As filed with the Securities and Exchange Commission on May 17, 2004
Registration No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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HOME PROPERTIES, INC.
(Exact name of registrant as specified in charter)
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Maryland 16-1455126
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
850 Clinton Square Rochester,
New York 14604
(585) 546-4900
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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Ann M. McCormick, Esq.
Executive Vice President, Secretary and General Counsel
Home Properties, Inc.
850 Clinton Square
Rochester, New York 14604
(585) 546-4900
Facsimile (585) 232-3147
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Deborah McLean Quinn, Esq.
Nixon Peabody LLP
1300 Clinton Square
Rochester, New York 14604
(585) 263-1307
Facsimile (585) 263-1600
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Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If only securities being registered on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /x/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act of 1933 registration statement number of the earlier
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
Title of Each Proposed Proposed
Amount Class of Amount to Maximum Maximum
of Securities to be Offering Price Aggregate Registra-
Registered Registered Per Share (1) Offering Price tion Fee
-------------- ---------- ------------- -------------- --------
Common Stock
par value $.01 515,572 $37.65 $19,411,285.80 $2,459.40
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933 and based upon the average
of the high and low prices reported on the New York Stock Exchange on
May 14, 2004 of $37.65.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
515,572 Shares
HOME PROPERTIES, INC.
COMMON STOCK
All of the shares of common stock, par value $.01 per share of Home
Properties, Inc. offered by this Prospectus are being offered by the Selling
Shareholder which holds those shares. See "Selling Shareholder". We will not
receive any proceeds of the sale of the shares offered hereby. The Common Stock
is listed on the New York Stock Exchange ("NYSE") under the symbol "HME." The
last reported sale price of the Common Stock on the NYSE was $37.65 on May 14,
2004.
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You should carefully consider the material risks set forth under "risk
factors" beginning on page 2 of this Prospectus before purchasing any shares of
our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this Prospectus is May 17,2004.
TABLE OF CONTENTS
Page
Home Properties 1
Risk Factors 2
Where You Can Find More Information 8
Special Note Regarding Forward-Looking Statements 9
Use of Proceeds 9
Selling Shareholders 10
Description of Capital Stock 11
Common Stock 12
Preferred Stock 13
Restriction on Transfer Ownership Limits 15
Ownership Reports 18
Certain Other Provisions of Maryland Law and Charter Documents 18
Federal Income Tax Considerations 20
Other Tax Consequences 39
Plan of Distribution 39
Experts 40
Legal Matters 40
The following information should be read in conjunction with the more
detailed information included elsewhere in this Prospectus or incorporated
herein or therein by reference. References to "Home Properties," "we" or "us" in
this Prospectus mean, except as the context otherwise requires, Home Properties,
Inc., a Maryland corporation, Home Properties, L.P., a New York limited
partnership (the "Operating Partnership"), Home Properties Trust, a Maryland
trust (the "Trust"), HP Management, Inc., a Maryland corporation ("HP
Management"), Home Properties Resident Services, Inc., a Maryland corporation
("HPRS " and, together with HP Management, the "Management Companies"), and all
other subsidiaries of Home Properties on a consolidated basis.
HOME PROPERTIES
We are a fully integrated, self-administered and self-managed real estate
investment trust, a REIT, and the 6th largest publicly traded apartment real
estate investment trust in the United States. With operations in select
Northeast, Midwest, and Mid-Atlantic markets, we own, operate, acquire,
rehabilitate, and develop apartment communities. Currently, we operate 201
communities containing 49,272 apartment units. Of these, we, along with our
subsidiaries, directly own 42,224 units in 154 communities. We partially own and
manage as general partner 4,764 units, and we manage 2,302 units for other
owners. We also manage 2.2 million square feet of commercial space. The owned
and managed apartment communities and commercial space are referred to herein as
the "Properties".
We were incorporated in November 1993 as a Maryland corporation. We are the
general partner of Home Properties, L.P., a New York limited partnership through
which we own, acquire and operate most of our market rate apartments. We
frequently refer to Home Properties, L.P. as the "Operating Partnership."
Certain of our activities, such as residential property management for others,
development activities and construction, development and redevelopment services
are carried on through two wholly-owned subsidiaries: Home Properties Management
Inc. and Home Properties Resident Services, Inc.
Our principal executive offices are located at 850 Clinton Square,
Rochester, New York 14604. Our telephone number is (585) 246-4900.
RISK FACTORS
An investment in the Common Stock of Home Properties involves various
risks. In addition to general investment risks and those factors set forth
elsewhere in this Prospectus, prospective investors should consider, among other
things, the following factors:
ASSIMILATION OF A SUBSTANTIAL NUMBER OF NEW ACQUISITIONS.
Since our formation, we have undertaken a strategy of aggressive growth
through acquisitions. Our ability to manage our growth effectively requires that
we, among other things, successfully apply our experience in managing our
existing portfolio to an increased number of properties. In addition, we will be
required to successfully manage the integration of a substantial number of new
personnel. There can be no assurances that we will be able to integrate and
manage these operations effectively or maintain or improve on their historical
financial performance.
REAL ESTATE FINANCING RISKS
GENERAL. We are subject to the customary risks associated with debt
financing including the potential inability to refinance existing mortgage
indebtedness upon maturity on favorable terms. If a property is mortgaged to
secure payment of indebtedness and we are unable to meet its debt service
obligations, the property could be foreclosed upon. This could adversely affect
our cash flow and, consequently, the amount available for distributions to
stockholders.
NO LIMITATION ON DEBT. The Board of Directors has adopted a policy of
limiting our indebtedness to approximately 50% of our total market
capitalization (i.e., the market value of issued and outstanding shares of
Common Stock and limited partnership interests in the Operating Partnership
("Units") plus total debt), but our organizational documents do not contain any
limitation on the amount or percentage of indebtedness, funded or otherwise, we
may incur. Accordingly, the Board of Directors could alter or eliminate its
current policy on borrowing. If this policy were changed, we could become more
highly leveraged, resulting in an increase in debt service that could adversely
affect our ability to make expected distributions to stockholders and an
increased risk of default on our indebtedness. Our debt to total market
capitalization ratio fluctuates based on the timing of acquisitions and
financings. Our bank agreements and certain agreements with holders of our
preferred stock limit the amount of indebtedness we may incur.
EXISTING DEBT MATURITIES. We are subject to the risks normally associated
with debt financing, including the risk that our cash flow will be insufficient
to meet the required payments of principal and interest. Because much of the
financing is not fully self-amortizing, we anticipate that only a portion of the
principal of our indebtedness will be repaid prior to maturity. So, we will need
to refinance debt. Accordingly, there is a risk that we will not be successful
in refinancing existing indebtedness or that the terms of such refinancing will
not be as favorable as the terms of the existing indebtedness. We aim to stagger
our debt maturities with the goal of minimizing the amount of debt which must be
refinanced in any year.
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS. Real property investments are subject to varying degrees of
risk. If our communities do not generate revenues sufficient to meet operating
expenses, including debt service and capital expenditures, Home Properties' cash
flow and ability to make distributions to its stockholders will be adversely
affected. A multifamily apartment community's revenues and value may be
adversely affected by the general economic climates; the local economic climate;
local real estate considerations (such as over supply of or reduced demand for
apartments); the perception by prospective residents of the safety, convenience
and attractiveness of the communities or neighborhoods in which they are located
and the quality of local schools and other amenities; and increased operating
costs (including real estate taxes and utilities). Certain significant fixed
expenses are generally not reduced when circumstances cause a reduction in
income from the investment.
OPERATING RISKS. We are dependent on rental income to pay operating
expenses and to generate cash to enable us to make distributions to our
stockholders. If we are unable to attract and retain residents or if our
residents are unable, due to an adverse change in the economic condition of the
region or otherwise, to pay their rental obligations, our ability to make
expected distributions will be adversely affected.
ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively illiquid
and, therefore, we have limited ability to vary our portfolio quickly in
response to changes in economic or other conditions. In addition, the
prohibition in the Internal Revenue Code (the "Code") on REITs holding property
for sale and related regulations may affect our ability to sell properties
without adversely affecting distributions to stockholders. A significant number
of our properties were acquired using Units subject to certain agreements, which
restrict our ability to sell such properties in transactions, that would create
current taxable income to the former owners.
COMPETITION. We plan to continue to acquire additional multifamily
residential properties in the Northeast, Midwest and Mid-Atlantic regions of the
United States. There are a number of multifamily developers and other real
estate companies that compete with us in seeking properties for acquisition,
prospective residents and land for development. Most of our properties are in
developed areas where there are other properties of the same type. Competition
from other properties may affect our ability to attract and retain residents, to
increase rental rates and to minimize expenses of operation. Virtually all of
the leases for the properties are short-term leases (generally, one year or
less).
UNINSURED LOSSES. Certain extraordinary losses may not be covered by our
comprehensive liability, fire, extended and rental loss insurance. If an
uninsured loss occurred, we could lose our investment in, and cash flow from,
the affected property (but we would be required to repay any indebtedness
secured by that property and related taxes and other charges).
COMPLIANCE WITH LAWS AND REGULATIONS.
Many laws and governmental regulations are applicable to our properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently. Under the Americans with Disabilities Act of 1990
(the "ADA"), all places of public accommodation are required to meet certain
federal requirements related to access and use by disabled persons. These
requirements became effective in 1992. Compliance with the ADA requires removal
of structural barriers to handicapped access in certain public areas where such
removal is "readily achievable." The ADA does not, however, consider residential
properties, such as apartment communities, to be public accommodations or
commercial facilities, except to the extent portions of such facilities, such as
a leasing office, are open to the public. A number of additional federal, state
and local laws exist which also may require modifications to the Properties, or
restrict certain further renovations thereof, with respect to access thereto by
disabled persons. For example, the Fair Housing Amendments Act of 1988 (the
"FHAA") requires apartment communities first occupied after March 13, 1990 to be
accessible to the handicapped. Noncompliance with the ADA or the FHAA could
result in the imposition of fines or an award of damages to private litigants.
Although management believes that the Properties are substantially in compliance
with present requirements, Home Properties may incur additional costs in
complying with the ADA for both existing properties and properties acquired in
the future. We believe that the Properties that are subject to the FHAA are in
compliance with such laws.
Under the federal Fair Housing Act and state fair housing laws,
discrimination on the basis of certain protected classes is prohibited. We have
a policy against any kind of discriminatory behavior and we train our employees
to avoid discrimination or the appearance of discrimination. There is no
assurance, however, that an employee will not violate our policy against
discrimination and violate the fair housing laws. Such a violation could subject
us to legal action and the possible awards of damages.
Under various laws, ordinances and regulations relating to the protection
of the environment, a current or previous owner or operator of real estate may
be held liable for the costs of removal or remediation of certain hazardous or
toxic substances located on, under or in the property. These laws often impose
liability without regard to whether the owner or operator was responsible for,
or even knew of, the presence of such substances. The presence of contamination
from hazardous or toxic substances, or the failure to remediate such
contaminated property properly, may adversely affect the owner's ability to rent
or sell the property or use the property as collateral. Independent
environmental consultants conducted "Phase I" environmental audits (which
involve visual inspection but not soil or groundwater analysis) of substantially
all of the Properties prior to their acquisition. The Phase I audit reports did
not reveal any significant issues of environmental concern, nor are we aware of
any environmental liability that we believe would have a material adverse effect
on us. There is no assurance that Phase I reports would reveal all environmental
liabilities or that environmental conditions not known to us may exist now or in
the future on existing properties or those subsequently acquired which would
result in liability to us for remediation or fines, either under existing laws
and regulations or future changes to such requirements. If compliance with the
various laws and regulations, now existing or hereafter adopted, exceeds our
budgets for such items, our ability to make expected distributions could be
adversely affected.
FEDERAL INCOME TAX RISKS.
GENERAL. We believe that we have been organized and have operated in such
manner so as to qualify as a REIT under the Internal Revenue Code, commencing
with our taxable year ended December 31, 1994. A REIT generally is not taxed at
the corporate level on income it currently distributes to its shareholders as
long as it distributes currently at least 90% of its taxable income (excluding
net capital gain). No assurance can be provided, however, that we have qualified
or will continue to qualify as a REIT or that new legislation, Treasury
Regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to our qualification as a REIT or
the federal income tax consequences of such qualification.
REQUIRED DISTRIBUTIONS AND PAYMENTS. In order to continue to qualify as a
REIT, we currently are required each year to distribute to our stockholders at
least 90% of our taxable income (excluding net capital gain). In addition, we
will be subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions made by us with respect to the calendar year are less than
the sum of 85% of our ordinary income, 95% of our capital gain net income for
that year, and any undistributed taxable income from prior periods. We intend to
make distributions to our stockholders to comply with the 90% distribution
requirement and to avoid the nondeductible excise tax and will rely for this
purpose on distributions from the Operating Partnership. However, differences in
timing between taxable income and cash available for distribution could require
us to borrow funds or to issue additional equity to enable us to meet the 90%
distribution requirement (and therefore to maintain our REIT qualification) and
to avoid the nondeductible excise tax. The Operating Partnership is required to
pay (or reimburse us, as its general partner, for) certain taxes and other
liabilities and expenses that we incur, including any taxes that we must pay in
the event we were to fail to qualify as a REIT. In addition, because we are
unable to retain earnings (resulting from REIT distribution requirements), we
will generally be required to refinance debt that matures with additional debt
or equity. There can be no assurance that any of these sources of funds, if
available at all, would be available to meet our distribution and tax
obligations.
