent that the balance of the distribution exceeds the
stockholders adjusted basis in such stockholders
stock. Corporate distributees may be eligible for the dividends
received deduction if they satisfy the relevant provisions of
the Code. Unless entitled to relief under specific statutory
provisions, we will also
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be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. We
might not be entitled to the statutory relief described in this
paragraph in all circumstances.
The 2004 Act provides additional relief in the event that we
fail to satisfy one or more requirements for qualification as a
REIT, other than the 75% gross income test and the 95% gross
income test and other than the new rules provided for failures
of the asset tests described above if:
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the violation is due to reasonable cause and not willful
neglect; and
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we pay a penalty of $50,000 for each failure to satisfy the
provision.
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Taxation
of Stockholders
U.S.
Stockholders
As used in this section, the term
U.S. stockholder means a holder of our stock
who, for U.S. Federal income tax purposes, is:
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a citizen or resident of the United States;
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a domestic corporation, partnership or other entity created or
organized in or under the laws of the United States or of
any political subdivision of the United States;
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an estate whose income is subject to U.S. Federal income
taxation regardless of its source;
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a trust if a United States court can exercise primary
supervision over the trusts administration and one or more
United States persons have authority to control all substantial
decisions of the trust; or
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a person or entity otherwise subject to U.S. Federal income
taxation on a net income basis.
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Distributions. As long as we qualify as a
REIT, distributions made by us out of our current or accumulated
earnings and profits, and not designated as capital gain
dividends, will constitute dividends taxable to our taxable
U.S. stockholders as ordinary income. Our individual
U.S. stockholders will generally not be entitled to the
lower tax rate applicable to certain types of dividends under
law enacted in 2003 except that individual
U.S. stockholders may be eligible for the lower tax rate
with respect to the portion of any distribution (a) that
represents income from dividends we received from a corporation
in which we own shares (but only if such dividends would be
eligible for the lower rate on dividends if paid by the
corporation to its individual stockholders) or (b) that is
equal to our real estate investment trust taxable income (taking
into account the dividends paid deduction available to us) and
less any taxes paid by us on these items during our previous
taxable year. Individual U.S. stockholders should consult
their own tax advisors to determine the impact of this
legislation. Distributions of this kind will not be eligible for
the dividends received deduction in the case of
U.S. stockholders that are corporations. Distributions made
by us that we properly designate as capital gain dividends will
be taxable to U.S. stockholders as gain from the sale of a
capital asset held for more than one year, to the extent that
they do not exceed our actual net capital gain for the taxable
year, without regard to the period for which a
U.S. stockholder has held his stock. Thus, with certain
limitations, capital gain dividends received by an individual
U.S. stockholder may be eligible for preferential rates of
taxation. U.S. stockholders that are corporations may,
however, be required to treat up to 20% of certain capital gain
dividends as ordinary income. In addition, net capital gains
attributable to the sale of depreciable real property held for
more than twelve months are subject to a 25% maximum
U.S. Federal income tax rate to the extent of previously
claimed real property depreciation.
To the extent that we make distributions, not designated as
capital gain dividends, in excess of our current and accumulated
earnings and profits, these distributions will be treated first
as a tax-free return of capital to each U.S. stockholder.
Thus, these distributions will reduce the adjusted basis which
the U.S. stockholder has in his stock for tax purposes by
the amount of the distribution, but not below zero.
Distributions in excess of a U.S. stockholders
adjusted basis in his stock will be taxable as capital gains,
provided that the stock has been held as a capital asset.
Dividends authorized by us in October, November or December of
any year and payable to a stockholder of record on a specified
date in any of these months will be treated as both paid by us
and received by the stockholder on December 31 of that year,
provided that we actually pay the dividend on or before January
31 of the following
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calendar year. Stockholders may not include in their own income
tax returns any of our net operating losses or capital losses.
U.S. stockholders holding our stock at the close of our
taxable year will be required to include, in computing their
long-term capital gains for the taxable year in which the last
day of our taxable year falls, the amount that we designate in a
written notice mailed to our stockholders. We may not designate
amounts in excess of our undistributed net capital gain for the
taxable year. Each U.S. stockholder required to include the
designated amount in determining the stockholders
long-term capital gains will be deemed to have paid, in the
taxable year of the inclusion, the tax paid by us in respect of
the undistributed net capital gains. U.S. stockholders to
whom these rules apply will be allowed a credit or a refund, as
the case may be, for the tax they are deemed to have paid.
U.S. stockholders will increase their basis in their stock
by the difference between the amount of the includible gains and
the tax deemed paid by the stockholder in respect of these gains.