ADVERSE CONSEQUENCES OF OUR FAILURE TO QUALIFY AS A REIT. If we fail to
qualify as a REIT, we will be subject to federal income tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. In addition, unless entitled to relief under certain statutory
provisions, we will be disqualified from treatment as a REIT for the four
taxable years following the year during which REIT qualification is lost. The
additional tax burden on us would significantly reduce the cash available for
distribution by us to our stockholders. Our failure to qualify as a REIT could
reduce materially the value of our common stock and would cause all our
distributions to be taxable as ordinary income to the extent of our current and
accumulated earnings and profits (although, subject to certain limitations under
the Internal Revenue Code, corporate distributees may be eligible for the
dividends received deduction with respect to these distributions). See "Federal
Income Tax Considerations - Failure to Qualify." THE OPERATING PARTNERSHIP'S
FAILURE TO QUALIFY AS A PARTNERSHIP. We believe that the Operating Partnership
qualifies as a partnership for federal income tax purposes. No assurance can be
provided, however, that the Internal Revenue Service (the "IRS") will not
challenge its status as a partnership for federal income tax purposes, or that a
court would not sustain such a challenge. If the IRS were to be successful in
treating the Operating Partnership as an entity that is taxable as a
corporation, we would cease to qualify as a REIT because the value our ownership
interest in the Operating Partnership would exceed 5% of our assets and because
we would be considered to hold more than 10% of the voting securities of another
corporation. See "Taxation of Home Properties - Asset Tests." Also, the
imposition of a corporate tax on the Operating Partnership would reduce
significantly the amount of cash available for distribution to its limited
partners. See "Federal Income Tax Considerations - Tax Aspects of the Operating
Partnership." Finally, the classification of the Operating Partnership as a
corporation would cause its limited partners to recognize gain (upon the event
that causes the Operating Partnership to be classified as a corporation) at
least equal to their "negative capital accounts" (and possibly more, depending
upon the circumstances).
RECENTLY ENACTED TAX LEGISLATION APPLICABLE TO CERTAIN CORPORATE DIVIDENDS
Under recently enacted tax legislation, the tax rate applicable to
qualifying corporate dividends received by individuals prior to 2009 has been
reduced to a maximum rate of 15%. This special tax rate is generally not
applicable to dividends paid by a REIT, unless such dividends represent earnings
on which the REIT itself had been taxed. As a result, dividends (other than
capital gain dividends) paid by us to individual investors will generally be
subject to the tax rates that are otherwise applicable to ordinary income which,
currently, are as high as 35%. This law change may make an investment in our
common shares comparatively less attractive relative to an investment in the
share of other corporate entities which pay dividends that are not formed as
REITs.
LIMITS ON OWNERSHIP
OWNERSHIP LIMIT. In order for us to maintain our qualification as a REIT,
not more than 50% in value of our outstanding stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of its taxable year. We have
limited ownership of the issued and outstanding shares of Common Stock by any
single stockholder to 8.0% of the aggregate value of our outstanding shares.
Shares of Common Stock held by certain entities, such as qualified pension
plans, are treated as if the beneficial owners of such entities were the holders
of the Common Stock. These restrictions can be waived by the Board of Directors
if it were satisfied, based upon the advice of tax counsel or otherwise, that
such action would be in our best interests. Waivers have been granted to certain
institutional investors in connection with the sale of our Preferred Stock.
Shares acquired or transferred in breach of the limitation may be redeemed by us
for the lesser of the price paid or the average closing price for the ten
trading days immediately preceding redemption or may be sold at our direction. A
transfer of shares of Common Stock to a person who, as a result of the transfer,
violates the ownership limit will be void and the shares will automatically be
converted into shares of "Excess Stock", which is subject to a number of
limitations. See "Description of Capital Stock - Restrictions on Transfer" for
additional information regarding the ownership limits.
CHANGE OF CONTROL
Our Articles of Amendment and Restatement of the Articles of Incorporation,
as amended, (the "Articles of Incorporation") authorize the Board of Directors
to issue up to a total of 80 million shares of Common Stock, 10 million shares
of excess stock and 10 million shares of preferred stock and to establish the
rights and preferences of any shares issued. Further, under the Articles of
Incorporation, the stockholders do not have cumulative voting rights.
The percentage ownership limit, the issuance of preferred stock in the
future and the absence of cumulative voting rights could have the effect of: (i)
delaying or preventing a change of control of us even if a change in control
were in the stockholders' interest; (ii) deterring tender offers for our Common
Stock that may be beneficial to the stockholders; or (iii) limiting the
opportunity for stockholders to receive a premium for their Common Stock that
might otherwise exist if an investor attempted to assemble a block of our common
stock in excess of the percentage ownership limit or otherwise to effect a
change of control of us.
We have various agreements, which may have the effect of discouraging a
change of control of us due to the costs involved. The Articles Supplementary to
our Articles of Incorporation under which several series of our outstanding
Preferred Stock were issued provide that upon a change of control of us or the
Operating Partnership, under certain circumstances, the holder of such stock may
require us to redeem it. In addition, in certain change of control
circumstances, Home Properties also has the option of redeeming several of the
other series of outstanding Preferred Stock and the dividend rate on that stock
increases in such circumstances. Also, to assure that our management has
appropriate incentives to focus on our business and Properties in the face of a
change of control situation, we have adopted an executive retention plan which
provides some key employees with salary, bonus and certain benefit continuation
in the event of a change of control.
POTENTIAL CONFLICTS OF INTEREST
Unlike persons acquiring Common Stock, certain of our executive officers
and directors own most of their interest in us through Units. As a result of
their status as holders of Units, those executive officers, directors and other
limited partners may have interests that conflict with stockholders with respect
to business decisions affecting us and the Operating Partnership. In particular,
certain executive officers and directors may suffer different or more adverse
tax consequences than us upon the sale or refinancing of some of the Properties
as a result of unrealized gain attributable to those Properties. Thus, those
executive officers and directors and the stockholders may have different
objectives regarding the appropriate pricing and timing of any sale or
refinancing of Properties. In addition, those executive officers and directors,
as limited partners of the Operating Partnership, have the right to approve
certain fundamental transactions such as the sale of all or substantially all of
the assets of the Operating Partnership, merger or consolidation or dissolution
of the Operating Partnership and certain amendments to the Operating Partnership
Agreement.
SHARES AVAILABLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
or the perception that such sales might occur could adversely affect the market
price of the Common Stock. The Operating Partnership has issued approximately 16
million Units through March 31, 2004 , to persons other than us or the Trust,
which may be exchanged on a one-for-one basis for shares of Common Stock under
certain circumstances. We have issued Class E Cumulative Convertible Preferred
Stock, which is convertible into 833,333 shares of Common Stock and Series F
Cumulative Redeemable Preferred Stock. In addition, Home Properties has granted
options to purchase shares of stock to certain directors, officers and employees
of Home Properties, of which, as of March 31, 2004, approximately, 2,659,419
options remain outstanding and unexercised.
All of the shares of Common Stock issuable upon the exchange of Units or
the exercise of options will be "restricted securities" within the meaning of
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act") and
may not be transferred unless they are registered under the Securities Act or
are otherwise transferable under Rule 144. The Company has filed or expects to
file registration statements with respect to such shares of Common Stock,
thereby allowing shares issuable under our stock benefit plans and in exchange
for Units to be transferred or resold without restriction under the Securities
Act.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy reports, statements or other
information at the SEC's public reference facilities in Washington D.C., at 450
Fifth Street, N.W., Washington D.C. 20544 and at the SEC's regional offices in
New York, 233 Broadway, New York, New York 10279 and Chicago, 175 W. Jackson
Boulevard, Suite 900, Chicago, Illinois 60604. Please call the SEC at
1-800-SEC-0330 for further information on the public reference facilities. Our
SEC filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC at http://www.sec.gov. You
can also review copies of our SEC filings at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
We have filed with the SEC a registration statement on Form S-3 to register
the securities. This prospectus is part of that registration statement and, as
permitted by the SEC's rules, does not contain all the information set forth in
the registration statement. For further information you may refer to the
registration statement and to the exhibits and schedules filed as part of the
registration statement. You can review and copy the registration statement and
its exhibits and schedules at the public reference facilities maintained by the
SEC as described above. The registration statement, including its exhibits and
schedules, is also available on the SEC's web site.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and the information that we file with
the SEC later will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"):
- - Annual Report on Form 10-K for the fiscal year ended December 31, 2003;
- - Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2004; and
- - The description of the common stock contained in our registration
statement on Form 8-A filed under Section 12 of the Exchange Act, including all
amendments and reports filed for the purpose of updating that description.
You may request a copy of these filings, at no cost, by writing or
telephoning us at: Home Properties, Inc., Attention: Ann M. McCormick,
Secretary, 850 Clinton Square, Rochester, New York 14604; telephone number (585)
546-4900.
YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
PROVIDED IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT. WE HAVE NOT AUTHORIZED
ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION. YOU SHOULD
NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY SUPPLEMENT IS ACCURATE
AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains, or incorporates by reference, statements that may
be deemed to be "forward-looking" within the meaning of Section 27A of the
Securities Act, and Section 21E of the Exchange Act. Although we believe
expectations reflected in such forward-looking statements are based on
reasonable assumptions, we can give no assurance that our expectations will be
achieved. Factors that may cause actual results to differ include general
economic and local real estate conditions and the weather, and other conditions
that might affect operating expenses, and timely completion of repositioning
activities within anticipated budgets, the actual pace of acquisitions, and
continued access to capital to fund growth. Our actual results could differ
materially from those set forth in the forward-looking statements. Other factors
that might cause such a difference are discussed in the section entitled "Risk
Factors."
USE OF PROCEEDS
The Company will not receive any proceeds of the sale of the shares offered
hereby.
SELLING SHAREHOLDERS
The partners of the Operating Partnership may from time to time tender
their Units of limited partnership interest to the Operating Partnership. The
Company may give notice to such partners that the Company will acquire such
Units in exchange for shares of Common Stock; a right which we refer to as the
LP purchase right. All of the shares being offered hereby are being sold by
certain partners in the Operating Partnership who may acquire shares of Common
Stock in exchange for their Units pursuant to the LP purchase right and then
wish to sell those shares. We refer to those persons as the Selling
Shareholders. Although the Selling Shareholders have not indicated a present
intent to tender their Units which would trigger the Company's right to issue
shares of Common Stock to them under the LP Purchase Right, the Company is
required, pursuant to the terms of a certain contribution agreement, to file the
registration statement of which this Prospectus forms a part registering such
shares for resale under the Securities Act. The Company is bearing all costs of
this registration. The Company will not receive any proceeds from the sale of
the shares offered hereby.
The following table sets forth certain information regarding the Selling
Shareholders' ownership of Units and the number of shares of Common Stock which
may be issued pursuant to the LP purchase right which are registered for resale
under the registration statement of which this Prospectus forms a part. (Other
partners of the Operating Partnership may sell the shares of Common Stock they
acquire in exchange for their Units under separate registration statements filed
with the SEC covering such shares.) Because the Selling Shareholders may sell
all, some or none of the shares registered for resale, no estimate can be made
concerning the number of shares of Common Stock issued in exchange for Units
that will be offered hereby or the number of shares or Units that the Selling
Shareholders will own upon completion of the offering contemplated by this
Prospectus.
The Selling Shareholders owned interests in entities, which sold properties
to the Operating Partnership. The Selling Shareholders are not officers or
directors of the Company.
Number of Shares
Units Owned Registered for Sale
Name Prior to Offering in Offering
Norman Feinberg 50,520 50,520
Ronald Altman 50,520 50,520
Estate of David Dolgenos 50,520 50,520
EdTech 60,000 60,000
Umbach Family Trust 205,217 205,217
Jose Nodar 98,795 98,795
Total 515,572 515,572
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Home Properties consists of:
- 80 million shares of common stock, $0.01 par value, of which
32,688,962 shares were outstanding on March 31, 2004;
- 10 million shares of preferred stock, $0.01 par value,
-- 1,666,667 shares of which have been designated Series A
Convertible Preferred Stock (the "Series A preferred
stock"), none of which were outstanding as of March 31,
2004,
-- 2,000,000 shares of which have been designated Series B
Convertible Cumulative Preferred Stock (the "Series B
preferred stock"), none of which were outstanding as of
March 31, 2004,
-- 600,000 shares of which have been designated Series C
Convertible Cumulative Preferred Stock (the "Series C
preferred stock"), none of which were outstanding as of
March 31, 2004; and
-- 500,000 shares of which have been designated Series D
Convertible Cumulative Preferred Stock (the "Series D
preferred stock"), 250,000 of which were outstanding as
of March 31, 2004; and
-- 300,000 shares of which have been designated Series E
Convertible Cumulative Preferred Stock (the "Series E
preferred stock"), none of which were outstanding as of
March 31, 2004; and
-- 3,000,000 shares of which have been designated Series F
Cumulative Redeemable Preferred Stock (the "Series F
preferred stock"), 2,400,000 of which were outstanding
as of March 31, 2004.
- 10 million shares of "excess stock," $0.01 par value,
of which no shares were outstanding on March 31, 2004.
For more detail about our Amended and Restated Articles of Incorporation, as
amended, and the Articles Supplementary thereto relating to the Preferred Stock
(sometimes collectively referred to as our "Articles of Incorporation" or
"charter") and bylaws you should refer to the charter and bylaws, which have
been filed as exhibits to other reports incorporated by reference into this
prospectus. In addition, for a discussion of limitations on the ownership of our
capital stock, you should refer to the section entitled "Risk Factors" in this
prospectus.
COMMON STOCK
All of the shares of Common Stock offered by this Prospectus will be duly
authorized, fully paid, and nonassessable when issued in exchange for the Units
in the Operating Partnership. Holders of the Common Stock will have no
conversion, redemption, sinking fund or preemptive rights; however, shares of
Common Stock will automatically convert into shares of Excess Stock as described
below. Under the Maryland General Corporation Law ("MGCL"), stockholders are
generally not liable for our debts or obligations, and the holders of shares
will not be liable for further calls or assessments by us. Subject to the
provisions of our Articles of Incorporation regarding Excess Stock described
below, all shares of Common Stock have equal dividend, distribution, liquidation
and other rights and will have no preference or exchange rights.
Subject to the right of holders of Preferred Stock to receive preferential
distributions, the holders of the shares of Common Stock will be entitled to
receive distributions in the form of dividends if and when declared by our Board
of Directors out of funds legally available therefor, and, upon liquidation of
us, each outstanding share of Common Stock will be entitled to participate pro
rata in the assets remaining after payment of, or adequate provision for, all of
our known debts and liabilities, including debts and liabilities arising out of
its status as general partner of the Operating Partnership, and any liquidation
preference of issued and outstanding Preferred Stock. We intend to continue
paying quarterly distributions.
The holder of each outstanding share of Common Stock is entitled to one
vote on all matters presented to stockholders for a vote, subject to the
provisions of our Articles of Incorporation regarding Excess Stock described
below. As described below, our Board of Directors has, and may in the future,
grant holders of one or more series of Preferred Stock the right to vote with
respect to certain matters when it fixes the attributes of such series of
Preferred Stock. Pursuant to the MGCL, we cannot dissolve, amend our charter,
merge with or into another entity, sell all or substantially all our assets,
engage in a share exchange or engage in similar transactions unless such action
is approved by stockholders holding a majority of the outstanding shares
entitled to vote on such matter. In addition, the Second Amended and Restated
Partnership Agreement of the Operating Partnership, as amended requires that any
merger or sale of all or substantially all of the assets of Operating
Partnership be approved by partners holding a majority of the outstanding Units,
excluding Operating Partnership Units held by us or Home Properties Trust. The
Company's Articles of Incorporation provide that its Bylaws may be amended by
its Board of Directors.
The holder of each outstanding share of Common Stock is entitled to one
vote in the election of directors who serve for terms of one year. Holders of
the shares of Common Stock will have no right to cumulative voting for the
election of directors. Consequently, at each annual meeting of stockholders, the
holders of a majority of the shares entitled to vote in the election of
directors will be able to elect all of the directors, subject to certain rights
of the holders of Preferred Stock, described below. Directors may be removed
only for cause and only with the affirmative vote of the holders of a majority
of the shares entitled to vote in the election of directors.
PREFERRED STOCK
We may issue shares of Preferred Stock from time to time, in one or more
series, as authorized by our Board of Directors. The Board of Directors will fix
the attributes of any Preferred Stock that it authorizes for issuance. Because
the Board of Directors has the power to establish the preferences and rights of
each series of Preferred Stock, it may afford the holders of any series of
Preferred Stock preferences, powers and rights, voting or otherwise, senior to
the rights of holders of shares of Common Stock. The issuance of Preferred Stock
could have the effect of delaying or preventing a change in control of Home
Properties.
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of Home Properties, then, before any distribution or payment shall
be made to the holders of any shares of Common Stock, any Excess Stock or any
other class or series of capital stock of Home Properties ranking junior to any
outstanding Preferred Stock in the distribution of assets upon any liquidation,
dissolution or winding up of Home Properties, the holders of shares of each
series of Preferred Stock shall be entitled to receive out of assets of Home
Properties legally available for distribution to shareholders liquidating
distributions in the amount of the liquidation preference per share, plus an
amount equal to all dividends accrued and unpaid thereon (which shall not
include any accumulation in respect of unpaid dividends for prior dividend
periods if such shares of Preferred Stock do not have cumulative dividends).
After payment of the full amount of the liquidating distributions to which they
are entitled, the holders of shares of Preferred Stock will have no right or
claim to any of the remaining assets of Home Properties. In the event that, upon
any such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of Home Properties are insufficient to pay the amount of the
liquidating distributions on all outstanding shares of Preferred Stock and the
corresponding amounts payable on all shares of other classes or series of
capital stock of Home Properties ranking on a parity with such shares of
Preferred Stock in the distribution of assets, then the holders of such shares
of Preferred Stock and all other such classes or series of capital stock shall
share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
Series A Convertible Preferred Stock
In December 1999, the Class A limited partnership interests held by the
State of Michigan Retirement System were converted to Series A preferred stock.
All of the shares of the Series A preferred stock have been converted to common
shares, leaving no Series A preferred stock outstanding. Pursuant to the
Articles Supplementary to the charter establishing the Series A preferred stock,
the shares of Series A preferred Stock were restored to the status of authorized
but unissued shares of preferred stock without designation as to series.
Series B, C and E Convertible Cumulative Preferred Stock
All of the shares of Series B, Series C and Series E preferred stock have
been converted to common stock leaving no shares of Series B, C or E preferred
stock outstanding. Pursuant to the Articles Supplementary to the charter
establishing these series of preferred stock, the shares of the preferred stock
so converted were restored to the status of authorized but unissued shares of
preferred stock without designation as to series.
Series D Convertible Cumulative Preferred Stock
On June 5, 2000, Home Properties issued 250,000 shares of its Series D
preferred stock. The Articles Supplementary to the charter establishing the
Series D preferred stock were filed on June 2, 2000, authorize an aggregate of
500,000 shares of Series D preferred stock, and set forth the rights, privileges
and preferences of that stock. The Series D preferred stock is on a parity with
the Series F preferred stock. The Articles Supplementary with respect to the
Series D preferred stock, are filed as an exhibit to one of our filings with the
Securities and Exchange Commission, which is incorporated herein by reference.
The Series D preferred stock is entitled to a liquidation preference equal
to $100 per share plus all accrued and unpaid dividends to the date of
liquidation.
Dividends on the Series D preferred stock accrue quarterly and are equal to
the greater of the dividends payable on the shares of Common Stock into which
the Series D preferred stock is convertible, or 8.775% of the liquidation
preference (or $8.775 per share) each year. If we fail to limit our ratio of
earnings before interest, taxes, depreciation and amortization (EBITDA) to fixed
charges (consisting of total interest expense and dividends on our preferred
stock), to 1.75 to 1.0, the dividends that will accrue on the Series D preferred
stock will increase by .50%. In addition, on the occurrence of certain events
resulting in a change of control of Home Properties, the Series D preferred
stock will accrue dividends at a rate fixed at 8% above the then current
five-year treasury note yield, but in no event less than 8.775%
The Series D preferred stock is redeemable at our option after the fifth
anniversary of its issuance at $100 per share, plus accrued dividends. In
addition, we are required to redeem the Series D preferred stock on the fiftieth
anniversary of the issuance at a redemption price per share payable at our
option, either: (i) in cash at $100.00 per share, plus accrued dividends; or
(ii) by issuance of shares of our common stock based on the then current
conversion price, which is described below. We may also redeem the Series D
preferred stock in the event of change of control (as defined in the Articles
Supplementary) of Home Properties. Upon the occurrence of certain limited
events, the Series D preferred stock may be subject to mandatory repurchase at
the option of the holders and, in certain instances, at a premium over the $100
stated value per share. Those events include: sale of all or substantially all
of the assets, incurrence of indebtedness in excess of 65% of total value (with
real estate assets valued at original, historical cost basis), a loss of REIT
status and other events described in the Articles Supplementary. The holders of
the Series D preferred stock, together with the holders of other classes of
preferred stock, also have the right to elect two directors to the Board of
Directors of Home Properties in the event that the preferred dividends are in
arrears for six quarters (whether consecutive or not).
Each share of Series D preferred stock is convertible into 3.33333 shares
of common stock (plus accrued and unpaid dividends), the equivalent of $30 per
share conversion price, subject to adjustment. The number of shares of common
stock issuable upon conversion and the price per share are subject to adjustment
upon the occurrence of certain events, including in the event of dividends or
other distributions payable in capital stock or combinations of stock so that
any holder of the Series D preferred stock will be entitled to the same number
of shares of common stock such holder could have received if the holder had
converted immediately prior to the event. The holders of the Series D preferred
stock may convert their shares into common stock at any time.
Series F Cumulative Redeemable Preferred Stock
On March 22, 2002, Home Properties issued 2,400,000 shares of its Series F
preferred stock. The Articles Supplementary to the charter establishing the
Series F preferred stock authorize an aggregate 3,000,000 shares of Series F
preferred stock and set forth the rights, privileges and preferences of that
stock. The Series F preferred stock is on a parity with the Series D preferred
stock described above. The Series F preferred stock is entitled to a liquidation
preference equal to $25 per share plus all accrued and unpaid dividends to the
date of liquidation.
Dividends on the Series F preferred stock accrue quarterly in arrears and
are equal to 9.00% of the liquidation preference (or $2.25 per share) each year.
The holders of the Series F preferred stock, together with the holders of other
classes of preferred stock, have the right to elect two directors to the Board
of Directors of Home Properties in the event that the preferred dividends are in
arrears for six quarter (whether consecutive or not).
Pursuant to certain covenants, if we fail to limit our ratio of earnings
before interest, taxes depreciation and amortization (EBITDA) to fixed charges
(consisting of total interest expense and dividends on our preferred stock), to
1.75 to 1.0 the holders of the Series F preferred stock will be entitled to
elect two additional directors to our Board of Directors until we again complete
a quarter in compliance with the ratio.
The Series F preferred stock is redeemable at our option on or after March
25, 2007 at $25 per share, plus accrued dividends. The Series F preferred stock
has no stated maturity and will not be subject to any sinking fund or mandatory
redemption.
The Series F preferred stock is not convertible into or exchangeable for
any of our other property or securities, except that shares of the Series F
preferred stock may be exchanged for shares of our excess stock in order to
ensure that we maintain qualified as a REIT for federal income tax purposes.
RESTRICTIONS ON TRANSFER OWNERSHIP LIMITS
Our charter contains certain restrictions on the number of shares of
capital stock that stockholders may own. For us to qualify as a REIT under the
Code, no more than 50% in value of its outstanding shares of capital stock may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Internal Revenue Code, to include certain entities) during the last half of
a taxable year or during a proportionate part of a shorter taxable year. The
capital stock must also be beneficially owned by 100 or more persons during at
least 335 days of a taxable year or during a proportionate part of a shorter
taxable year. Because we expect to continue to qualify as a REIT, our charter
contains restrictions on the ownership and transfer of shares of our capital
stock intended to ensure compliance with these requirements. Subject to certain
exceptions specified in the charter, no holder may own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 8.0% (the "Ownership
Limit") of the value of the issued and outstanding shares of our capital stock.
Certain entities, such as qualified pension plans, are treated as if their
beneficial owners were the holders of the Common Stock held by such entities.
Stockholders ("Existing Holders") whose holdings exceeded the Ownership Limit
immediately after our initial public offering of our Common Stock, assuming that
all Units of the Operating Partnership are counted as shares of Common Stock,
are permitted to continue to hold the number of shares they held on such date
and may acquire additional shares of capital stock upon (i) the exchange of
Units for Shares, (ii) the exercise of stock options or receipt of grants of
shares of capital stock pursuant to a stock benefit plan, (iii) the acquisition
of shares of capital stock pursuant to a dividend reinvestment plan, (iv) the
transfer of shares of capital stock from another Existing Holder or the estate
of an Existing Holder by devise, gift or otherwise, or (v) the foreclosure on a
pledge of shares of capital stock; provided, no such acquisition may cause any
Existing Holder to own, directly or by attribution, more than 17.5% (the
"Existing Holder Limit") of the issued and outstanding Shares, subject to
certain additional restrictions.
Our Board of Directors may increase or decrease the Ownership Limit and
Existing Holder Limit from time to time, but may not do so to the extent that
after giving effect to such increase or decrease (i) five beneficial owners of
Shares could beneficially own in the aggregate more than 49.5% of the aggregate
value of our outstanding capital or (ii) any beneficial owner of capital stock
would violate the Ownership Limit or Existing Holder Limit as a result of a
decrease. The Board of Directors may waive the Ownership Limit or the Existing
Holder Limit with respect to a holder if such holder provides evidence
acceptable to the Board of Directors that such holder's ownership will not
jeopardize our status as a REIT. Waivers of the Ownership Limit have been
granted to certain institutional investors in connection with the sale of our
Preferred Stock.