Distributions made by us and arising from a
U.S. stockholders sale or exchange of our stock will
not be treated as passive activity income. As a result,
U.S. stockholders generally will not be able to apply any
passive losses against that income or gain.
Our dividends, to the extent they do not constitute a return of
capital, will generally be treated as investment income for
purposes of the investment interest limitation under
Section 163 of the Code. Net capital gain from the
disposition of our stock and capital gains generally will be
eliminated from investment income unless the taxpayer elects to
have the gain taxed at ordinary income rates.
Sales of Stock. When a U.S. stockholder
sells or otherwise disposes of our stock, the stockholder will
recognize gain or loss for U.S. Federal income tax purposes
in an amount equal to the difference between
(a) the amount of cash and the fair market value of
any property received on the sale or other disposition and
(b) the holders adjusted basis in the stock for tax
purposes. This gain or loss will be capital gain or loss if
the U.S. stockholder has held the stock as a capital
asset. The gain or loss will be long-term gain or loss if the
U.S. stockholder has held the stock for more than one year.
Long-term capital gain of an individual U.S. stockholder is
generally taxed at preferential rates. In general, any loss
recognized by a U.S. stockholder when the stockholder sells
or otherwise disposes of our stock that the stockholder has held
for twelve months or more, after applying certain holding period
rules, will be treated as a long-term capital loss.
Redemption of Stock. The treatment to be
accorded to any redemption by us of the stock can only be
determined on the basis of particular facts as to each holder of
our stock at the time of redemption. In general, a preferred
holder will recognize capital gain or loss measured by the
difference between the amount realized by the holder upon the
redemption and the holders adjusted tax basis in the stock
redeemed, provided the stock is held as a capital asset, if the
redemption
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results in a complete termination of the
holders shares interest in all classes of our stock under
Section 302(b)(3) of the Code,
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is substantially disproportionate with respect to
the holders interest in us under Section 302(b)(2) of
the Code; or
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is not essentially equivalent to a dividend with
respect to the holder of our stock under Section 302(b)(1)
of the Code.
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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 Code, as well as
shares actually owned, must generally be taken into account.
Because the determination as to whether any of the alternative
tests of Section 302(b) of the Code will be satisfied with
respect to any particular holder of our stock depends upon the
facts and circumstances at the time when the determination must
be made, prospective investors are advised to consult their own
tax advisors to determine the tax treatment to them. Any portion
of the redemption proceeds attributable to a declared but unpaid
dividend will be treated as a distribution to the stock as
described above under Taxation of
Stockholders U.S. Stockholders
Distributions.
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A substantially disproportionate reduction in the
interest of a holder of our stock will have occurred if, as a
result of the redemption,
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the holders ownership of all of our outstanding voting
stock is reduced immediately after the redemption to less than
80% of the holders percentage interest in the shares
immediately before the redemption;
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the holders percentage ownership of the interest of our
stock after and before the redemption meets the same 80%
requirement; and
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the holder owns, immediately after the redemption, less than 50%
of the total combined voting power of all classes of shares
entitled to vote.
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Based upon current law, it is possible that a redemption of our
stock from a holder of our stock would be considered not
essentially equivalent to a dividend. However, whether a
distribution is not essentially equivalent to a
dividend depends on all of the facts and circumstances.
The application of these tests to a redemption of our stock is
unclear, and a holder of our stock should consult its own tax
adviser to determine their application to its particular
situation.
If the redemption does not meet any of the tests under
Section 302 of the Code, then the redemption proceeds
received from the stock will be treated as a distribution on the
stock as described above under Taxation of
Stockholders U.S. Stockholders
Distributions. If the redemption is taxed as a dividend,
the holders adjusted tax basis in the stock will be
transferred to any other shareholdings of the holder in us. If,
however, the shareholder has no remaining shareholdings in us,
such basis could be transferred to a related person or it may be
lost.
Backup Withholding. We will report to our
U.S. stockholders and the IRS the amount of dividends paid
during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, backup withholding may
apply to a stockholder with respect to dividends paid unless the
holder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or
(b) provides a taxpayer identification number, certifies as
to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding
rules. The IRS may also impose penalties on a
U.S. stockholder that does not provide us with his correct
taxpayer identification number. A stockholder may credit any
amount paid as backup withholding against the stockholders
income tax liability. In addition, we may be required to
withhold a portion of capital gain distributions to any
stockholders who fail to certify their non-foreign status to us.