Any transfer of our outstanding capital stock ("Outstanding Stock") that
would (i) cause any holder, directly or by attribution, to own capital stock
having a value in excess of the Ownership Limit or Existing Holder Limit, (ii)
result in shares of capital stock other than Excess Stock, if any, to be owned
by fewer than 100 persons, (iii) result in our being closely held within the
meaning of section 856(h) of the Code, or (iv) otherwise prevent us from
satisfying any criteria necessary for us to qualify as a REIT, is null and void,
and the purported transferee acquires no rights to such Outstanding Stock.
Outstanding Stock owned by or attributable to a stockholder or shares of
Outstanding Stock purportedly transferred to a stockholder which cause such
stockholder or any other stockholder to own shares of capital stock in excess of
the Ownership Limit or Existing Holder Limit will automatically convert into
shares of Excess Stock. Such Excess Stock will be transferred by operation of
law to a separate trust, with Home Properties acting as trustee, for the
exclusive benefit of the person or persons to whom such Outstanding Stock may be
ultimately transferred without violating the Ownership Limit or Existing Holder
Limit. Excess Stock is not treasury stock, but rather constitutes a separate
class of issued and outstanding stock of Home Properties. While the Excess Stock
is held in trust, it will not be entitled to vote, will not be considered for
purposes of any stockholder vote or the determination of a quorum for such vote
and will not be entitled to participate in dividends or other distributions. Any
record owner or purported transferee of Outstanding Stock which has converted
into Excess Stock (the "Excess Holder") who receives a dividend or distribution
prior to the discovery by us that such Outstanding Stock has been converted into
Excess Stock must repay such dividend or distribution upon demand. While Excess
Stock is held in trust, we will have the right to purchase it from the trust for
the lesser of (i) the price paid for the Outstanding Stock which converted into
Excess Stock by the Excess Holder (or the market value of the Outstanding Stock
on the date of conversion if no consideration was given for the Outstanding
Stock)or (ii) the market price of shares of capital stock equivalent to the
Outstanding Stock which converted into Excess Stock (as determined in the manner
set forth in the Articles of Incorporation) on the date we exercise our option
to purchase. We must exercise this right within the 90-day period beginning on
the date on which we receive written notice of the transfer or other event
resulting in the conversion of Outstanding Stock into Excess Stock. Upon our
liquidation, distributions will be made with respect to such Excess Stock as if
it consisted of the Outstanding Stock from which it was converted.
Any Excess Holder, with respect to each trust created upon the conversion
of Outstanding Stock into Excess Stock, may designate any individual as a
beneficiary of such trust; provided, such person would be permitted to own the
Outstanding Stock which converted into the Excess Stock held by the trust under
the Ownership Limit or Existing Holder Limit and the consideration paid to such
Excess Holder in exchange for designating such person as the beneficiary is not
in excess of the price paid for the Outstanding Stock which converted into
Excess Stock by the Excess Holder (or the market value of the Outstanding Stock
on the date of conversion if no consideration was given for the Outstanding
Stock). Our redemption right must have expired or been waived prior to such
designation. Immediately upon the designation of a permitted beneficiary, the
Excess Stock, if any, will automatically convert into shares of the Outstanding
Stock from which it was converted and we as trustee of the trust will transfer
such shares, if any, and any proceeds from redemption or liquidation to the
beneficiary.
If the restrictions on ownership and transfer, conversion provisions or
trust arrangements in our Articles of Incorporation are determined to be void or
invalid by virtue of any legal decision, statute, rule or regulation, then the
Excess Holder of any Outstanding Stock that would have converted into shares of
Excess Stock if the conversion provisions of the Articles of Incorporation were
enforceable and valid shall be deemed to have acted as an agent on behalf of us
in acquiring such Outstanding Stock and to hold such Outstanding Stock on behalf
of us unless we waive our right to this remedy.
The foregoing ownership and transfer limitations may have the effect of
precluding acquisition of control of Home Properties without the consent of our
Board of Directors. All certificates representing shares of capital stock will
bear a legend referring to the restrictions described above. The foregoing
restrictions on transferability and ownership will not apply if the Board of
Directors determines, and the stockholders concur, that it is no longer in our
best interests to attempt to qualify, or to continue to qualify, as a REIT.
Approval of the limited partners of the Operating Partnership to terminate REIT
status is also required.
OWNERSHIP REPORTS
Every owner of more than 5% of our issued and outstanding shares of capital
stock must file a written notice with us containing the information specified in
the Articles of Incorporation no later than January 31 of each year. In
addition, each stockholder shall, upon demand, be required to disclose to us in
writing such information as we may request in order to determine the effect of
such stockholder's direct, indirect and attributed ownership of shares of
capital stock on our status as a REIT or to comply with any requirements of any
taxing authority or other governmental agency.
CERTAIN OTHER PROVISIONS OF MARYLAND LAW AND CHARTER DOCUMENTS
The following discussion summarizes certain provisions of MGCL and our
Articles of Incorporation and Bylaws. This summary does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Articles of Incorporation and Bylaws, copies of which are filed as exhibits to
the Registration Statement of which this prospectus constitutes a part. The
Articles of Incorporation and Bylaws limit the liability of directors and
officers to us and our stockholders to the fullest extent permitted from time to
time by the MGCL and require us to indemnify our directors, officers and certain
other parties to the fullest extent permitted from time to time by the MGCL.
BUSINESS COMBINATIONS. Under the MGCL, certain "business combinations"
(including a merger, consolidation, share exchange or, in certain circumstances,
an asset transfer or issuance or reclassification of equity securities) between
a Maryland corporation and any person who beneficially owns 10% or more of the
voting power of the outstanding voting stock of the corporation or an affiliate
or associate of the corporation who, at any time within the two-year period
immediately prior to the date in question, was the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the then-outstanding voting
stock of the corporation (an "Interested Stockholder") or an affiliate thereof,
are prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, in addition to any
other required vote, any such business combination must be recommended by the
board of directors of such corporation and approved by the affirmative vote of
at least (i) 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation, voting together as a single voting
group, and (ii) two-thirds of the votes entitled to be cast by holders of voting
stock of the corporation (other than voting stock held by the Interested
Stockholder who will, or whose affiliate will, be a party to the business
combination or by an affiliate or associate of the Interested Stockholder)
voting together as a single voting group. The extraordinary voting provisions do
not apply if, among other things, the corporation's stockholders receive a price
for their shares determined in accordance with the MGCL and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of the MGCL do not apply, however,
to business combinations that are approved or exempted by the board of directors
of the corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. Our Articles of Incorporation contain a provision
exempting from these provisions of the MGCL any business combination involving
the Leenhoutses (or their affiliates) or any other person acting in concert or
as a group with any of the foregoing persons.
CONTROL SHARE ACQUISITIONS. The MGCL provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by the affirmative vote of two- thirds of
the votes entitled to be cast on the matter other than "interested shares"
(shares of stock in respect of which any of the following persons is entitled to
exercise or direct the exercise of the voting power of shares of stock of the
corporation in the election of directors: an "acquiring person," an officer of
the corporation or an employee of the corporation who is also a director).
"Control shares" are shares of stock which, if aggregated with all other such
shares of stock owned by the acquiring person, or in respect of which such
person is entitled to exercise or direct the exercise of voting power of shares
of stock of the corporation in electing directors within one of the following
ranges of voting power: (i) one-tenth or more but less than one-third, (ii)
one-third or more but less than a majority, or (iii) a majority of more of all
voting power. Control shares do not include shares the acquiring person is
entitled to vote as a result of having previously obtained stockholder approval.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation. A person who has made or proposes to make a control share
acquisition, under certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the control shares upon delivery of an acquiring person statement containing
certain information required by the MGCL, including a representation that the
acquiring person has the financial capacity to make the proposed control share
acquisition, and a written undertaking to pay the corporation's expenses of the
special meeting (other than the expenses of those opposing approval of the
voting rights). If no request for a meeting is made, the corporation may itself
present the question at any stockholders meeting. If voting rights are not
approved at the meeting or if the acquiring person does not deliver an acquiring
person statement as required by the MGCL, then, subject to certain conditions
and limitations, the corporation may redeem any or all of the control shares
(except those for which voting rights have previously been approved) for fair
value, determined without regard to the absence of voting rights for control
shares, as of the date of the last control share acquisition or, if a
stockholder meeting is held, as of the date of the meeting of stockholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders' meeting before
the control share acquisition and the acquiring person becomes entitled to
exercise or direct the exercise of a majority or more of all voting power, all
other stockholders may exercise rights of objecting stockholders under Maryland
law to receive the fair value of their shares. The fair value of the shares for
such purposes may not be less than the highest price per share paid by the
acquiring person in the control share acquisition. Certain limitations and
restrictions otherwise applicable to the exercise of objecting stockholders'
rights do not apply in the context of a control share acquisition. The Articles
of Incorporation contain a provision exempting from the control share
acquisition statute any and all acquisitions to the extent that such
acquisitions would not violate the Ownership Limit or Existing Owner Limit.
There can be no assurance that such provision will not be amended or eliminated
at any point in the future.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax consequences regarding
Home Properties and the common stock we are registering is based on current law,
is for general information only and is not tax advice. The information in this
section is based on the Internal Revenue Code as currently in effect, current,
temporary and proposed Treasury Regulations promulgated under the Internal
Revenue Code, the legislative history of the Internal Revenue Code, current
administrative interpretations and practices of the IRS, including its practices
and policies as expressed in private letter rulings which are not binding on the
IRS except with respect to the particular taxpayers who requested and received
such rulings, and court decisions, all as of the date of this prospectus. There
is no assurance that future legislation, Treasury Regulations, administrative
interpretations and practices or court decisions will not adversely affect
existing interpretations. Any change could apply retroactively to transactions
preceding the date of the change.
We have not requested, and do not plan to request, any rulings from the IRS
concerning our tax treatment and the statements in this prospectus are not
binding on the IRS or a court. Thus, we can provide no assurance that these
statements will not be challenged by the IRS or sustained by a court if
challenged by the IRS. The tax treatment to holders of common stock will vary
depending on a holder's particular situation and this discussion does not
purport to deal with all aspects of taxation that may be relevant to a holder of
common stock in light of his or her personal investments or tax circumstances,
or to stockholders subject to special treatment under the federal income tax
laws except to the extent discussed under the headings "Taxation of Tax-Exempt
Stockholders" and "Taxation of Non-U.S. Stockholders." Stockholders subject to
special treatment include, without limitation, insurance companies, financial
institutions or broker-dealers, tax-exempt organizations, stockholders holding
securities as part of a conversion transaction or hedge or hedging transaction
or as a position in a straddle for tax purposes, foreign corporations and
persons who are not citizens or residents of the United States.
In addition, the summary below does not consider the effect of any foreign,
state, local or other tax laws that may be applicable to holders of the common
stock. If we meet the detailed requirements in the Internal Revenue Code for
qualification as a REIT, which are summarized below, we will be treated as a
REIT for federal income tax purposes. In this case, we generally will not be
subject to federal corporate income taxes on our net income that is currently
distributed to our stockholders. This treatment substantially eliminates the
"double taxation" that generally results from investments in a corporation.
Double taxation refers to the imposition of corporate level tax on income earned
by a corporation and taxation at the shareholder level on funds distributed to a
corporation's shareholders. If we fail to qualify as a REIT in any taxable year,
we would not be allowed a deduction for dividends paid to our stockholders in
computing taxable income and would be subject to federal income tax at regular
corporate rates. Unless entitled to relief under specific statutory provisions,
we would be ineligible to be taxed as a REIT for the four succeeding tax years.
As a result, the funds available for distribution to our stockholders would be
reduced. Each prospective purchaser should consult his or her own tax advisor
regarding the specific tax consequences of the purchase, ownership and sale of
common stock, including the federal, state, local, foreign and other tax
consequences of such purchase, ownership and sale and of potential changes in
applicable tax laws.
TAXATION OF HOME PROPERTIES
GENERAL. We elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code, commencing with our taxable year ended December 31,
1994. We believe we have been organized and have operated in a manner which
qualifies for taxation as a REIT under the Internal Revenue Code commencing with
our taxable year ended December 31, 1994. We intend to continue to operate in
this manner. However, our qualification and taxation as a REIT depends upon our
ability to meet, through actual annual operating results, asset diversification,
distribution levels and diversity of stock ownership, the various qualification
tests imposed under the Internal Revenue Code. Accordingly, there is no
assurance that we have operated or will continue to operate in a manner so as to
qualify or remain qualified as a REIT. Further, legislative, administrative or
judicial action may change, perhaps retroactively, the anticipated income tax
treatment described in this prospectus. See "Failure to Qualify."
This discussion is not intended to be a substitute for careful tax
planning. We urge each prospective investor to consult with his or her own tax
advisor regarding the specific tax consequences applicable to him or her, in
light of his or her particular circumstances, relating to the purchase,
ownership and disposition of our common shares, including the federal, state,
local, foreign and other tax consequences of such purchase, ownership, sale and
disposition.
In the opinion of Nixon Peabody LLP, Home Properties was organized in
conformity with the requirements for qualification as a REIT, and its method of
operation has enabled it to meet the requirements for qualification and taxation
as a REIT under the Code. This opinion is based on certain assumptions and is
conditioned upon certain representations made by Home Properties as to certain
factual matters relating to Home Properties' organization, manner of operation,
income and assets. Nixon Peabody LLP is not aware of any facts or circumstances
that are inconsistent with these assumptions and representations. Home
Properties' qualification and taxation as a REIT will depend upon Home
Properties' satisfaction of the requirements necessary to be classified as a
REIT, discussed below, on a continuing basis. Nixon Peabody LLP will not review
compliance with these tests on a continuing basis. Therefore, no assurance can
be given that Home Properties will satisfy such tests on a continuing basis.
The sections of the Internal Revenue Code that relate to the qualification
and operation as a REIT are highly technical and complex. The following sets
forth the material aspects of the sections of the Internal Revenue Code that
govern the federal income tax treatment of a REIT and its stockholders. This
summary is qualified in its entirety by the applicable Internal Revenue Code
provisions, relevant rules and regulations promulgated under the Internal
Revenue Code, and administrative and judicial interpretations of the Internal
Revenue Code, and these rules and these regulations.
If we qualify for taxation as a REIT, we generally will not be subject to
federal corporate income taxes on our net income that is currently distributed
to our stockholders. This treatment substantially eliminates the "double
taxation" that generally results from investment in a corporation. However, Home
Properties will be subject to federal income tax as follows:
First, we will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains; provided,
however, that properly designated undistributed capital gains will effectively
avoid taxation at the stockholder level. A REIT's "REIT taxable income" is the
otherwise taxable income of the REIT subject to certain adjustments, including a
deduction for dividends paid.
Second, we may be subject to the "alternative minimum tax" on our items of
tax preference under some circumstances.
Third, if we have (a) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (b) other nonqualifying income from foreclosure
property, we will be subject to tax at the highest corporate rate on this
income. Foreclosure property is defined generally as property we acquired
through foreclosure or after a default on a loan secured by the property or a
lease of the property.
Fourth, we will be subject to a 100% tax on any net income from prohibited
transactions. Prohibited transactions generally include sales or other
dispositions of property held primarily for sale to customers in the ordinary
course of business, other than the sale or disposition of foreclosure property.
Fifth, we will be subject to a 100% tax on an amount equal to (a) the gross
income attributable to the greater of the amount by which we fail the 75% or 95%
test multiplied by (b) a fraction intended to reflect our profitability, if we
fail to satisfy the 75% gross income test or the 95% gross income test but have
maintained our qualification as a REIT because we satisfied other requirements.
The gross income tests are discussed below.
Sixth, we would be subject to a 4% excise tax on the excess of the required
distribution over the amounts actually distributed if we fail to distribute
during each calendar year at least the sum of: 85% of our REIT ordinary income
for the year, 95% of our REIT capital gain net income for the year, and any
undistributed taxable income from prior periods.
Seventh, if we acquire any asset from a corporation which is or has been a
C corporation in a transaction in which the basis of the acquired asset in our
hands is determined by reference to the basis of the asset in the hands of the C
corporation, and we subsequently recognize gain on the disposition of the asset
during the ten-year period beginning on the date on which we acquired the asset,
then we will be subject to tax at the highest regular corporate tax rate on this
gain to the extent of the "built-in-gain" of the asset. The built-in- gain of an
asset equals the excess of (a) the fair market value of the asset over (b) our
adjusted basis in the asset, determined as of the date we acquired the asset
from the C corporation. A C corporation is generally a corporation subject to
full corporate-level tax.
Eighth, we will be subject to a 100% tax on amounts received through
arrangements between Home Properties, its tenants and a taxable REIT subsidiary
that are not arm's length.
REQUIREMENTS FOR QUALIFICATION AS A REIT. The Internal Revenue Code defines
a REIT as a corporation, trust or association that:
1. is managed by one or more trustees or directors;
2. uses transferable shares or transferable certificates to evidence
beneficial ownership;
3. would be taxable as a domestic corporation, but for Sections 856
through 860 of the Internal Revenue Code;
4. is not a financial institution referred to in Section 582(c) of the
Internal Revenue Code or an insurance company to which subchapter L of
the Internal Revenue Code applies;
5. is beneficially owned by 100 or more persons;
6. during the last half of each taxable year not more than 50% in value
of its outstanding stock is owned, actually or constructively, by five
or fewer individuals, as defined in the Internal Revenue Code to
include the entities set forth in Section 542(a)(2) of the Internal
Revenue Code; and
7. meets other tests, described below, regarding the nature of its income
and assets and the amount of its distributions.
The Internal Revenue Code provides that conditions (1) to (4), inclusive,
must be met during the entire taxable year and that condition (5) must be met
during at least 335 days of a taxable year of twelve months, or during a
proportionate part of a taxable year of less than twelve months. Conditions (5)
and (6) do not apply until after the first taxable year for which an election
made to be taxed as a REIT. For purposes of condition (6), pension funds and
some other tax-exempt entities are treated as individuals, subject to a
"look-through" exception in the case of pension funds. We have satisfied
condition (5) and believe that we have issued sufficient shares to satisfy
condition (6). In addition, our articles of incorporation provides for
restrictions regarding ownership and transfer of shares. These restrictions are
intended to assist us in continuing to satisfy the share ownership requirements
described in (5) and (6) above. These ownership and transfer restrictions are
described in the accompanying prospectus in "Description of Capital Stock-
Restrictions on Transfer." Primarily, though not exclusively, as a result of
fluctuations in value among the different classes of our stock, these
restrictions may not ensure that we will, in all cases, be able to satisfy the
share ownership requirements described in conditions (5) and (6) above. If we
fail to satisfy these share ownership requirements, our status as a REIT will
terminate. However, if we comply with the rules contained in applicable Treasury
Regulations that require us to ascertain the actual ownership of our shares and
we do not know, or would not have known through the exercise of reasonable
diligence, that we failed to meet the requirement described in condition (6)
above, we will be treated as having met this requirement. See "Failure to
Qualify."
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. We have and will continue to have a calendar
taxable year.
TAXABLE REIT SUBSIDIARIES. A taxable REIT subsidiary of Home Properties is
a corporation other than a REIT in which Home Properties directly or indirectly
holds stock and that has made a joint election with Home Properties to be
treated as a taxable REIT subsidiary. A taxable REIT subsidiary also includes
any corporation other than a REIT with respect to which a taxable REIT
subsidiary of Home Properties owns securities possessing more than 35% of the
total voting power or value of the outstanding securities of such corporation.
However, a taxable REIT subsidiary does not include certain health care and
lodging facilities. A taxable REIT subsidiary is subject to regular federal
income tax, and state and local income tax where applicable, as a regular "C"
corporation. In addition, a taxable REIT subsidiary of Home Properties may be
limited in its ability to deduct interest paid to Home Properties. Home
Properties jointly made the election with the following entities for them to be
treated as taxable REIT subsidiaries of Home Properties effective January 1,
2001: Home Properties Resident Services, Inc. and Home Properties Management,
Inc.
QUALIFIED REIT SUBSIDIARIES. If a REIT owns a corporate subsidiary that is
a "qualified REIT subsidiary," the separate existence of that subsidiary will be
disregarded for federal income tax purposes. Generally, a qualified REIT
subsidiary is a corporation, other than a taxable REIT subsidiary, all of the
capital stock of which is owned by the REIT. All assets, liabilities and items
of income, deduction and credit of the qualified REIT subsidiary will be treated
as assets, liabilities and items of income, deduction and credit of the REIT
itself. A qualified REIT subsidiary of Home Properties will not be subject to
federal corporate income taxation, although it may be subject to state and local
taxation in some states.
OWNERSHIP OF A PARTNERSHIP INTEREST. In the case of a REIT which is a
partner in a partnership, IRS regulations provide that the REIT will be deemed
to own its proportionate share of the assets of the partnership. Also, a partner
in a partnership will be deemed to be entitled to the income of the partnership
attributable to its proportionate share. The character of the assets and gross
income of the partnership retains the same character in the hands of Home
Properties for purposes of Section 856 of the Internal Revenue Code, including
satisfying the gross income tests and the asset tests. Thus, our proportionate
share of the assets, liabilities and items of income of the Operating
Partnership, including the Operating Partnership's share of these items for any
partnership or limited liability company, are treated as our assets, liabilities
and items of income for purposes of applying the requirements described in this
prospectus.
We have included a summary of the rules governing the Federal income
taxation of partnerships and their partners below in "Tax Aspects of the
Operating Partnership". We have direct control of the Operating Partnership and
will continue to operate it consistent with the requirements for qualification
as a REIT.
INCOME TESTS. We must satisfy two gross income requirements annually to
maintain our qualification as a REIT. First, each taxable year we must derive
directly or indirectly at least 75% of our gross income from investments
relating to real property or mortgages on real property, including "rents from
real property" and, in specific circumstances, interest, or from particular
types of temporary investments. Gross income from prohibited transactions is
excluded for purposes of determining if we satisfy this test. Second, each
taxable year we must derive at least 95% of our gross income from these real
property investments, dividends, interest and gain from the sale or disposition
of stock or securities, or from any combination of the foregoing. Gross income
from prohibited transactions is excluded for purposes of determining if we
satisfy this test.
The term "interest" generally does not include any amount received or
accrued, directly or indirectly, if the determination of the amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Rents we receive will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met.
First, the amount of rent must not be based in whole or in part on the
income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "rents from real property" solely
by reason of being based on a fixed percentage or percentages of receipts or
sales.
Second, the Internal Revenue Code provides that rents received from a
"related party tenant" will not qualify as "rents from real property" in
satisfying the gross income tests. A related party tenant is a tenant of Home
Properties that Home Properties, or one or more actual or constructive owners of
10% or more of Home Properties, actually or constructively own in the aggregate
10% or more of such tenant. For taxable years after December 31, 2000, Home
Properties will be able to lease its properties to a taxable REIT subsidiary and
the rents received from that subsidiary will not be disqualified from being
"rents from real property" by reason of Home Properties' ownership interest in
the subsidiary so long as the property is operated on behalf of the taxable REIT
subsidiary by an "eligible independent contractor."
Third, if rent attributable to personal property, leased in connection with
a lease of real property, is greater than 15% of the total rent received under
the lease, then the portion of rent attributable to personal property will not
qualify as "rents from real property."
Finally, for rents received to qualify as "rents from real property," Home
Properties is allowed only to provide services that are both "usually or
customarily rendered" in connection with the rental of real property and not
otherwise considered "rendered to the occupant." Income received from any other
services will be treated as "impermissible tenant service income" unless the
services are provided through an independent contractor that bears the expenses
of providing the services and from whom Home Properties derives no revenue or
through a taxable REIT subsidiary, subject to specified limitations. The amount
of impermissible tenant service income is deemed to be the greater of the amount
actually received by the REIT or 150% of Home Properties' direct cost of
providing the service. If the impermissible tenant service income exceeds 1% of
Home Properties' total income from income from a property, then all of the
income from that property will fail to qualify as rents from real property. If
the total amount of impermissible tenant service income from a property does not
exceed 1% of Home Properties' total income from that property, the income will
not cause the rent paid by tenants of that property to fail to qualify as rents
from real property, but the impermissible tenant service income itself will not
qualify as rents from real property.
It is expected that Home Properties' real estate investments will continue
to give rise to income that will enable it to satisfy all of the income tests
described above. Substantially all of Home Properties' income will be derived
from its interest in the Operating Partnership, which will, for the most part,
qualify as "rents from real property" for purposes of the 75% and the 95% gross
income tests. We generally do not and do not intend to:
- charge rent for any property that is based in whole or in part on the
income or profits of any person, except by reason of being based on a percentage
of receipts or sales, as described above;
- rent any property to a related party tenant (except for leases to a
taxable REIT subsidiary);
- derive rental income attributable to personal property, other than
personal property leased in connection with the lease of real property, the
amount of which is less than 15% of the total rent received under the lease; or
- perform services (other than services that are "usual or customary")
considered to be rendered to the occupant of the property, other than through an
independent contractor from whom we derive no revenue or through a taxable REIT
subsidiary.
Notwithstanding the foregoing, we may have taken and may continue to take the
actions set forth above to the extent these actions will not, based on the
advice of our tax counsel, jeopardize our status as a REIT.
Home Properties may receive certain types of income with respect to the
properties it owns that will not qualify for the 75% or 95% gross income test.
In addition, dividends on Home Properties' stock in any non-controlled
subsidiaries or taxable REIT subsidiaries will not qualify under the 75% gross
income test. Home Properties believes, however, that the aggregate amount of
such fees and other non-qualifying income in any taxable year will not cause
Home Properties to exceed the limits on non-qualifying income under the 75% and
95% income tests.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a REIT for the year if we are
entitled to relief under specific provisions of the Internal Revenue Code.
Generally, we may avail ourselves of the relief provisions if:
- our failure to meet these tests was due to reasonable cause and not
due to willful neglect;
- we attach a schedule of the sources of our income to our federal
income tax return; and
- any incorrect information on the schedule was not due to fraud with
intent to evade tax.