Taxation of Tax-Exempt Stockholders. The IRS
has ruled that amounts distributed as dividends by a REIT
generally do not constitute unrelated business taxable income
when received by a tax-exempt entity. Based on that ruling,
provided that a tax-exempt stockholder (i) is not an entity
described in the next paragraph, (ii) has not held its
stock as debt financed property within the meaning
of the Code and (iii) does not hold its stock in a trade or
business, the dividend income received by such stockholder with
respect to the stock will not be unrelated business taxable
income to a tax-exempt stockholder. Similarly, income from the
sale of our stock will not constitute unrelated business taxable
income unless the tax-exempt stockholder has held the stock as
debt financed property within the meaning of the
Code or has used the stock in an unrelated trade or business.
Income from an investment in our stock will constitute unrelated
business taxable income for tax-exempt stockholders that are
social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group
legal services plans exempt from U.S. Federal income
taxation under the applicable subsections of Section 501(c)
of the Code, unless the organization is able to properly deduct
amounts set aside or placed in reserve for certain purposes so
as to offset the income generated by its stock. Prospective
investors of the types described in the preceding sentence
should consult their own tax advisors concerning these set
aside and reserve requirements.
Notwithstanding the foregoing, however, a portion of the
dividends paid by a pension-held REIT will be
treated as unrelated business taxable income to any trust which:
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is described in Section 401(a) of the Code;
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is tax-exempt under Section 501(a) of the Code; and
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holds more than 10% (by value) of the equity interests in the
REIT.
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Tax-exempt pension, profit-sharing and stock bonus funds that
are described in Section 401(a) of the Code are referred to
below as qualified trusts. A REIT is a
pension-held REIT if:
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it would not have qualified as a REIT but for the fact that
Section 856(h)(3) of the Code provides that stock owned by
qualified trusts will be treated, for purposes of the not
closely held requirement, as owned by the beneficiaries of
the trust (rather than by the trust itself); and
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either (a) at least one qualified trust holds more than 25%
by value of the interests in the REIT or (b) one or more
qualified trusts, each of which owns more than 10% by value of
the interests in the REIT, hold in the aggregate more than 50%
by value of the interests in the REIT.
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The percentage of any REIT dividend treated as unrelated
business taxable income to a qualifying trust that owns more
than 10% of the value of the REITs interests is equal to
the ratio of (a) the gross income of the REIT from
unrelated trades or businesses, determined as though the REIT
were a qualified trust, less direct expenses related to this
gross income, to (b) the total gross income of the REIT,
less direct expenses related to the total gross income. A de
minimis exception applies where this percentage is less than 5%
for any year. We do not expect to be classified as a
pension-held REIT.
The rules described above under the heading
Taxation of Stockholders
U.S. Stockholders Distributions
concerning the inclusion of our designated undistributed net
capital gains in the income of our stockholders will apply to
tax-exempt entities. Thus, tax-exempt entities will be allowed a
credit or refund of the tax deemed paid by these entities in
respect of the includible gains.
Under recently promulgated Treasury regulations, if a
stockholder recognizes a loss with respect to the stock of
$2 million or more for an individual stockholder or
$10 million or more for a corporate stockholder, the
stockholder must file with the IRS a disclosure statement on
Form 8886. The fact that a loss is reportable under these
regulations does not affect the legal determination of whether
the taxpayers treatment of the loss is proper.
Stockholders should consult their tax advisors to determine the
applicability of these regulations in light of their individual
circumstances.
Non-U.S.
Stockholders
The rules governing U.S. Federal income taxation of
nonresident alien individuals, foreign corporations, foreign
partnerships and estates or trusts that in either case are not
subject to U.S. Federal income tax on a net income basis
who own our stock, which we call
non-U.S. stockholders,
are complex. The following discussion is only a limited summary
of these rules. Prospective
non-U.S. stockholders
should consult with their own tax advisors to determine the
impact of U.S. Federal, state and local income tax laws
with regard to an investment in the stock, including any
reporting requirements.
Ordinary Dividends. Distributions, other than
distributions that are treated as attributable to gain from
sales or exchanges by us of U.S. real property interests,
as discussed below, and other than distributions designated by
us as capital gain dividends, will be treated as ordinary income
dividends to the extent that they are made out of our current or
accumulated earnings and profits. A withholding tax equal to 30%
of the gross amount of the distribution will ordinarily apply to
distributions of this kind to
non-U.S. stockholders,
unless an applicable tax treaty reduces that tax. However, if
income from the investment in the stock is treated as
effectively connected with the
non-U.S. stockholders
conduct of a U.S. trade or business or is attributable to a
permanent establishment that the
non-U.S. stockholder
maintains in the United States if that is required by an
applicable income tax treaty as a condition for subjecting the
non-U.S. stockholder
to U.S. taxation on a net income basis, tax at graduated
rates will generally apply to the
non-U.S. stockholder
in the same manner as U.S. stockholders are taxed with
respect to dividends, and the 30% branch profits tax may also
apply if the stockholder is a foreign corporation. U.S. tax
will be withheld at the rate of 30% on the gross amount of any
dividends, other than dividends treated as attributable to gain
from sales or exchanges of U.S. real property interests and
capital gain dividends, paid to a
non-U.S. stockholder,
unless (a) a lower treaty rate applies and the required
form evidencing eligibility for that reduced rate is filed with
us or the appropriate withholding agent or (b) the
non-U.S. stockholder
files an IRS
Form W-8
ECI or a successor form with us or the appropriate withholding
agent claiming that the distributions are effectively connected
with the
non-U.S. stockholders
conduct of a U.S. trade or business.
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Distributions to a
non-U.S. stockholder
that are designated by us at the time of distribution as capital
gain dividends which are not attributable to or treated as
attributable to the disposition by us of a U.S. real
property interest generally will not be subject to
U.S. Federal income taxation, except as described below.
Return of Capital. Distributions in excess of
our current and accumulated earnings and profits, which are not
treated as attributable to the gain from our disposition of a
U.S. real property interest, will not be taxable to a
non-U.S. stockholder
to the extent that they do not exceed the adjusted basis of the
non-U.S. stockholders
stock. Distributions of this kind will instead reduce the
adjusted basis of the stock. To the extent that distributions of
this kind exceed the adjusted basis of a
non-U.S. stockholders
stock, they will give rise to tax liability if the
non-U.S. stockholder
otherwise would have to pay tax on any gain from the sale or
disposition of our stock, as described below. If it cannot be
determined at the time a distribution is made whether the
distribution will be in excess of current and accumulated
earnings and profits, withholding will apply to the distribution
at the rate applicable to dividends. However, the
non-U.S. stockholder
may seek a refund of these amounts from the IRS if it is
subsequently determined that the distribution was, in fact, in
excess of our current accumulated earnings and profits.
Capital Gain Dividends. For any year in which
we qualify as a REIT, distributions that are attributable to
gain from sales or exchanges by us of U.S. real property
interests will be taxed to a
non-U.S. stockholder
under the provisions of the Foreign Investment in Real Property
Tax Act of 1980, as amended. Under this statute, these
distributions are taxed to a
non-U.S. stockholder
as if the gain were effectively connected with a
U.S. business. Thus,
non-U.S. stockholders
will be taxed on the distributions at the normal capital gain
rates applicable to U.S. stockholders, subject to any
applicable alternative minimum tax and special alternative
minimum tax in the case of nonresident alien individuals.
Distributions subject to the Foreign Investment in Real Property
Tax Act made to
non-U.S. stockholders
may also be subject to a 30% branch profits tax in the hands of
a foreign corporate stockholder that is not entitled to a treaty
exemption. The appropriate withholding agent will be required by
applicable Treasury regulations under this statute to withhold
and remit to the IRS 35% of any distribution that we could
designate as a capital gain dividend. However, if we designate
as a capital gain dividend a distribution made before the day we
actually effect the designation, then although the distribution
may be taxable to a
non-U.S. stockholder,
withholding does not apply to the distribution under this
statute. Rather, we must effect the 35% withholding from
distributions made on and after the date of the designation,
until the distributions so withheld equal the amount of the
prior distribution designated as a capital gain dividend. The
non-U.S. stockholder
may credit the amount withheld against its U.S. tax
liability.
If a class of our stock is regularly traded, as
defined by applicable Treasury regulations, on an established
securities market (e.g., the New York Stock Exchange), a
distribution with respect to such class of stock received by a
non-U.S. stockholder
that does not own more than 5% of that class of stock during the
tax year within which the distribution is received will not be
treated as gain that is effectively connected with a
U.S. business. As such, a
non-U.S. stockholder
who does not own more than 5% of the relevant class of stock at
any time during the applicable taxable year would not be
required to file a U.S. Federal income tax return by reason
of receiving such a distribution. In this case, the distribution
would be treated as a REIT dividend to that
non-U.S. stockholder
and taxed as a REIT dividend that is not a capital gain
distribution as described above, meaning that it will be subject
to a 30% withholding tax (or lesser rate as reduced by an
applicable treaty) under the circumstances described above. In
addition, the branch profits tax would not apply to such
distributions. However, there can be no assurance that a
particular class of our stock will at any time be regularly
traded on an established securities market.