It is not possible, however, to state whether in all circumstances we would be
entitled to the benefit of these relief provisions. For example, if we fail to
satisfy the gross income tests because non-qualifying income that we
intentionally incur exceeds the limits on non-qualifying income, the IRS could
conclude that our failure to satisfy the tests was not due to reasonable cause.
If these relief provisions do not apply to a particular set of
circumstances, we will not qualify as a REIT. As discussed above in "Taxation of
Home Properties -General," even if these relief provisions apply, and we retain
our status as a REIT, a tax would be imposed with respect to our excess net
income. We may not always be able to maintain compliance with the gross income
tests for REIT qualification despite our periodic monitoring of our income.
PROHIBITED TRANSACTION INCOME. Any gain realized by us on the sale of any
property held as inventory or other property held primarily for sale to
customers in the ordinary course of business, including our share of any such
gain realized by the Operating Partnership, will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. This prohibited
transaction income may also adversely effect our ability to satisfy the income
tests for qualification as a REIT. Under existing law, whether property is held
as inventory or primarily for sale to customers in the ordinary course of a
trade or business is a question of fact that depends on all the facts and
circumstances surrounding the particular transaction.
The Operating Partnership intends to hold the properties for investment
with a view to long- term appreciation, to engage in the business of acquiring,
developing, owning, and operating its properties and to make occasional sales of
the properties as are consistent with the Operating Partnership's investment
objectives. However, the IRS may contend that one or more of these sales is
subject to the 100% penalty tax.
ASSET TESTS. At the close of each quarter of our taxable year, we also must
satisfy six tests relating to the nature and diversification of our assets.
First, at least 75% of the value of our total assets must be represented by
real estate assets, cash, cash items and government securities. Home Properties'
real estate assets include, for purposes of this test, its allocable share of
real estate assets held by the partnerships in which it owns an interest and the
non-corporate subsidiaries of those partnerships, as well as stock or debt
instruments held for one year or less that are purchased with the proceeds of an
offering of shares or long-term (at least five years) debt of Home Properties.
Second, not more than 25% of our total assets may be represented by
securities, other than those securities includable in the 75% asset test.
Third, except for investments in REITs, qualified REIT subsidiaries and
taxable REIT subsidiaries, the value of any one issuer's securities owned by
Home Properties may not exceed 5% of the value of Home Properties' total assets.
Fourth, except for investments in REITs, qualified REIT subsidiaries and
taxable REIT subsidiaries, Home Properties may not own more than 10% of any one
issuer's outstanding voting securities.
Fifth, except for investments in REITs, qualified REIT subsidiaries and
taxable REIT subsidiaries, Home Properties may not own more than 10% of the
total value of the outstanding securities of any one issuer.
Sixth, not more than 20% of the value of Home Properties' total assets may
be represented by the securities of one or more taxable REIT subsidiaries.
As previously discussed, Home Properties is deemed to own its proportionate
share of the assets of a partnership in which it is a partner so that the
partnership interest, itself, is not a security for purposes of this asset test.
After initially meeting the asset tests at the close of any quarter, we will not
lose our status as a REIT for failure to satisfy the asset tests at the end of a
later quarter solely by reason of changes in asset values. If we fail to satisfy
the asset tests because we acquire additional securities of the Management
Companies or other securities or other property during a quarter, including an
increase in our interests in the Operating Partnership, we can cure this failure
by disposing of sufficient non-qualifying assets within 30 days after the close
of that quarter. We have maintained and will continue to maintain adequate
records of the value of our assets to ensure compliance with the asset tests and
to take such other actions within the 30 days after the close of any quarter as
may be required to cure any noncompliance. If we fail to cure noncompliance with
the asset tests within this time period, we would cease to qualify as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS. To maintain our qualification as a REIT,
we are required to distribute dividends, other than capital gain dividends, to
our stockholders in an amount at least equal to:
- the sum of:
- 90% of our "REIT taxable income," computed without regard to
the dividends paid deduction and our net capital gain, and
- 90% of the after tax net income, if any, from foreclosure
property;
- minus:
- the excess of the sum of particular items of noncash income
over 5% of "REIT taxable income" as described above.
These distributions must be paid in the taxable year to which they relate, or in
the following taxable year if they are declared before we timely file our tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. These distributions are taxable to holders of common
stock and convertible preferred stock, other than tax-exempt entities, as
discussed below, in the year in which paid. This is so even though these
distributions relate to the prior year for purposes of our 90% distribution
requirement. The amount distributed must not be preferential (e.g., every
shareholder of the class of stock to which a distribution is made must be
treated the same as every other shareholder of that class, and no class of stock
may be treated otherwise than in accordance with its dividend rights as a
class).
To the extent that we do not distribute all of our net capital gain or
distribute at least 90%, but less than 100%, of our "REIT taxable income," as
adjusted, we will be subject to tax thereon at regular ordinary and capital gain
corporate tax rates. We have made and intend to make timely distributions
sufficient to satisfy these annual distribution requirements. We expect that our
REIT taxable income will be less than our cash flow due to the allowance of
depreciation and other non-cash charges in computing REIT taxable income.
Accordingly, we anticipate that we will generally have sufficient cash or liquid
assets to enable us to satisfy the distribution requirements described above. In
this regard, the Partnership Agreement of the Operating Partnership authorizes
Home Properties, as general partner, to take such steps as may be necessary to
cause the Operating Partnership to distribute to its partners an amount
sufficient to permit Home Properties to meet these distribution requirements.
However, from time to time, we may not have sufficient cash or other liquid
assets to meet these distribution requirements due to timing differences between
the actual receipt of income and actual payment of deductible expenses, and the
inclusion of income and deduction of expenses in arriving at our taxable income.
If these timing differences occur, in order to meet the distribution
requirements, we may need to arrange for short-term, or possibly long-term,
borrowings or need to pay dividends in the form of taxable stock dividends.
Under specific circumstances identified in the Internal Revenue Code, we may be
able to rectify a failure to meet the distribution requirement for a year by
paying "deficiency dividends" to stockholders in a later year, which may be
included in our deduction for dividends paid for the earlier year. Thus, we may
be able to avoid being taxed on amounts distributed as deficiency dividends.
However, we will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
Furthermore, we would be subject to a 4% excise tax on the excess of the
required distribution over the amounts actually distributed if we should fail to
distribute during each calendar year, or in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, by the end of January immediately following such year, at least the sum
of:
- 85% of our REIT ordinary income for such year,
- 95% of our REIT capital gain income for the year,
- and any undistributed taxable income from prior periods.
Any REIT taxable income and net capital gain on which this excise tax is imposed
for any year is treated as an amount distributed during that year for purposes
of calculating such tax.
FAILURE TO QUALIFY
If we fail to qualify for taxation as a REIT in any taxable year, and the
relief provisions do not apply, we will be subject to tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. Distributions to stockholders in any year in which we fail to qualify
will not be deductible by us and we will not be required to distribute any
amounts to our stockholders. As a result, our failure to qualify as a REIT would
reduce the cash available for distribution by us to our stockholders.
In addition, if we fail to qualify as a REIT, all distributions to
stockholders will be taxable as ordinary income to the extent of our current and
accumulated earnings and profits, and subject to limitations identified in the
Internal Revenue Code, corporate distributees may be eligible for the dividends
received deduction. Unless entitled to relief under specific statutory
provisions, we will also be ineligible to be taxed as a REIT for the four tax
years following the year during which we lost our qualification. It is not
possible to state whether in all circumstances we would be entitled to this
statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used below, the term "U.S. stockholder" means a holder of shares of
common stock who, for United States federal income tax purposes: is a citizen or
resident of the United States; is a corporation, partnership, or other entity
created or organized in or under the laws of the United States or of any state
thereof or in the District of Columbia, unless, in the case of a partnership,
Treasury Regulations provide otherwise; is an estate the income of which is
subject to United States federal income taxation regardless of its source; or is
a trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust. Notwithstanding the
preceding sentence, to the extent provided in Treasury Regulations, some trusts
in existence on August 20, 1996, and treated as United States persons prior to
this date that elect to continue to be treated as United States persons, are
also considered U.S. stockholders.
DISTRIBUTIONS GENERALLY. As long as we qualify as a REIT, distributions out
of our current or accumulated earnings and profits, other than capital gain
dividends discussed below, will constitute dividends taxable to our taxable U.S.
stockholders as ordinary income. These distributions will not be eligible for
the dividends-received deduction in the case of U.S. stockholders that are
corporations. To the extent that we make distributions, other than capital gain
dividends discussed below, in excess of our current and accumulated earnings and
profits, these distributions will be treated first as a tax-free return of
capital to each U.S. stockholder. This treatment will reduce the adjusted basis
which each U.S. stockholder has in his shares of stock for tax purposes by the
amount of the distribution. This reduction will not, however, reduce a holder's
adjusted basis below zero. Distributions in excess of a U.S. stockholder's
adjusted basis in his shares will be taxable as capital gain, provided that the
shares have been held as a capital asset. In addition, these distributions will
be taxable as long-term capital gain if the shares have been held for more than
one year.
Dividends that we declare in October, November, or December of any year and
that are payable to a stockholder of record on a specified date in any of these
months shall be treated as both paid by us and received by the stockholder on
December 31 of that year, provided we actually pay the dividend on or before
January 31 of the following calendar year. Stockholders may not include in their
own income tax returns any of our net operating losses or capital losses.
CAPITAL GAIN DISTRIBUTIONS. Distributions that we properly designate as
capital gain dividends will be taxable to U.S. stockholders as gains, to the
extent that they do not exceed our actual net capital gain for the taxable year,
from the sale or disposition of a capital asset. Capital gain dividends are
taxed to U.S. stockholders as gain from the sale or exchange of a capital asset
held for more than one year. This tax treatment applies regardless of the period
the stockholder has held its shares. If we designate any portion of a dividend
as a capital gain dividend, a U.S. stockholder will receive an Internal Revenue
Service Form 1099-DIV indicating the amount that will be taxable to the
stockholder as capital gain. U.S. stockholders that are corporations may,
however, be required to treat up to 20% of some capital gain dividends as
ordinary income.
PASSIVE ACTIVITY LOSSES AND INVESTMENT INTEREST LIMITATIONS. Distributions
we make and gain arising from the sale or exchange by a U.S. stockholder of our
shares will not be treated as passive activity income. As a result, U.S.
stockholders generally will not be able to apply any "passive losses" against
this income or gain. Distributions we make, to the extent they do not constitute
a return of capital, generally will be treated as investment income for purposes
of computing the investment income limitation. Gain arising from the sale or
other disposition of our shares, however, will not be treated as investment
income under some circumstances.
RETENTION OF NET LONG-TERM CAPITAL GAINS. We may elect to retain, rather
than distribute as a capital gain dividend, our net long-term capital gains. If
we make this election, we would pay tax on our retained net long-term capital
gains. In addition, to the extent we designate, a U.S. stockholder generally
would: include its proportionate share of our undistributed long-term capital
gains in computing its long-term capital gains in its return for its taxable
year in which the last day of our taxable year falls subject to limitations as
to the amount that is includable; be deemed to have paid the capital gains tax
imposed on us on the designated amounts included in the U.S. stockholder's
long-term capital gains; receive a credit or refund for the amount of tax deemed
paid by it; increase the adjusted basis of its common stock by the difference
between the amount of includable gains and the tax deemed to have been paid by
it; and in the case of a U.S. stockholder that is a corporation, appropriately
adjust its earnings and profits for the retained capital gains in accordance
with Treasury Regulations to be prescribed by the IRS.
DISPOSITIONS OF COMMON STOCK
Generally, gain or loss realized by a shareholder upon the sale of common
shares (including redemptions of common shares which are treated as sales) will
be reportable as capital gain or loss. Such gain or loss will be treated as
long-term capital gain or loss if the shares have been held for more than 12
months and as short-term capital gain or loss if the shares have been held for
12 months or less. If a shareholder receives a long-term capital gain dividend
and has held the shares for six months or less, any loss incurred on the sale or
exchange of the shares is treated as a long-term capital loss to the extent of
the corresponding long-term capital gain dividend received.
BACKUP WITHHOLDING
We report to our U.S. stockholders and the IRS the amount of dividends paid
during each calendar year, and the amount of any tax withheld. Under the backup
withholding rules, a stockholder may be subject to backup withholding at the
rate of 28% with respect to dividends paid unless the holder is a corporation or
comes within other exempt categories and, when required, demonstrates this fact,
or provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A U.S. stockholder that does not
provide us with his correct taxpayer identification number may also be subject
to penalties imposed by the IRS. Any amount paid as backup withholding will be
creditable against the stockholder's income tax liability. In addition, we may
be required to withhold a portion of capital gain distributions to any
stockholders who fail to certify their non-foreign status. See "Taxation of
Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder,
except tax-exempt shareholders described below, has not held its shares as "debt
financed property" within the meaning of the Internal Revenue Code and the
shares are not otherwise used in a trade or business, dividend income from us
will not be unrelated business taxable income to a tax-exempt shareholder.