Sales of Stock. Gain recognized by a
non-U.S. stockholder
upon a sale or exchange of our stock generally will not be taxed
under the Foreign Investment in Real Property Tax Act if we are
a domestically controlled REIT, defined generally as
a REIT, less than 50% in value of whose stock is and was held
directly or indirectly by foreign persons at all times during a
specified testing period. We believe that we will be a
domestically controlled REIT, and, therefore, that taxation
under this statute generally will not apply to the sale of our
stock. However, gain to which this statute does not apply will
be taxable to a
non-U.S. stockholder
if investment in the stock is treated as effectively connected
with the
non-U.S. stockholders
U.S. trade or business or is attributable to a permanent
establishment that the
non-U.S. stockholder
maintains in the United States if that is required by an
applicable income tax treaty as a condition for subjecting the
non-U.S. stockholder
to U.S. taxation on a net income basis. In this case, the
same treatment will apply to the
non-U.S. stockholder
as to U.S. stockholders with respect to the gain. In
addition, gain to which the Foreign Investment in Real Property
Tax Act does not apply will be taxable to a
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non-U.S. stockholder
if the
non-U.S. stockholder
is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has
a tax home in the United States, or maintains an
office or a fixed place of business in the United States to
which the gain is attributable. In this case, a 30% tax will
apply to the nonresident alien individuals capital gains.
A similar rule will apply to capital gain dividends to which
this statute does not apply.
If we do not qualify as a domestically controlled REIT, tax
under the Foreign Investment in Real Property Tax Act would
apply to a
non-U.S. stockholders
sale of our stock, unless our stock is regularly traded on an
established securities market at the time of such sale and such
non-U.S. stockholder
does not own more than 5% of our stock at any time during a
specified period. This period is generally the shorter of the
period that the
non-U.S. stockholder
owned the stock sold or the five-year period ending on the date
when the stockholder disposed of the stock. If tax under this
statute applies to the gain on the sale of our stock, the same
treatment would apply to the
non-U.S. stockholder
as to U.S. stockholders with respect to the gain, subject
to any applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien
individuals.
In any event, a purchaser of our stock from a
non-U.S. stockholder
will not be required under the Foreign Investment in Real
Property Tax Act to withhold on the purchase price if the
purchased class of stock is regularly traded on an established
securities market and the seller did not own more than 5% of
such class of stock at any time during the taxable year or if we
are a domestically controlled REIT. Otherwise, under the Foreign
Investment in Real Property Tax Act, the purchaser of our stock
may be required to withhold 10% of the purchase price and remit
that amount to the IRS.
Backup Withholding and Information
Reporting. If you are a
non-U.S. stockholder,
you are generally exempt from backup withholding and information
reporting requirements with respect to:
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dividend payments and
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the payment of the proceeds from the sale of our stock effected
at a U.S. office of a broker,
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as long as the income associated with these payments is
otherwise exempt from U.S. Federal income tax, and:
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the payor or broker does not have actual knowledge or reason to
know that you are a U.S. person and you have furnished to
the payor or broker:
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a valid IRS
Form W-8BEN
or an acceptable substitute form upon which you certify, under
penalties of perjury, that you are a
non-U.S. person, or
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other documentation upon which it may rely to treat the payments
as made to a
non-U.S. person
in accordance with U.S. Treasury regulations, or
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you otherwise establish an exemption.
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Payment of the proceeds from the sale of our stock effected at a
foreign office of a broker generally will not be subject to
information reporting or backup withholding. However, a sale of
our stock that is effected at a foreign office of a broker will
be subject to information reporting and backup withholding if:
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the proceeds are transferred to an account maintained by you in
the United States,
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the payment of proceeds or the confirmation of the sale is
mailed to you at a U.S. address, or
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the sale has some other specified connection with the United
States as provided in U.S. Treasury regulations, unless the
broker does not have actual knowledge or reason to know that you
are a U.S. person and the documentation requirements
described above are met or you otherwise establish an exemption.
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In addition, a sale of our stock will be subject to information
reporting if it is effected at a foreign office of a broker that
is:
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a U.S. person,
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a controlled foreign corporation for U.S. tax purposes,
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a foreign person 50% or more of whose gross income is
effectively connected with the conduct of a U.S. trade or
business for a specified three-year period, or
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a foreign partnership, if at any time during its tax year:
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one or more of its partners are U.S. persons,
as defined in U.S. Treasury regulations, who in the
aggregate hold more than 50% of the income or capital interest
in the partnership, or
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such foreign partnership is engaged in the conduct of a
U.S. trade or business,
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unless the broker does not have actual knowledge or reason to
know that you are a U.S. person and the documentation
requirements described above are met or you otherwise establish
an exemption. Backup withholding will apply if the sale is
subject to information reporting and the broker has actual
knowledge that you are a U.S. person.
You generally may obtain a refund of any amounts withheld under
the backup withholding rules that exceed your actual income tax
liability by filing a refund claim with the IRS.
Tax
Aspects of our Investments in our Operating
Partnership
The following discussion summarizes certain federal income tax
considerations applicable to our direct or indirect investments
in our Operating Partnership and any subsidiary partnerships or
limited liability companies that we form or acquire (each
individually a Partnership and, collectively, the
Partnerships). The discussion does not cover state
or local tax laws or any federal tax laws other than income tax
laws.
Classification as Partnerships. We will include in our income
our distributive share of each Partnerships income and we
will deduct our distributive share of each Partnerships
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
fails to make an election, it generally will be treated as a
partnership for federal income tax purposes. Each Partnership
intends to be classified as a partnership for federal income tax
purposes (or an entity that is disregarded for federal income
tax purposes if the entity has only one owner or member), and no
Partnership will elect to be treated as an association taxable
as a corporation under the
check-the-box
regulations.
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 the substantial equivalent
thereof. A publicly traded partnership will not, however, be
treated as a corporation for any taxable year if 90% or more of
the partnerships gross income for such year consists of
certain passive-type income, including real property rents,
gains from the sale or other disposition of real property,
interest, and dividends (the 90% passive income
exception).
Treasury regulations (the PTP regulations) provide
limited safe harbors from the definition of 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 and (2) the partnership
does not have more than 100 partners at any time during the
partnerships taxable year. In determining 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 such
partnership only if (1) substantially all of the value of
the owners interest in the entity is attributable to the
entitys direct or indirect interest in the partnership and
(2) a principal purpose of the use of the entity is to
permit the
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partnership to satisfy the 100-partner limitation. We currently
intend that each Partnership will qualify for the private
placement exclusion.
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 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 likely would not be able to qualify as a REIT. See
Income Tests and Asset
Tests. In addition, any change in a Partnerships
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
Requirement. Further, items of income and deduction of
such Partnership would not pass through to its partners, and its
partners would be treated as stockholders 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 Partnerships 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. Rather, we are required to take
into account our allocable share of each Partnerships
income, gains, losses, deductions, and credits for any taxable
year of such Partnership ending within or with our taxable year,
without regard to whether we have received or will receive any
distribution from such Partnership.
Partnership Allocations. Although a
partnership agreement generally will determine the allocation of
income and losses among partners, such allocations may be
disregarded for tax purposes if they do not comply with certain
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. We expect
that each Partnerships allocations of taxable income,
gain, and loss will be respected for U.S. federal income
tax purposes.
Tax Allocations With Respect to Contributed
Properties. Income, gain, loss, and deduction
attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the
partnership must be allocated in a manner 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 (built-in
gain or built-in loss) is generally equal to
the difference between the fair market value of the contributed
property at the time of contribution and the adjusted tax basis
of such property at the time of contribution (a book-tax
difference). Such allocations are solely for federal
income tax purposes and do not affect the book capital accounts
or other economic or legal arrangements among the partners. The
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.
Under our Operating Partnerships partnership agreement,
depreciation or amortization deductions of the operating
partnership generally will be allocated among the partners in
accordance with their respective interests in our Operating
Partnership, except to the extent that our Operating Partnership
is required under the federal income tax laws governing
partnership allocations to use a method for allocating tax
depreciation deductions attributable to contributed properties.
In addition, gain or loss on the sale of a property that has
been contributed, in whole or in part, to our Operating
Partnership will be specially allocated to the contributing
partners to the extent of any built-in gain or loss with respect
to such property for federal income tax purposes.
Basis in Partnership Interest. Our adjusted
tax basis in our partnership interest in our Operating
Partnership generally will be equal to:
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the amount of cash and the basis of any other property
contributed by us to our Operating Partnership;
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increased by our allocable share of our Operating
Partnerships income and our allocable share of
indebtedness of our Operating Partnership; and
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reduced, but not below zero, by our allocable share of our
Operating Partnerships loss and the amount of cash
distributed to us, and by constructive distributions resulting
from a reduction in our share of indebtedness of our Operating
Partnership.