Similarly, income from the sale of shares will not constitute unrelated business
taxable income unless a tax-exempt shareholder has held its shares as "debt
financed property" within the meaning of the Internal Revenue Code or has used
the shares in its trade or business.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Internal
Revenue Code Section 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively,
income from an investment in our shares will constitute unrelated business
taxable income unless the organization is able to properly deduct amounts set
aside or placed in reserve for certain purposes so as to offset the income
generated by its investment in our shares. These prospective investors should
consult their own tax advisors concerning these "set aside" and reserve
requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation Act
of 1993 provides that, effective for taxable years beginning in 1994, a portion
of the dividends paid by a "pension held REIT" shall be treated as unrelated
business taxable income as to any trust which: is described in Section 401(a) of
the Internal Revenue Code; is tax-exempt under Section 501(a) of the Internal
Revenue Code; and holds more than 10%, by value, of the interests in a REIT.
Tax-exempt pension funds that are described in Section 401(a) of the Internal
Revenue Code are referred to below as "qualified trusts." A REIT is a "pension
held REIT" if: it would not have qualified as a REIT but for the fact that
Section 856(h)(3) of the Internal Revenue Code provides that stock owned by
qualified trusts shall be treated, for purposes of the "not closely held"
requirement, as owned by the beneficiaries of the trust, rather than by the
trust itself; and either at least one such qualified trust holds more than 25%,
by value, of the interests in a REIT, or one or more such qualified trusts, each
of which owns more than 10%, by value, of the interests in a REIT, holds in the
aggregate more than 50%, by value, of the interests in the REIT.
The percentage of any REIT dividend treated as unrelated business taxable
income is equal to the ratio of: the unrelated business taxable income earned by
Home Properties, treating Home Properties as if it were a qualified trust and
therefore subject to tax on unrelated business taxable income, to the total
gross income of Home Properties. A de minimis exception applies where the
percentage is less than 5% for any year. The provisions requiring qualified
trusts to treat a portion of REIT distributions as unrelated business taxable
income will not apply if Home Properties is able to satisfy the "not closely
held" requirement without relying upon the "look-through" exception with respect
to qualified trusts. As a result of the limitations on the transfer and
ownership of stock contained in our articles of incorporation, we are not and do
not expect to be classified as a "pension held REIT."
TAXATION OF NON-U.S. STOCKHOLDERS
When we use the term "non-U.S. stockholders," we mean holders of shares of
common stock that are nonresident alien individuals, foreign corporations,
foreign partnerships or foreign estates or trusts. The rules governing United
States federal income taxation of the ownership and disposition of stock by
persons that are non-U.S. stockholders are complex. No attempt is made in this
prospectus to provide more than a brief summary of these rules. Accordingly,
this discussion does not address all aspects of United States federal income tax
and does not address state, local or foreign tax consequences that may be
relevant to a non-U.S. stockholder in light of its particular circumstances. In
addition, this discussion is based on current law, which is subject to change,
and assumes that we qualify for taxation as a REIT. Prospective non- U.S.
stockholders should consult with their own tax advisers to determine the impact
of federal, state, local and foreign income tax laws with regard to an
investment in stock, including any reporting requirements.
DISTRIBUTIONS. If we make a distribution that is not attributable to gain
from the sale or exchange of United States real property interests and is not
designated as capital gains dividends, then the distribution will be treated as
dividends of ordinary income to the extent it is made out of current or
accumulated earnings and profits. These distributions ordinarily will be subject
to withholding of United States federal income tax on a gross basis at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
However, if the dividends are treated as effectively connected with the conduct
by the non-U.S. stockholder of a United States trade or business, or if an
income tax treaty applies, as attributable to a United States permanent
establishment of the non-U.S. stockholder, the dividends will be subject to tax
on a net basis at graduated rates, in the same manner as domestic stockholders
are taxed with respect to such dividends and are generally not subject to
withholding. Any such dividends received by a non-U.S. stockholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Under some treaties, lower withholding rates generally applicable to dividends
do not apply to dividends from a REIT. Certification and disclosure requirements
must be satisfied to be exempt from withholding under the effectively connected
income and permanent establishment exemptions discussed above. Home Properties
expects to withhold U.S. income tax at the rate of 30% on any dividend
distributions, not designated as (or deemed to be) capital gain dividends, made
to a non-U.S. stockholder unless:
- a lower treaty rate applies and the non-U.S. stockholder
files an Internal Revenue Service Form W-8BEN evidencing
eligibility for that reduced rate with Home Properties; or
- the non-U.S. stockholder files an Internal Revenue Service
Form W-8ECI with Home Properties claiming that the
distribution is effectively connected income.
Distributions we make in excess of our current or accumulated earnings and
profits will not be taxable to a non-U.S. stockholder to the extent that they do
not exceed the adjusted basis of the stockholder's stock, but rather will reduce
the adjusted basis of such stock. To the extent that these distributions exceed
the adjusted basis of a non-U.S. stockholder's stock, they will give rise to
gain from the sale or exchange of his stock. The tax treatment of this gain is
described below. Home Properties may be required to withhold at least 10% of any
distribution in excess of its current and accumulated earnings and profits, even
if a lower treaty rate applies or the non-U.S. stockholder is not liable for tax
on the receipt of that distribution. However, a non-U.S. stockholder may seek a
refund of these amounts.
Distributions to a non-U.S. stockholder that we designate at the time of
distribution as capital gains dividends, other than those arising from the
disposition of a United States real property interest, generally will not be
subject to United States federal income taxation, unless: investment in the
stock is effectively connected with the non-U.S. stockholder's United States
trade or business, in which case the non-U.S. stockholder will be subject to the
same treatment as domestic stockholders with respect to such gain, except that a
stockholder that is a foreign corporation may also be subject to the 30% branch
profits tax, as discussed above; or the non-U.S. stockholder is a nonresident
alien individual who is present in the United States for 183 days or more during
the taxable year and has a "tax home" in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains.
Distributions to a non-U.S. stockholder that are attributable to gain from
our sale or exchange of United States real property interests will cause the
non- U.S. stockholder to be treated as recognizing this gain as income
effectively connected with a United States trade or business. Non-U.S.
stockholders would thus generally be taxed at the same rates applicable to
domestic stockholders, subject to a special alternative minimum tax in the case
of nonresident alien individuals. Also, this gain may be subject to a 30% branch
profits tax in the hands of a non-U.S. stockholder that is a corporation, as
discussed above. We are required to withhold 35% of any such distribution. That
amount is creditable against the non-U.S. stockholder's United States federal
income tax liability. We or any nominee (e.g., a broker holding shares in street
name) may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the disposition
of United States real property interests. A domestic person who holds shares of
common stock on behalf of a non-U.S. stockholder will bear the burden of
withholding, provided that we have properly designated the appropriate portion
of a distribution as a capital gain dividend.
SALE OF STOCK. If you are a non-U.S. stockholder and you recognize gain
upon the sale or exchange of shares of stock, the gain generally will not be
subject to United States taxation unless the stock constitutes a "United States
real property interest" within the meaning of FIRPTA. If we are a "domestically
controlled REIT," then the stock will not constitute a "United States real
property interest." A "domestically-controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock is
held directly or indirectly by non-U.S. stockholders. Because our shares of
stock are publicly traded, there is no assurance that we are or will continue to
be a "domestically-controlled REIT." Notwithstanding the foregoing, if you are a
non-U.S. stockholder and you recognize gain upon the sale or exchange of shares
of stock and the gain is not subject to FIRPTA, the gain will be subject to
United States taxation if: your investment in the stock is effectively connected
with a United States trade or business, or, if an income treaty applies, is
attributable to a United States permanent establishment; or you are a
nonresident alien individual who is present in the United States for 183 days or
more during the taxable year and you have a "tax home" in the United States. In
this case, a nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
If we are not or cease to be a "domestically-controlled REIT" whether gain
arising from the sale or exchange by a non-U.S. stockholder of shares of stock
would be subject to United States taxation under FIRPTA as a sale of a "United
States real property interest" will depend on whether the shares are "regularly
traded," as defined by applicable Treasury Regulations, on an established
securities market and on the size of the selling non-U.S. stockholder's interest
in our shares. If gain on the sale or exchange of shares of stock were subject
to taxation under FIRPTA, the non-U.S. stockholder would be subject to regular
United States income tax on this gain in the same manner as a U.S. stockholder
and the purchaser of the stock would be required to withhold and remit to the
Internal Revenue Service 10% of the purchase price. In addition in this case,
non- U.S. stockholders would be subject to any applicable alternative minimum
tax, nonresident alien individuals may be subject to a special alternative
minimum tax and foreign corporations may be subject to the 30% branch profits
tax.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding tax
generally is a withholding tax imposed at the rate of 28% on reportable
payments, as defined in Section 3406 of the Internal Revenue Code, to persons
that fail to furnish the required information under the United States
information reporting requirements. Backup withholding tax and information
reporting will generally not apply to distributions paid to non-U.S.
stockholders outside the United States that are treated as: dividends subject to
the 30%, or lower treaty rate, withholding tax discussed above; capital gains
dividends; or distributions attributable to gain from our sale or exchange of
United States real property interests. As a general matter, backup withholding
and information reporting will not apply to a payment of the proceeds of a sale
of stock by or through a foreign office of a foreign broker. Information
reporting, but not backup withholding, will apply, however, to a payment of the
proceeds of a sale of stock by a foreign office of a broker that: is a United
States person; derives 50% or more of its gross income for specific periods from
the conduct of a trade or business in the United States; or is a "controlled
foreign corporation" for United States tax purposes. Information reporting will
not apply if the broker has documentary evidence in its records that the holder
is a non-U.S. stockholder and other conditions are met, or the stockholder
otherwise establishes an exemption. Payment to or through a United States office
of a broker of the proceeds of sale of stocks is subject to both backup
withholding and information reporting unless the stockholder certifies under
penalties of perjury that the stockholder is a non-U.S. stockholder, or
otherwise establishes an exemption. A non-U.S. stockholder may obtain a refund
of any amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
GENERAL. Substantially all of our investments will be held indirectly
through the Operating Partnership. In general, partnerships are "pass-through"
entities which are not subject to federal income tax. Rather, partners are
allocated their proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive a distribution from the
partnership. We will include in our income our proportionate share of the
foregoing partnership items for purposes of the various REIT income tests and in
the computation of our REIT taxable income. Moreover, for purposes of the REIT
asset tests, we will include our proportionate share of assets held by the
Operating Partnership. See "Taxation of Home Properties."
ENTITY CLASSIFICATION. Our interests in the Operating Partnership involve
special tax considerations, including the possibility of a challenge by the IRS
of the status of the Operating Partnership as a partnership, as opposed to an
association taxable as a corporation, for federal income tax purposes. If the
Operating Partnership were treated as an association, it would be taxable as a
corporation and therefore be subject to an entity-level tax on its income. In
such a situation, the character of our assets and items of gross income would
change and preclude us from satisfying the asset tests and possibly the income
tests (see "Taxation of Home Properties - Asset Tests" and "-Income Tests").
This, in turn, would prevent us from qualifying as a REIT. See "Taxation of Home
Properties - Failure to Qualify" above for a discussion of the effect of our
failure to meet these tests for a taxable year. In addition, a change in the
Operating Partnership's status for tax purposes might be treated as a taxable
event. If so, we might incur a tax liability without any related cash
distributions.
Treasury Regulations that apply for tax period beginning on or after
January 1, 1997, provide that an "eligible entity" may elect to be taxed as a
partnership for federal income tax purposes. An eligible entity is a domestic
business entity not otherwise classified as a corporation and which has at least
two members. Unless it elects otherwise, an eligible entity in existence prior
to January 1, 1997, will have the same classification for federal income tax
purposes that it claimed under the entity classification Treasury Regulations in
effect prior to this date. In addition, an eligible entity which did not exist,
or did not claim a classification, prior to January 1, 1997, will be classified
as a partnership for federal income tax purposes unless it elects otherwise. The
Operating Partnership intends to claim classification as a partnership under
these regulations.
Even if the Operating Partnership is taxable as a partnership under these
Treasury Regulations, it could be treated as a corporation for federal income
tax purposes under the "publicly traded partnership" rules of Section 7704 of
the Internal Revenue Code. A publicly traded partnership is a partnership whose
interests trade on an established securities market or are readily tradable on a
secondary market, or the substantial equivalent thereof. While units of the
Operating Partnership are not and will not be traded on an established trading
market, there is some risk that the IRS might treat the units held by the
limited partners of the Operating Partnership as readily tradable because, after
any applicable holding period, they may be exchanged for our common stock, which
is traded on an established market. A publicly traded partnership will be
treated as a corporation for federal income tax purposes unless at least 90% of
such partnership's gross income for a taxable year consists of "qualifying
income" under the publicly traded partnership provisions of Section 7704 of the
Internal Revenue Code. "Qualifying income" under Section 7704 of the Internal
Revenue Code includes interest, dividends, real property rents, gains from the
disposition of real property, and certain income or gains from the exploitation
of natural resources. Therefore, qualifying income under Section 7704 of the
Internal Revenue Code generally includes any income that is qualifying income
for purposes of the 95% gross income test applicable to REITs. We anticipate
that the Operating Partnership will satisfy the 90% qualifying income test under
Section 7704 of the Internal Revenue Code and, thus, will not be taxed as a
corporation.