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If the allocation of our distributive share of our Operating
Partnerships loss would reduce the adjusted tax basis of
our partnership interest below zero, the recognition of such
loss will be deferred until such time as the recognition of such
loss would not reduce our adjusted tax basis below zero. To the
extent that our Operating Partnerships distributions, or
any decrease in our share of the indebtedness of our Operating
Partnership, which is considered a constructive cash
distribution to the partners, reduce our adjusted tax basis
below zero, such distributions will constitute taxable income to
us. Such distributions and constructive distributions normally
will be characterized as long-term capital gain.
Depreciation Deductions Available to Our Operating
Partnership. To the extent that our Operating
Partnership acquires its properties in exchange for cash, its
initial basis in such properties for federal income tax purposes
generally will be equal to the purchase price paid by our
Operating Partnership. Our Operating Partnership generally plans
to depreciate each depreciable property for federal income tax
purposes under the alternative depreciation system of
depreciation (ADS). Under ADS, the Operating
Partnership generally will depreciate buildings and improvements
over a
40-year
recovery period using a straight-line method and a mid-month
convention and will depreciate furnishings and equipment over a
12-year
recovery period. Our Operating Partnerships initial basis
in properties acquired in exchange for units in our Operating
Partnership should be the same as the transferors basis in
such properties on the date of acquisition by our Operating
Partnership. Although the law is not entirely clear, our
Operating 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. Our
Operating Partnerships tax depreciation deductions will be
allocated among the partners in accordance with their respective
interests in our Operating Partnership, except to the extent
that our Operating Partnership is required under the federal
income tax laws governing partnership allocations to use a
method for allocating tax depreciation deductions attributable
to contributed properties.
Sale of a
Partnerships Property
Generally, any gain realized by a Partnership on the sale of
property held by the Partnership for more than one year will be
long-term capital gain, except for any portion of such gain that
is treated as depreciation or cost recovery recapture. Any gain
or loss recognized by a Partnership on the disposition of
contributed properties will be allocated first to the partners
of the Partnership who contributed such properties 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
such contributed properties will equal 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. Any remaining
gain or loss recognized by the Partnership on the disposition of
the contributed properties, and any gain or loss recognized by
the Partnership on the disposition of the other properties, will
be allocated among the partners in accordance with their
respective percentage interests in the Partnership.
Our distributive share of any gain realized by a Partnership on
the sale of any property held by the Partnership as inventory or
other property held primarily for sale to customers in the
ordinary course of the Partnerships trade or business will
be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. Such prohibited transaction
income also may have an adverse effect upon our ability to
satisfy the income tests for REIT status. See
Income Tests. We, however, do not
presently intend to acquire or hold or to allow any Partnership
to acquire or hold any property that represents inventory or
other property held primarily for sale to customers in the
ordinary course of our or such Partnerships trade or
business.
State and
Local Taxes
We and our stockholders may be subject to taxation by various
states and localities, including those in which we or our
stockholders transact business, own property or reside. The
state and local tax treatment may differ from the federal income
tax treatment described above. Consequently, stockholders should
consult their own tax advisers regarding the effect of state and
local tax laws upon an investment in the common shares.
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PLAN OF
DISTRIBUTION
We may sell the securities through underwriters or dealers,
through agents, or directly to one or more purchasers. One or
more prospectus supplements will describe the terms of the
offering of the securities, including:
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the name or names of any underwriters, if any;
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the purchase price of the securities and the proceeds we will
receive from the sale;
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any over-allotment options under which underwriters may purchase
additional securities from us;
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any agency fees or underwriting discounts and other items
constituting agents or underwriters compensation;
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any public offering price;
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any discounts or concessions allowed or reallowed or paid to
dealers; and
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any securities exchange or market on which the securities may be
listed.
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Each prospectus supplement filed with respect to any offered
securities, to the extent applicable, will describe the number
and terms of the securities to which such prospectus relates,
the name or names of any underwriters or agents with whom we
have entered into arrangements with respect to the sale of such
securities, the public offering or purchase price of such
securities and the net proceeds we will receive from such sale.
Only underwriters named in the prospectus supplement are
underwriters of the securities offered by the prospectus
supplement.
If underwriters are used in the sale, they will acquire the
securities for their own account and may resell them from time
to time in one or more transactions at a fixed public offering
price. The obligations of the underwriters to purchase the
securities will be subject to the conditions set forth in the
applicable underwriting agreement. We may offer the securities
to the public through underwriting syndicates represented by
managing underwriters or by underwriters without a syndicate.
Subject to certain conditions, the underwriters will be
obligated to purchase all the securities of the series offered
by the prospectus supplement. Any public offering price and any
discounts or concessions allowed or reallowed or paid to dealers
may change from time to time. We may use underwriters with whom
we have a material relationship. We will describe in the
prospectus supplement, naming the underwriter, the nature of any
such relationship.
We may sell securities directly or through agents we designate
from time to time. We will name any agent involved in the
offering and sale of securities and we will describe any
commissions we will pay the agent in the prospectus supplement.
Unless the prospectus supplement states otherwise, our agent
will act on a best-efforts basis for the period of its
appointment. However, no prospectus supplement shall
fundamentally change the terms that are set forth in this
prospectus or offer a security that is not registered and
described in this prospectus at the time of its effectiveness.
We may authorize agents or underwriters to solicit offers by
certain types of institutional investors to purchase securities
from us at the public offering price set forth in the prospectus
supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. We will
describe the conditions to these contracts and the commissions
we must pay for solicitation of these contracts in the
prospectus supplement.
We may enter into derivative transactions with third parties, or
sell securities not covered by this prospectus to third parties
in privately negotiated transactions. If the related prospectus
supplement so indicates, in connection with those derivatives,
the third parties may sell securities covered by this prospectus
and the related prospectus supplement, including in short sale
transactions. If so, the third party may use securities pledged
by us or borrowed from us or others to settle those sales or to
close out any related open borrowings of stock and may use
securities received from us in settlement of those derivatives
to close out any related open borrowings of stock. The third
party in such sale transactions will be an underwriter and, if
not identified in this prospectus, will be identified in the
related prospectus supplement (or a post-effective amendment).
We may provide agents and underwriters with indemnification
against certain civil liabilities, including liabilities under
the Securities Act, or contribution with respect to payments
that the agents or underwriters may
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make with respect to such liabilities. Agents and underwriters
may engage in transactions with, or perform services for, us in
the ordinary course of business.
Our shares of common stock are principally traded on the Nasdaq
Global Market. All securities we offer, other than common stock
and other than securities issued upon a reopening of a previous
series, will be new issues of securities with no established
trading market. Any underwriters may make a market in these
securities, but will not be obligated to do so and may
discontinue any market making at any time without notice. We
cannot guarantee the liquidity of the trading markets for any
securities.
Any underwriter may engage in overallotment, stabilizing
transactions, short covering transactions and penalty bids in
accordance with Regulation M under the Exchange Act, as
amended. Overallotment involves sales in excess of the offering
size, which create a short position. Stabilizing transactions
permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum price. Short
covering transactions involve purchases of the securities in the
open market after the distribution is completed to cover short
positions. Penalty bids permit the underwriters to reclaim a
selling concession from a dealer when the securities originally
sold by the dealer are purchased in a covering transaction to
cover short positions. Those activities may cause the price of
the securities to be higher than it would otherwise be. If
commenced, the underwriters may discontinue any of the
activities at any time.
Any underwriters who are qualified market makers on The Nasdaq
Stock Market may engage in passive market making transactions in
the securities on The Nasdaq Stock Market in accordance with
Rule 103 of Regulation M under the Exchange Act, as
amended, during the business day prior to the pricing of the
offering, before the commencement of offers or sales of the
securities. Passive market makers must comply with applicable
volume and price limitations and must be identified as passive
market makers. In general, a passive market maker must display
its bid at a price not in excess of the highest independent bid
for such security; if all independent bids are lowered below the
passive market makers bid, however, the passive market
makers bid must then be lowered when certain purchase
limits are exceeded.
Some of the underwriters, dealers and agents and their
affiliates may engage in transactions with or perform services
for us and our affiliates in the ordinary course of business.
Underwriters have from time to time in the past provided, and
may from time to time in the future provide, investment banking
services to us for which they have in the past received, and in
the future may receive, customary fees.
In compliance with guidelines of the Financial Industry
Regulatory Authority, or FINRA, the maximum consideration or
discount to be received by any FINRA member or independent
broker dealer may not exceed 8% of the aggregate amount of the
securities offered pursuant to this prospectus and any
applicable prospectus supplement.
EXPERTS
The financial statements and managements assessment of the
effectiveness of internal control over financial reporting
(which is included in Managements Report on Internal
Control over Financial Reporting) incorporated in this
prospectus by reference to the Annual Report on
Form 10-K
for the year ended December 31, 2006 have been so
incorporated in reliance on the reports of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
LEGAL
MATTERS
The validity of the offered securities will be passed upon for
Gladstone Commercial Corporation by Cooley Godward Kronish LLP,
Reston, Virginia. Legal counsel to any underwriters or agents
may pass upon legal matters for such underwriters or agents.
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