There is one significant difference, however, regarding rent received from
related party tenants. For a REIT, rent from a tenant does not qualify as rents
from real property if the REIT and/or one or more actual or constructive owners
of 10% or more of the REIT actually or constructively own 10% or more of the
tenant. See "Taxation of Home Properties - Income Tests." Under Section 7704 of
the Internal Revenue Code, rent from a tenant is not qualifying income if a
partnership and/or one or more actual or constructive owners of 5% or more of
the partnership actually or constructively own 10% or more of the tenant.
Accordingly, we will need to monitor compliance with both the REIT rules
and the publicly traded partnership rules. The Operating Partnership has not
requested, nor does it intend to request, a ruling from the IRS that it will be
treated as a partnership for federal income tax purposes. In the opinion of
Nixon Peabody LLP, which is based on the provisions of the partnership agreement
of the Operating Partnership and on certain factual assumptions and
representations of Home Properties, the Operating Partnership has since its
formation and will continue to be taxed as a partnership rather than an
association taxable as a corporation. Nixon Peabody LLP's opinion is not binding
on the IRS or the courts.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Under Section 704(c) of the
Internal Revenue Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership, must be allocated in a manner so
that the contributing partner is charged with the "book-tax difference"
associated with the property at the time of the contribution. The book-tax
difference with respect to property that is contributed to a partnership is
generally equal to the difference between the fair market value of contributed
property at the time of contribution and the adjusted tax basis of the property
at the time of contribution. These allocations are solely for federal income tax
purposes and do not affect the book capital accounts or other economic or legal
arrangements among the partners. The Operating Partnership was formed by way of
contributions of appreciated property, including some of the properties.
Moreover, subsequent to the formation of the Operating Partnership, additional
persons have contributed appreciated property to the Operating Partnership in
exchange for interests in the Operating Partnership.
The partnership agreement requires that these allocations be made in a
manner consistent with Section 704(c) of the Internal Revenue Code. In general,
limited partners of the Operating Partnership who acquired their limited
partnership interests through a contribution of appreciated property will be
allocated depreciation deductions for tax purposes which are lower than these
deductions would be if determined on a pro rata basis. In addition, in the event
of the disposition of any of the contributed assets which have a book-tax
difference all income attributable to the book-tax difference will generally be
allocated to the limited partners who contributed the property, and we will
generally be allocated only our share of capital gains attributable to
appreciation, if any, occurring after the time of contribution to the Operating
Partnership. This will tend to eliminate the book-tax difference over the life
of the Operating Partnership. However, the special allocation rules of Section
704(c) do not always entirely eliminate the book-tax difference on an annual
basis or with respect to a specific taxable transaction such as a sale. Thus,
the carryover basis of the contributed assets in the hands of the Operating
Partnership may cause us to be allocated lower depreciation and other
deductions. Possibly we could be allocated an amount of taxable income in the
event of a sale of these contributed assets in excess of the economic or book
income allocated to us as a result of the sale. This may cause us to recognize
taxable income in excess of cash proceeds, which might adversely affect our
ability to comply with the REIT distribution requirements. See "Taxation of Home
Properties - Annual Distribution Requirements."
BASIS IN THE OPERATING PARTNERSHIP INTEREST. The adjusted tax basis in our
interest in the Operating Partnership generally will be equal to: the amount of
cash and the basis of any other property we contribute to the Operating
Partnership, increased by our allocable share of the Operating Partnership's
income and our allocable share of indebtedness of the Operating Partnership, and
reduced, but not below zero, by our allocable share of losses suffered by the
Operating Partnership, the amount of cash distributed to us and constructive
distributions resulting from a reduction in our share of indebtedness of the
Operating Partnership. If the allocation of our distributive share of the
Operating Partnership's loss exceeds the adjusted tax basis of our partnership
interest in the Operating Partnership, the recognition of this excess loss will
be deferred until such time and to the extent that we have adjusted tax basis in
our interest in the Operating Partnership. We will recognize taxable income to
the extent that the Operating Partnership's distributions, or any decrease in
our share of the indebtedness of the Operating Partnership, exceeds our adjusted
tax basis in the Operating Partnership. A decrease in our share of the
indebtedness of the Operating Partnership is considered a cash distribution.
SALE OF PARTNERSHIP 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. However, under the REIT Requirements,
Home Properties' share as a partner of any gain realized by the Operating
Partnership on the sale of any property held as inventory or other property held
primarily for sale to customers in the ordinary course of a trade or business
will be treated as income from a prohibited transaction that is subject to a
100% penalty tax. See "Taxation of Home Properties." Such prohibited transaction
income will also have an adverse effect upon Home Properties' ability to satisfy
the income tests for REIT status. Under existing law, whether property is held
as inventory or primarily for sale to customers in the ordinary course of a
trade or business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction.
OTHER TAX CONSEQUENCES
STATE AND LOCAL TAX CONSIDERATIONS. We may be subject to state or local
taxation in various state or local jurisdictions, including those in which we
transact business and our stockholders may be subject to state or local taxation
in various state or local jurisdiction, including those in which they reside.
Our state and local tax treatment may not conform to the federal income tax
consequences discussed above. In addition, your state and local tax treatment
may not conform to the federal income tax consequences discussed above.
Consequently, you should consult your own tax advisors regarding the effect of
state and local tax laws on an investment in our shares.
POSSIBLE FEDERAL TAX DEVELOPMENTS. The rules dealing with federal income
taxation are constantly under review by the IRS, the Treasury Department and
Congress. New federal tax legislation or other provisions may be enacted into
law or new interpretations, rulings or Treasury Regulations could be adopted,
all of which could affect the taxation of Home Properties or of its
stockholders. No prediction can be made as to the likelihood of passage of any
new tax legislation or other provisions either directly or indirectly affecting
Home Properties or its stockholders. Consequently, the tax treatment described
herein may be modified prospectively or retroactively by legislative, judicial
or administrative action.
PLAN OF DISTRIBUTION
The shares offered hereby may be offered and sold from time to time as
market conditions permit on the New York Stock Exchange, or otherwise, at prices
and terms then prevailing, at prices related to the then-current market price,
or in negotiated transactions by the holders thereof, which may include donees
and pledgees. The shares may be sold by one or more of the following methods,
without limitation: (a) a block trade in which a broker or dealer so engaged
will attempt to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate a transaction; (b) purchases by a broker
or a dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (d) face-to-face
transactions between sellers and purchasers without a broker or dealer. In
effecting sales, brokers or dealers engaged by the Selling Shareholder may
arrange for other brokers or dealers to participate. The Selling Shareholder and
such brokers or dealers may receive commissions or discounts from the Selling
Shareholder in amounts to be negotiated. Such brokers and dealers and any other
participating brokers or dealers may be deemed "underwriters" under the
Securities Act.
EXPERTS
The financial statements and financial statement schedule of Home
Properties, Inc. incorporated in this Prospectus by reference to the Annual
Report on Form 10-K of Home Properties, Inc. for the year ended December 31,
2003, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon by Nixon
Peabody LLP, Rochester, New York. Certain partners of Nixon Peabody LLP own
Units equal to less than 1% of the equity of Home Properties on a fully diluted
basis. Nixon Peabody LLP has also provided an opinion with respect to certain
tax matters which form the basis of the discussion under the heading "Federal
Income Tax Considerations."
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table is an itemized listing of expenses to be incurred by Home
Properties in connection with the issuance and distribution of the shares of
Common Stock being registered hereby, other than discounts and commissions:
SEC Registration Fee ........................... $ 2,459
NYSE Listing Fee ........................... 3,000*
Legal Fees and Expenses .................... 1,500*
Accounting Fees and Expenses ............... 6,000*
Miscellaneous .............................. 2,000*
Total ................................ $14,959*
*Estimate
Item 15. Indemnification of Directors and Officers
Our officers and directors are and will be indemnified under Maryland law,
our Articles of Incorporation and the Partnership Agreement ("Operating
Partnership Agreement") of Home Properties, L.P., a New York limited partnership
of which we are the general partner, against certain liabilities. The Articles
of Incorporation require us to indemnify our directors and officers to the
fullest extent permitted from time to time by the laws of Maryland. The Bylaws
contain provisions which implement the indemnification provisions of the
Articles of Incorporation.
The Maryland General Corporation Law ("MGCL") permits a corporation to
indemnify its directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that the act
or omission of the director or officer was material to the matter giving rise to
the proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty, or the director or officer actually received an improper
personal benefit in money, property or services, or in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. No amendment of our Articles of Incorporation shall
limit or eliminate the right to indemnification provided with respect to acts or
omissions occurring prior to such amendment or repeal. Maryland law permits us
to provide indemnification to an officer to the same extent as a director,
although additional indemnification may be provided if such officer is not also
a director.
The MGCL permits the articles of incorporation of a Maryland corporation to
include a Provision limiting the liability of its directors and officers to the
corporation and its stockholders For money damages, subject to specified
restrictions. The MGCL does not however, permit the II-1 liability of directors
and officers to the corporation or its stockholders to be limited to the extent
that (1) it is proved that the person actually received an improper benefit or
profit in money, property or services (to the extent such benefit or profit was
received) or (2) a judgment or other final adjudication adverse to such person
is entered in a proceeding based on a finding that the person's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. Our Articles of
Incorporation contain a provision consistent with the MGCL. No amendment of the
Articles of Incorporation shall limit or eliminate the limitation of liability
with respect to acts or omissions occurring prior to such amendment or repeal.
The Operating Partnership Agreement also provides for indemnification of us
and our officers and directors to the same extent indemnification is provided to
officers and directors of Home Properties in its Articles of Incorporation, and
limits the liability of us and our officers and directors to the Operating
Partnership and its partners to the same extent liability of officers and
directors of Home Properties to Home Properties and its stockholders is limited
under our Articles of Incorporation.
We have entered into indemnification agreements with each of our directors
and certain of our officers. The indemnification agreements require, among other
things, that we indemnify our directors and those officers to the fullest extent
permitted by law, and advance to the directors and officers all related
expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. We also must indemnify and advance all
expenses incurred by directors and officers seeking to enforce their rights
under the indemnification agreements, and cover directors and officers under our
directors' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by provisions in the Articles of Incorporation and the Bylaws and the
Operating Partnership Agreement of the Operating Partnership, it provides
greater assurance to directors and officers that indemnification will be
available, because, as a contract, it cannot be modified unilaterally in the
future by the Board of Directors or by the stockholders to eliminate the rights
it provides. We have purchased insurance under a policy that insures both us and
our officers and directors against exposure and liability normally insured
against under such policies, including exposure on the indemnities described
above.
Item 16. Exhibits
5.1 Opinion of Nixon Peabody LLP as to legality of Common Stock*
8.1 Opinion of Nixon Peabody LLP as to certain tax matters*
23.1 Consent of Nixon Peabody LLP (included as part of Exhibits 5.1 and 8.1)
23.2 Consent of PricewaterhouseCoopers LLP*
24 Power of Attorney (included on signature page)
* Included with this filing.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post- effective amendment to this registration statement to include any material
information with respect to the plan of distribution not previously disclosed in
the registration statement or any material change to such information in the
registration statement.
2. For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
4. For purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Exchange Act (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Rochester, New York, on the 17 day of May, 2004.
HOME PROPERTIES, INC.
By: /s/ David P. Gardner
-----------------------------
David P. Gardner
Executive Vice President
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby severally constitutes and appoints Norman P. Leenhouts and
Nelson B. Leenhouts, and each of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post- effective amendments) to the Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorney-in-fact and agents, and each of them, full power and authority to do
and person each and every act and thing requisite or necessary that he might do
in person. Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/S/ EDWARD J. PETTINELLA Director, President, Chief Executive May 17, 2004
Edward J. Pettinella Officer
(Principal Executive Officer)
/S/ DAVID P. GARDNER Executive Vice President, Chief May 17, 2004
David P. Gardner Financial Officer
(Principal Financial and Accounting Officer)
/S/ NORMAN P. LEENHOUTS Director, Co-Chairman May 17, 2004
Norman P. Leenhouts
/S/ NELSON B. LEENHOUTS Director, Co-Chairman May 17, 2004
Nelson B. Leenhouts
/S/ WILLIAM BALDERSTON, III Director May 17, 2004
William Balderston, III
/S/ ALAN L. GOSULE Director May 17, 2004
Alan L. Gosule
/S/ LEONARD F. HELBIG, III Director May 17, 2004
Leonard F. Helbig, III
/S/ ROGER W. KOBER Director May 17, 2004
Roger W. Kober
/S/ CLIFFORD W. SMITH, JR Director May 17, 2004
Clifford W. Smith, Jr.
/S/ PAUL L. SMITH Director May 17, 2004
Paul L. Smith
/S/ AMY L. TAIT Director May 17, 2004
Amy L. Tait
EXHIBIT INDEX
Home Properties, Inc.
(the "Company")
Registration Statement on Form S-3 No. 333-______
NUMBER DESCRIPTION LOCATION
5.1 Opinion of Nixon Peabody LLP regarding
the legality of the Common Stock being registered *
8.1 Opinion of Nixon Peabody LLP
regarding certain tax matters *
23.1 Consent of Nixon Peabody LLP Included with
Exhibits 5.1
and 8.1
23.2 Consent of PricewaterhouseCoopers LLP *
24 Power of Attorney Included on
signature page
* Filed herewith